Renewable Heat Incentive: The Market Explained

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Renewable Heat Incentive: The Market Explained

  1. 1. Renewable Heat IncentiveThe market explainedEversheds LLP6 June 2011, London
  2. 2. Programme09:00 Michelle Thomas, Eversheds LLP09:05 Paul Thompson, REA09:30 Jean-Pascal Boutin, Eversheds LLP09:55 Paul Carey, MVV10:20 Q&A Session10:35 Coffee Break10:50 Stuart Campbell, E&Y11:15 Peter Dickson, BNP Paribas11:40 Lisa Shaw, NIBC Bank11:55 Q&A Session with the panel including ‘Bernie’ Bulkin & Amit Dewan12:30 Lunch14:00 Close
  3. 3. The Renewable Heat Incentive – past, present and future Paul Thompson Head of Policy June 2011 3
  4. 4. Who are the REA? The UK trade association for the renewables sectorWe are unique, in that: 650 members and rising Members of all sizes – sole traders to multinationals, with a democratic, one member one vote structure Cover all sectors and all renewable technologies Activities include lobbying and policy development, and information dissemination to stakeholders and the wider community 4
  5. 5. What this presentation will cover Background The RHI decision document Some outstanding issues 2012 and beyond 5
  6. 6. The Renewable Energy Directive Published 2009. Imposes binding renewables targets to be reached by 2020 across the EU.Targets in the Renewable Energy Directive: 20% of energy across the EU to be renewable 15% of energy in the UK to be renewable 10% of energy used in transport to be renewable 6% reduction in GHG emissions from road transport 6
  7. 7. Energy Act 2008Section 100contains powers toset up a RenewableHeat Incentive 7
  8. 8. Renewable Energy Strategy Proposed increase in renewable heat to 12% - from around 1% now 8
  9. 9. Breakdown by technology 9
  10. 10. Current UK heat sources 10
  11. 11. Not just about climate changeGlobal energy demand is forecast to increase byaround 40% between 2007 and 2030, with morethan three quarters of the rise from fossil fuels.In 2008 the UK imported around 25% of its naturalgas.Projections suggest that by 2020 this could rise toaround 60%. 11
  12. 12. TariffConsultation closed26 April. Followedby the generalelection, a very longwait… 12
  13. 13. ..and a certain degreeof stress 13
  14. 14. Published March 10,2011Decision document –not for furtherconsultation£860million budget to2014/15 14
  15. 15. What it might deliver in 2020 15
  16. 16. Likely timelineDate ActionJune • Ofgem publishes draft guidance • Final text of regulations laid before ParliamentJuly Parliament approves regulationsSeptember RHI startsEnd 2011? Further consultation launched on next phase of RHISpring/summer Decisions and Parliamentary2012 approval of new regulationsAutumn 2012 Phase 2 of RHI starts 16
  17. 17. HeadlinesTariffs for solid biomass, ground source heatpumps, solar thermal, biogas and injection ofbiomethane to the gas gridSignificant omissions and limitations, some ofwhich will be corrected in 2012: > No bioliquids > No biogas or solar thermal 200kW and above > No dedicated tariff for deep geothermal > No district heating uplift > No air source heat pumps > No domestic 17
  18. 18. EligibilityHeat must be for space, water or process heatingand delivered by water or steamGrants must be paid backPlant must be new at time of installationPlant only eligible if first commissioned on or after15 July 2009If 45kWth or less, kit must be MCS certified now –installer must have been certified at the time 18
  19. 19. Setting the tariffsBroken down into sizes and technologyPaid on p/kWh of metered heatpaid for 20 years – index-linked to RPIIntended to cover the typical difference in costbetween fossil and renewable heat, and give 12%return over tariff lifetime (for most technologies)No ‘reference installations’ for CHP – heat fromCHP receives the same tariff as heat-onlygeneration by that technology/scale 19
  20. 20. 20
  21. 21. BiomassTwo-tier tariffs for <1MW. Higher rate paid outonly up to tier break – installed capacity x 1314Sustainability reporting for 1MWth and aboveAir quality maximum limits to be set for <20MWth:30g/GJ for PMs and 150g/GJ for Nox. To beintroduced 2012 21
  22. 22. Biomass in wasteOnly municipal solid waste (notcommercial/industrial)Similar ability to use deemed content of MSW asRO (at 50%), BUTWaste must have minimum 50% biomass contentSimilar allowances for use of fossil fuel forancillary purposes as RO, but light touch for<1MWth 22
  23. 23. CHP (1) Power-only installations commissioned pre 15 July 2009 can claim RHI on heat if convert to CHP after that date Bands based on installed thermal capacity – how is this to be calculated for CHP? No CHPQA requirementFor many technologies, installations face a choice between RHI and RO ‘uplift’. Outcomes of RO Banding Review therefore crucial – proposals for consultation due July 2011 23
  24. 24. CHP (2) – RO vs RHIInstallations accredited under RO to receive 0.5ROC ‘uplift’ (including 1ROC for EfW) cannotclaim RHIInstallations accredited between 15 July 2009 and1 April 2013 likely to have one-off choice betweenuplift and RHIRO uplift likely to be withdrawn from April 2013 –REA pushing for some transition for already-committed projects (2 years?)Installations receiving RO uplift are not currentlygrandfathered 24
  25. 25. There is scope for confusion..Technology RO without RO with RHI (p/kWh) CHP CHP (ROCs/MWh) (ROCsMWh)Biomass 1.5 2 <200kW - 7.6/1.9(general) 200-999kW - 4.7/1.9 >1MW - 2.6Biomass 2 2 As above(energycrops)Biomass (co- 0.5 1 None (if less than 50%firing) biomass)AD/advanced 2 2 <200kW – 6.5gasification & Other scales – nonepyrolysisEnergy from 0 1 As biomass – but only ifWaste from MSW and not less than 50% renewableGeothermal 2 2 3 25
  26. 26. DomesticNot in phase 1. Government has committed toinclude in ‘phase 2’ – but no guarantee what formthis will takeAs a stop-gap, ‘premium payments’ are planned:£15million in one-off grants, but recipients willthen be able to claim RHIDetails were due to be announced last month.Expected soon – later this week?May have limited effect until details of full RHI areknown 26
  27. 27. Staying in budgetRHI funded from general taxation. Budget to 2014/15must not be exceededLikely to be some form of ‘degression’ – ie rates reducefor new entrants in pre-announced wayStrong industry preference for reductions on fixed datesbut Government concerned that this would not catch amajor bubbleIntention is to introduce ‘capacity-triggered’ degression.Not easy to satisfy Government and industryFirst planned review due to be implemented in 2015 27
  28. 28. Any questions? 28
  29. 29. Renewable Heat IncentiveThe ProcessJean-Pascal Boutin,Eversheds LLP6 June 2011
  30. 30. The Process• Accreditation• Who can claim?• Multiple sites• New plant/extensions/conversions• Ongoing obligations• Payment terms• Grants• Contract challenges
  31. 31. Accreditation• Critical dates• Preliminary• Commissioning• Meters
  32. 32. Who can claim?• Non-domestic• Owners• Assignment/nomination/agents
  33. 33. Multiple Sites• Site• Common heating system
  34. 34. New plant/extensions/conversions• New plant• Replacing old plant• Extensions
  35. 35. Ongoing Obligations• Real requirement• Reporting
  36. 36. Payment terms• Quarterly• RPI• Reviews
  37. 37. Grants/Other benefits
  38. 38. Contract Issues• 20 year offtake agreement• Early termination• Backup plan• Community schemes/JVs• Heat supply not regulated
  39. 39. © EVERSHEDS LLP 2011. Eversheds LLP is a limited liability partnership.
  40. 40. The Renewable Heat IncentiveRenewable heat – project economicsStuart Campbell
  41. 41. Agenda► Introduction to Ernst & Young► RHI – uncertainties► Renewable heat – indicative CHP project economics Stuart Campbell Assistant Director – Energy and Environmental Infrastructure Advisory Ernst & Young scampbell4@uk.ey.com Tel:+44 (0) 20 7951 6973 Mob: +44 (0) 7824 609692Page 70 31 March 2011 The Renewable Heat Incentive
  42. 42. Ernst & Young global network of renewableenergy specialists Business Advisory Services UK global centre of Tax Assurance renewable expertise Transaction Advisory ServicesPage 71 31 March 2011 The Renewable Heat Incentive
  43. 43. RHI – market profileTechnology EfW with CHP Medium to Biomethane Deep District Solar thermal large scale injection and geothermal/ heating solid biomass biogas Ground source CHP combustion heat pumpsIndustry ► Corporate ► Renewable ► Agricultural ► Commercial ► Local ► Home ownerplayer waste project sector property authority/ ► Commercial management developers ► Corporate developers public sector property operators ► Utilities waste ► Industrial schemes developers ► Local ► Industrial management commercial ► Commercial ► Local authorities commercial operators offtakers property authority ► Utilities offtakers (food waste) ► Home owner developers schemes ► Local ► Local ► ESCO authorities Authorities ► Renewable project developersTypical ► On balance ► Project ► Asset finance ► Asset finance ► PB ► Private equityfinancing sheet finance ► Project ► Project ► Project ► Tax based ► Project ► On balance finance finance finance equity (?) finance sheet ► PFI/PB ► PB ► On balance ► Asset finance ► PFI/PB ► Equity funds ► On balance ► Green Deal sheet ► Project sheet ► Equity funds finance ► Green DealPage 72 31 March 2011 The Renewable Heat Incentive
  44. 44. RHI – market profileTechnology EfW with CHP Medium to Biomethane Deep District Solar thermal large scale injection and geothermal/ heating solid biomass biogas Ground source CHP combustion heat pumpsIndustry ► Corporate ► Renewable ► Agricultural ► Commercial ► Local ► Home ownerplayer waste project sector property authority/ ► Commercial management developers ► Corporate developers public sector property operators ► Utilities waste ► Industrial schemes developers ► Local ► Industrial management commercial ► Commercial ► Local authorities commercial operators offtakers property authority ► Utilities offtakers (food waste) ► Home owner developers schemes ► Local ► Local ► ESCO authorities Authorities ► Renewable project developersTypical ► On balance ► Project ► Asset finance ► Asset finance ► PB ► Private equityfinancing sheet finance ► Project ► Project ► Project ► Tax based ► Project ► On balance finance finance finance equity (?) finance sheet ► PFI/PB ► PB ► On balance ► Asset finance ► PFI/PB ► Equity funds ► On balance ► Green Deal sheet ► Project sheet ► Equity funds finance ► Green DealPage 73 31 March 2011 The Renewable Heat Incentive
  45. 45. RHI – uncertainties impacting investmentUncertainties► Review of support level – triggers for early review► Degression mechanism – rate and triggers► Impact on CHP technologies of RO banding review due in 2013► Feedstock constraints► Availability of high quality heat off take► £860m cap limit► Air quality limit levels► Phase 2 technologies and roll out: ► MSW specific tariff ► Treatment of non-MSW waste (inc SRF) ► Large scale AD/biogas tariff ► Heat from CHP tariff ► ASHP tariff ► Bioliquids ► DH uplift ► Domestic► Investors require certainty over project revenues► Longer development time frames for RHI technologies, planning regime implicationsPage 74 19 May 2011 The Renewable Heat Incentive
  46. 46. RHI – uncertainties impacting investmentUncertainties► Review of support level – triggers for early review► Degression mechanism – rate and triggers► Impact on CHP technologies of RO banding review due in 2013► Feedstock constraints► Availability of high quality heat off take► £860m cap limit► Air quality limit levels► Phase 2 technologies and roll out: ► MSW specific tariff ► Treatment of non-MSW waste (inc SRF) ► Large scale AD/biogas tariff ► Heat from CHP tariff ► ASHP tariff ► Bioliquids ► DH uplift ► Domestic► Investors require certainty over project revenues► Longer development time frames for RHI technologies, planning regime implicationsPage 75 19 May 2011 The Renewable Heat Incentive
  47. 47. RHI indicative CHP project economicsBiomass CHP project (Heat to Power 50:50) RO uplift RHIPost-tax project IRR 13% 12%► RHI scheme marginally underperforms RO uplift for 50:50 ratio► Project economics driven by heat to power configurationPage 76 31 March 2011 The Renewable Heat Incentive
  48. 48. RHI indicative CHP project economics(cont’d)Biomass CHP project (heat to power 60:40) RO uplift RHIPost tax project IRR 11% 12%► RHI scheme marginally outperforms RO uplift for 60:40 heat to power ratioPage 77 31 March 2011 The Renewable Heat Incentive
  49. 49. RHI indicative CHP project economics(cont’d)Biomass CHP project (heat to power 60:40) RO uplift RHIPost tax project IRR 11% 12%► RHI scheme marginally outperforms RO uplift for 60:40 heat to power ratioPage 78 31 March 2011 The Renewable Heat Incentive
  50. 50. RHI indicative CHP project economics(cont’d)Biomass CHP project (heat to power 60:40) RO uplift RHIPost tax project IRR 11% 12%► RHI scheme marginally outperforms RO uplift for 60:40 heat to power ratioPage 79 31 March 2011 The Renewable Heat Incentive
  51. 51. RHI indicative CHP project economics(cont’d)Biomass CHP project (heat to power 60:40) RHI no heat RHI low heat RHI high heat sales sales salesPost tax project IRR 12% 13% 14%Heat price £0.0/MWh £7.8/MWh £13.3/MWh► Heat price of c. £10/MWh required for returns comparable with RO uplift on 50:50Page 80 31 March 2011 The Renewable Heat Incentive
  52. 52. RHI indicative CHP project economics(cont’d)District heating network with Biomass CHP► Heat to power ratio 50:50 RO uplift RHIPost tax project return 10% 9%Heat price £0.0/MWh £0.0/MWhPost tax project return 13% 12%Heat price £38/MWh £36/MWh► Additional network capital costs require support over and above RHI► Project viability driven by connection costsPage 81 31 March 2011 The Renewable Heat Incentive
  53. 53. RHI indicative CHP project economics(cont’d)Biomass CHP project (heat to power 60:40) RHI no heat RHI low heat RHI high heat sales sales salesPost tax project IRR 12% 13% 14%Heat price £0.0/MWh £7.8/MWh £13.3/MWh► Heat price of c. £10/MWh required for returns comparable with RO uplift on 50:50Page 82 31 March 2011 The Renewable Heat Incentive
  54. 54. Impact on EfW project economicsROC uplift for CHP vs RHI 65% Heat 65% Power No ROCs No ROCs No RHI ROCs RHI No RHI ROCs RHIPost-tax 10.9% 12.3% 12.7% 11.8% 13.4% 12.3%project IRR► Ratio of power to heat is key driver in comparative impact► Other characteristics of the RHI to be consideredPage 83 19 May 2011 The Renewable Heat Incentive
  55. 55. RHI indicative CHP project economics(cont’d)District heating network with Biomass CHP► Heat to power ratio 50:50 RO uplift RHIPost tax project return 10% 9%Heat price £0.0/MWh £0.0/MWhPost tax project return 13% 12%Heat price £38/MWh £36/MWh► Additional network capital costs require support over and above RHI► Project viability driven by connection costsPage 84 31 March 2011 The Renewable Heat Incentive
  56. 56. Impact on funding for EfW/CHP plants► Funder view of heat offtaker► Part of project revenues for debt sizing or equity upside?► Appetite to size debt from optimised power configurationPage 85 19 May 2011 The Renewable Heat Incentive
  57. 57. Impact on EfW project economicsROC uplift for CHP vs RHI 65% Heat 65% Power No ROCs No ROCs No RHI ROCs RHI No RHI ROCs RHIPost-tax 10.9% 12.3% 12.7% 11.8% 13.4% 12.3%project IRR► Ratio of power to heat is key driver in comparative impact► Other characteristics of the RHI to be consideredPage 86 19 May 2011 The Renewable Heat Incentive
  58. 58. Impact on funding for EfW/CHP plants► Funder view of heat offtaker► Part of project revenues for debt sizing or equity upside?► Appetite to size debt from optimised power configurationPage 87 19 May 2011 The Renewable Heat Incentive
  59. 59. Important informationThis presentation pack necessarily represents only part of the information which weconsidered in carrying out our work, being that which we considered to be most relevantto our understanding of your needs, in the light of this seminar.The information in this presentation pack will have been supplemented by matters arisingfrom any oral presentation by us, and should be considered in the light of this additionalinformation.If you require any further information or explanations of our underlying work, you shouldcontact us.The information in this presentation pack is confidential and contains proprietaryinformation of Ernst & Young LLP. It should not be provided to anyone other than theintended recipients without our written consent.Anyone who receives a copy of this presentation pack other than in the context of ouroral presentation of its contents should note the first two points above, and that we shallnot have any responsibility to anyone other than our client in respect of the informationcontained in this documentPage 88
  60. 60. Thank you
  61. 61. Ernst & Young LLPAssurance | Tax | Transactions | Advisorywww.ey.com/ukThe UK firm Ernst & Young LLP is a limited liabilitypartnership registered in England and Waleswith registered number OC300001 and is a member firmof Ernst & Young Global Limited.Ernst & Young LLP, 1 More London Place, London SE1 2AF.© Ernst & Young LLP 2011. Published in the UK.All rights reserved.
  62. 62. BNP ParibasClean Energy FundThe Renewable Heat Incentive – Private EquityInvestor View6 June, 2011
  63. 63. Clean Energy Fund | 92 07/06/2011 | BNP Paribas Clean Energy Fund – key points Proven 1. Little technology risk in investments technologies ● Proven technologies will demonstrable track record ● Performance guarantees from robust suppliers ● Volume of opportunitiesAttractive 2. Steady return with exit upliftreturn profile ● Reasonable returns reflecting style of risk appetite ● Infrastructure assets - low correlation ● Largest proportion of return locked in at investment 3. Non-recourse debt ● Leverage at asset levelLeverage ● Enhanced return ● Increased diversification 4. Cash yield though life ● Secure income streams ● Feed-in tariffs provide transparency ● Inflation linkage Cash yield
  64. 64. Clean Energy Fund | 93 07/06/2011 | Diversified investors with common requirements Investor Sector Investor Base Non-strategic investor base requiring clear investment criteria
  65. 65. Clean Energy FundFundClean Energy | 94 07/06/2011 |Attractiveness of clean energy assets Per Annum Growth in European Generation 2005-2015 Themes 30% 25% ● Ongoing Environmental 25% Concerns ● Desire for Energy 20% Independence 14% 15% ● Government Support 13% Mechanisms 10% 7% ● Advances in Technological 6% Innovation 5% 2% ● Increased Energy Demand 1% 0% Coal Oil Total Hydro Geo Biomass Tidal & Wind Solar -1% Energy thermal Wave -5% -3.60% -10% Source: IEA Alternative Scenario • Renewable energy has provided investors with secure cash yielding asset class • Pricing becoming difficult – market becoming saturated.
  66. 66. Clean Energy FundFundClean Energy | 95 07/06/2011 |Sector consists of a number of proven generation technologies–The “Core Technologies” Wind Power Solar ● Large market consistent growth ● Slowing market ● Individual projects typically ● Individual projects up to 50MW between 20-50 MW (PV) ● European core of experience ● Little volume risk ● No pricing risk ● No pricing risk ● Volume according to wind resource Small scale Hydro Biomass ● Small niche market ● Individual projects up to 50MW ● Individual projects <30MW ● Power from proven ● Secondary investment technologies opportunities ● Fuel supply risk ● Unique engineering and volume ● Base load supply assessment ● Strong growth in UK ● Regulatory changes creating pricing risk
  67. 67. Clean Energy Fund | 96 07/06/2011 |Fund structure geared to deliver solid returns and steady income Invested Capital + Capital Gain Income Yield Income Yield Divested Capital (incl Capital Gain) NAV Cumulative Called Capital Capital at Risk (Called Less Distrib) € mn Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Investment Period “Harvesting” / Management Exits / Realisations Phase Year 1 – 2 (indicative) Interim period Year 10 (max) Clean Energy
  68. 68. Renewable Heat Incentive
  69. 69. Clean Energy Fund | 98 07/06/2011 | Renewable Heat Incentive The Issues ● Biomass-based power generation pricing ● Sustainable heat production – 12% of heat from RES by 2020 ● Technological development ● Create long-term market security Private Infrastructure Compatibility ● Secure cash yield ● Reduced risk ● Increased bankability ● Inflation hedge
  70. 70. Clean Energy Fund | 99 07/06/2011 | RHI vs RO Biomass CHP with Biomass CHP with RHI ROCs Cash generation Proportionate to Proportionate to heat electricity sales sales Validity To end of Renewables 20 years from Obligation 2027 accreditation Bankability ROCs proven bankability, Presumably secure, pending EMR related to counter-party Risk - Price Reduced No Risk - Volume Covered by PPA Yes Risk - Inflation No No Market Scale Yes Unknown Exit / consolidation Yes Unknown Options
  71. 71. Clean Energy Fund | 100 07/06/2011 | Conclusions ●The CEP focuses on power production ●The RHI brings secure value to the heat element of biomass-based chp ●Increased complexity of projects ●Lack of clarity of bankability ●Unproven market for exits ●No proof of increased market
  72. 72. Renewable Heat Incentive: The Market ExplainedWill the RHI encourage bank funding of biomass projects? 6 June 2011101 101101
  73. 73. NIBC Approach to the Renewable Energy Sector Focus from Multiple AnglesRenewable energy Specialised Finance European Infrastructure Fundis a key client sector  Providing senior debt  Investments in primaryat NIBC for which solutions including, project, project market with stablewe have a pan- asset based, corporate and long-term cash flowEuropean mandate leveraged financing across characteristics the sector  Geographical focus:  Specialists throughout our Benelux, Germany, UK offices in The Hague,  Managed from London, London, Frankfurt and Frankfurt and The Hague Brussels Client Coverage offices  Strong focus on the  Fund size EUR 350m renewable energy and utility sector within the 23-strong RenewableNIBC Infrastructure Infrastructure & Renewables Energy& Renewables has teambuilt up substantial  Structuring of alternative Sectornetwork of equity financing transactions andfund investors and M&A fund initiatives Treasurystrategic developers  >25 specialists in The Hague  Treasury products offeredactive in the & Brussels include interest rate hedging,renewable energy  Experienced M&A Utility FOREX hedging andsector Team structured tax deals  Recent buy side mandates  Specialists in The Hague include – Leading European energy company – Disposal of Dutch integrated waste company 102
  74. 74. Key Lender IssuesRegulatory Welcome a dedicated support mechanism for heat – Direct payment from Ofgem – Encourage variety of technologies Reporting regime – Generally in line with RO – Sustainability of fuel supply an ongoing risk Government funding – £860m available to support the RHI to 2014 – Will not implement previous administration’s proposals for an RHI levy Sustainability of tariff – Set at level to ensure fast uptake – Right retained to review at an early stage 103
  75. 75. Key Lender IssuesPracticalities Timing risk – Tariff applies at point of commissioning – Uncertainty until this point Usage – Measured at point of use, not generation – Long term credit risk taken on heat user Assignment – Assignment & transfer of RHI to lenders prohibited – Recouping of payments must be contractually agreed 104
  76. 76. BankabilityWill the RHI encourage bank funding of biomass projects? Biomass projects – Generally ancillary element – Fuel supply will always be key concern – Similar criteria to RO CHP uplift – Possible heightened regulatory uncertainty – Lengthy construction periods exacerbate problem – Usage risk is key Other technologies – Deep geothermal, solar thermal – UK natural resources 105
  77. 77. © EVERSHEDS LLP 2011. Eversheds LLP is a limited liability partnership.

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