may 2013 [[1R]]financing windukinvestmentwindpowermonthly.comUKgovernmenttakesstepstoreassureinvestorsThe UK government’s ...
financing[[1L]] may 2013Popular Banks werekeen to invest inphases 2 and 3 ofC-Power’s...
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Windpower Monthly May 2013 - UK investment article


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Windpower Monthly May 2013 - UK investment article

  1. 1. may 2013 [[1R]]financing windukinvestmentwindpowermonthly.comUKgovernmenttakesstepstoreassureinvestorsThe UK government’s efforts to encourage alternative forms of investment to utilities’ balancesheets and bank debt are showing some earlysigns of success.But investors still have fears overthe uncertaintysurrounding the proposed newcontracts for difference.John McKenna reportshave to delay final investment decisions (FID) on theirprojects until that time,when theywould knowwhat thelikely income earned on any investment would be.Thegovernment’s answer has been to introduce these“investment contracts”,which will be legally bindingcontracts between the Department of Energy and ClimateChange (Decc) and developers that agree to pay the draftstrike prices,which are due to be set later this year.“By helping developers make final investmentdecisions this year,this process should allowconstruction to start on a number of projects soonerthan otherwise would have been the case,” a Deccspokesman said at the time of the announcement.However,some question whether the contracts willbe enough to reassure developers and investors.“Youlook at this enabling instrument,and there’s nothing init that answers the question about who’s going to buythe power,” says Fintan Whelan,corporate financedirector at developer Mainstream Renewable Power.No purchase obligationUnlike under the RO system,there is no obligation forutilities to buy power from renewable projects.Whilemost big offshore wind projects have some kind ofutility involvement so that this does not become anissue,there are others,such as Mainstream’s own 4GWHornsea project off the Yorkshire coast,which it isdeveloping in a joint venture with Siemens,that do nothave the luxury of immediate access to a power buyer.Pascale Vogel,a lawyer at Norton Rose specialising inThere has been a flurry of activity from theUK government in the wind market recently,focused on increasing investor confidence,particularly in the offshore sector.First camethe announcement in mid-March that thegovernment would be offering “investmentcontracts” to developers of renewables projects withproposed generating capacities of 50MW or over.Thesecontracts have been introduced to counteractuncertainty around the government’s electricity marketreform (EMR) which is being legislated through theenergy bill currently going through parliament.A key part of the EMR will introduce a new supportsystem for renewables: known as contracts for difference(CfD),this is a type of feed-in tariff (FIT) under whichgenerators will receive a top-up payment when thewholesale electricity price is below a pre-agreed “strikeprice” and pay money back when the price rises above it.This mechanism will be introduced in 2014,althoughgenerators will be able to choose between the currentrenewables obligation (RO) system and CfD until 2017.However,many developers,particularly those withlarge offshore wind projects with long lead times,complained to the government that without knowingwhat the strike price would be until 2014,they wouldIncluded Stakes inRhyl Flats (left) andLittle Cheyne Courtwind farms were partof RWE’s deal withGreencoat UK Windrweinnogy;simontunbridge
  2. 2. financing[[1L]] may 2013Popular Banks werekeen to invest inphases 2 and 3 ofC-Power’s ThorntonBank projectmade because government thought that Greencoat wasexactly the kind of mobilising of capital markets that itis looking to encourage,” says Whelan.“The fund is aninstrument for recycling capital.I love the fact thatGreencoat has already invested in an offshore wind farm.If you as developer have got funding [such as from a bank]that wants to do construction,but not a 20-year loan,then I would say let’s go and talk to the Greencoat guys.”However,both the GIB and BIS investments are basedon the assumption that longer-term bank debt is notavailable anymore for the project financing of windfarms.This is a claim that can be relatively easily disputedjust by looking at the wind project financings thatclosed in the UK in 2012,with the vast majority offeredloan terms of the construction period plus 15 years.If there are any restrictions on lending for wind,it islargely a local problem driven by the UK’s two state-owned banks Lloyds and RBS,some experts say.Bruce Valpy,director of renewable-energyconsultancy BVG Associates,points to the financing ofC-Power’s Thornton Bank offshore wind farm inBelgium,which was financed in just nine months andwas oversubscribed with banks wanting to lend.Theproblem is that European banks face exchange rate riskwith UK projects,which pushes their prices up,whilethe UK banks’ interest rates are already high,he says.Jerome Guillet,managing director of Green GiraffeEnergy Bankers,adds that the shortage of windfinancing deals coming through may mean that the UKbanks have to start cutting the cost and increasing thelength of their loans if they want to remain active in thewind sector.“Japanese,German and French banks arestill able to provide long-term debt,” he says.“UK banks like RBS and Lloyds,with more severerestrictions on long term lending,are actually outliers,and are being squeezed out of deals,even domestic ones.Given that they are supposed to focus their investmentsin the UK,they will need to increase maturities again inorder not be undercut by foreign banks.”Government-owned RBS and Lloyds may well feelpressure to crank up their UK lending,after the news inMarch that UK banks’ earnings on internationalinvestments have collapsed.Last year,the UK earned£1.56 billion more on its investments abroad thanforeigners earned on their UK holdings,compared to a2011 investment surplus of nearly £26 billion.Doing socould benefit the wind sector,and make the GIB seemslightly less vital than it does right now.renewable-energy projects,agrees that this issue ofroute to market with the CfD could still be a stumblingblock for projects looking to make their finalinvestment decisions before the energy bill is passed.“The investment contract doesn’t solve the problem[of route to market] for independent generators,but it issomething that is being worked on by Decc and theindustry,” she says.“They are looking at working onstandardising terms for power purchase agreements(PPAs) and alternative structures for offtake.There is nosolution as yet,but it is an issue being considered.”Far from perfectNot only does the government’s attempt at removinguncertainty fail to fully do so for independentgenerators but,Vogel admits,even for those who dodecide to take up the contracts,investment decisions ontheir projects will only be brought forward by sixmonths,due to the legal processes involved.Investment contracts are conditional on the energybill being formally passed into law by Royal Assent andstate-aid clearance,she points out.“Royal Assent is currently anticipated for December2013.It will then take two to three months for state aidapproval,assuming there is no issue.CfDs are expectedto be signed at the earliest in August 2014,so theinvestment contract will bring forward someinvestments by at least six months or so.”However,while the CfD investment contracts look asthough they will have minimal impact on the market,afar more significant announcement for the future ofwind financing in the UK soon followed.In late March,the UK government confirmed it was investing £108million (€127 million) in offshore wind via both theDepartment of Business,Innovation and Skills (BIS) andits newly created Green Investment Bank (GIB).Government investmentThe GIB invested £57.5 million to take a 24.95% equitystake in RWE’s Rhyl Flats offshore project.RWE also solda 24.95% stake to Greencoat UK Wind,a new fundlaunched on the London Stock Exchange (LSE) with itsinitial public offering (IPO) in March.The fund will buyoperational UK wind farms from utilities RWE and SSE.It will take stakes in six onshore and offshore windfarms comprising a net capacity of 126.5MW.In additionto the Rhyll Flats stake,Greencoat’s will also be buying a41% stake in RWE’s Little Cheyne Court wind farm,a59.8MW project in Kent.Greencoat’s total investment inthe two UK projects is £107.7 million.Greencoat’s IPO raised £260 million,and buyers of itsshares included BIS,which subscribed for 50 millionshares at a price of £1 per share,and SSE which took tenmillion shares.Whelan welcomes both the GIB’s investments andthe government’s backing of the Greencoat IPO —which together represent an investment of £108 million— as means of allowing cash-strapped utilities to freeup their balance sheets to build more projects.Indeed,RWE confirmed it would be reinvesting the £162.5million it earned from the Rhyl Flats and Little Cheynesales into other projects.“The BIS investment in Greencoat,I suspect,was