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ENERGY: Where is the funding coming from to finance renewable energy initiatives? Tom Riordan, chief executive, Leeds City Council (chair) Mark Cumbo,

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Presentation on theme: "ENERGY: Where is the funding coming from to finance renewable energy initiatives? Tom Riordan, chief executive, Leeds City Council (chair) Mark Cumbo,"— Presentation transcript:

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2 ENERGY: Where is the funding coming from to finance renewable energy initiatives? Tom Riordan, chief executive, Leeds City Council (chair) Mark Cumbo, business development manager, Co- operative Bank Stephen Cirell, independent lawyer advising on low carbon and renewable energy projects Andrew Page, head of environment, Foresight Group Erich Scherer, assistant director – renewable energy corporate finance, BDO

3 WHERE IS THE FUNDING COMING FROM TO FINANCE RENEWABLE ENERGY INITIATIVES? A Senior Debt Providers Perspective Mark Cumbo Renewable Energy, Energy Efficiency and Asset Finance 11 September 2012

4 Agenda Brief introduction to The Co-operative Group and The Co-operative Bank Specialist Energy Team – Our experience, objectives and mandate Honest appraisal of the current market dynamics Senior debt funding structures and real life examples Funder’s ‘tick list’

5 About Us – The Co-operative Group

6 Member Direction

7 Specialist Energy Team – An overview Renewable Energy & Energy Efficiency Team Dedicated specialist team Manchester, Edinburgh and Glasgow bases Work independently of traditional regional corporate lending teams Mandate UK only National coverage Funding Structures Project/Transaction lending versus relationship lending Specialists in Project Finance & Asset Finance Long term (>7yr) commitments Capital £1bn Fund c£760m of committed facilities Deal Size Min: £2m (consideration of smaller if replicable transaction/portfolio) Max £25m (per project not borrower) Technologies Capable of providing financing solutions across a number of technologies Generation technologies, including: –On-shore Wind farms –Hydro –Solar PV (not domestic ‘rent-a-roof’) –AD Efficiency & Heat technologies include: Biomass GSHP CHP District heating Energy efficient boilers/BMS/Lighting

8 Specialist Energy Team – Our mandate The largest dedicated energy team by resource and transaction volume of any UK lender…. The delivery of low carbon energy generation Promote energy efficiency and the efficient use of resources As passionate about heat as electricity Promote affordable warmth and the alleviation of fuel poverty Work to reduce carbon footprint in the UK Keen to support co-operative ownership models with community benefits … committed to a triple bottom line (Economic, Environmental & Social)

9 Our Target Borrower & Current Market Dynamics We are a senior debt lender: by definition we charge lower margins but expect minimal default risk and a strong security position…. Renewable Energy Generation Planning approval secured Established counterparties (e.g. turbine supply, civil engineers, etc) Equity contribution secured Requirement for long term commitment (7yrs +) and ‘fair’ operational terms Recognises ‘low cost’ project finance solution for smaller (<£30m) projects Likely a Project Finance funding solution Renewable Heat & Energy Efficiency Strong operating background (established, credible, profitable, equity base) Developed relationships into high credit quality end users (public est., blue chip etc) Likely long term contracts (5yr+) and service obligations Robust contractual documentation Limitations on existing working capital lines / seeking full life payment certainty Likely an Asset Finance and Receivables funding solution

10 Our Target Borrower & Current Market Dynamics Market Dynamics Fluid support policy (FITs, RHI, RO’s, EMR) Lack of ‘long term’ bank capital Historic low levels of long term ‘cost of funds’ Introduction of catalyst organisations (Green Investment Bank) Lack of grant or low interest subsidised funding Development of frameworks (RE:Fit, CEF, etc)

11 Funding structures Documentation complexity Low High NonFull Recourse Secured lending Receivables funding HP/ lease Project finance

12 Funding structures – Project Finance Features Most complex (documents and due diligence) SPV established SPV contracts with third parties Non recourse solution Equity requirement Terms 10 to 15 year term Requires detailed financial model and legal due diligence (therefore costly) Requires long term income certainty Bank will take a charge over assets plus step ins Costs tend to be prohibitive to all but largest projects (£2m+) End User(s) Special Purpose Vehicle (“SPV”) Senio r debt Equity Project income (e.g. electricity generation ROCs / FITs) used to repay bank debt 3 rd party service providers (e.g. delivery partners, legal advisers etc.)

13 Example project – Community Scale Tiree Renewable Energy Limited Community Feed in Tariff scheme 0.9MW turbine, cost £1.9m Received bank debt of £1.2m plus Big Lottery funding of £0.7m 90% of island residents are Co-op members Turbine will produce over 3,100,000 kw/h of energy a year – sufficient for 700 households Average capacity factor in UK of 30%. Tiree can expect 44.5%. Benefits Anticipated to return a minimum of £100k back to the community per annum Monies generated to be used by community projects; supporting local clubs, schools, charities etc.

14 Funding structures - Receivables Delivery partner Installation, operations and maintenance Service charge: assigned to Bank Managed service contract Features Complex documentation Single end user Service charge must contain a ‘hard deck’ element Guaranteed performance / savings Termination provisions Terms 10 to 15 year term Same delivery partner to install, operate and maintain Requires high credit quality end user Potential to aggregate small projects: batch approach End User

15 Example project – large scale public building Natural History Museum, London Provision of energy efficient solution - Introduced CHP and re-engineered the delivery systems to maximise efficiency. Guaranteed Savings Solution over 16yrs for the Museum KPI’s for performance and efficiency supported by penalty payments CFS contributed £3.6m in funding. Benefits Projected savings for the Museum for year 1 of £500,000, actual savings £650,000. C02 reductions of 1,800 tonnes pa. £3m investment fund –previously made available for plant refurbishment - can be assigned elsewhere.

16 Example project – Social Housing Aberdeen Heat & Power, Scotland £1m of debt support for the installation of a CHP energy centre. The energy savings have generated additional revenue and this has been used to alleviate fuel poverty. The Local Authority purchases the excess energy. Extension of pilot scheme to nearby leisure centre – development of DH network Benefits Alleviating fuel poverty Substantial reduction in fuel bills Better quality of heat for the building Reduction in void periods – waiting list Infrastructure is future proofed

17 Funder’s ‘tick-list’ Business Case (driver?) Savings vs. generation Payback Underlying business performance Planning approval? Project Counterparties Credibility Credit quality Technology Credentials Warranty Credit quality of guarantee (LD’s) Maintenance Installation lead time Metering Accuracy Base load assumptions Complexity (single site versus DH) Demand side risk Anchor users? Minimum take or pay? Base fuel price risk taker Policy Which support mechanisms used? Accreditation risk? End user Credit quality Demand issues Security Requirement for charge over asset Security over income stream

18 Thank you – any questions?

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20 BASE Leeds City Region 11 September 2012 Bradford Stephen Cirell

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22 Problem Areas Strategy Organisation Budgets Targets

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26 Therefore this Council believes that by 2015: all vehicles procured by the Council should be electrically powered or run on liquefied petroleum gas. there will be at least 500 electric cars running on the streets of the city as we will develop the electric charging infrastructure. 50% of electricity used by the Council should be generated from renewable sources. the City Council's energy consumption will be reduced by 25%. 10% of Birmingham homes will be linked to district heating systems. 10% of Birmingham homes will have retrofit insulation. there will be at least 10 "low carbon communities" similar to the successful example of Summerfield Eco-neighbourhood. Birmingham City Council The Birmingham Declaration

27 Funding Renewable Energy Projects (1) Reserves Slippage on other projects Public sector borrowing Commercial borrowing

28 Funding Renewable Energy Projects (2) Equity stakes Institutional investors An offering to the public

29 Regional Issues Experience from Cornwall Council The lessons from abroad

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33 Lessons Learned Stable, Long Term Policy Public /Private Differentiation Determining PrioritiesDevelopment of strategies Financial and Business casesBe Prepared to Borrow Gain ConfidenceRaise Your Ambition!

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36 Stephen Cirell mobile: 07774 451 587 email: stephencirell@me.comstephencirell@me.com twitter: @stephencirell web: www.stephencirell.co.uk.uk

37 BASE Leeds City Region 11 September 2012 Bradford Stephen Cirell

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39 Renewable and Waste to Energy Funding Andrew Page, Head of Environmental Infrastructure September 2012

40 Foresight Overview 3 Multi- asset class, multi-sector, multi-fund, multi-geography business Institutional and Retail Funds Over 50 People operating in UK, Europe and US Independent and Privately owned by team who co-invest alongside investors c.£1bn of Funds under management and Managed account frameworks Deep expertise in specific areas Transaction structuring and Value creation Private Equity, Project Finance, PFI Waste, Renewables ( chiefly Solar), Carbon, Energy Efficiency Differentiated as a Fund Manager by the team mix and level of team experience operating in the sectors in which we invest

41 Funding Hurdles – Renewables and Waste to Energy 3 Shortfall of Funding or Shortfall of Fundable propositions? Over-optimism on potentially available returns? Typically capex intensive capping upside potential Appropriate risk/return balance vs.other investment opportunities Challenge in discerning the difference between debt and equity risk and appropriate structure Diverse, complex and changing markets with a multitude of influencers Financial performance can vary hugely with location Upfront investment in planning, design-work, diligence and deal costs Level of understanding of the complexities of the markets and solutions by all parties – financiers and developers Industry skill-sets Limited number of interested financiers with mix of sector understanding

42 Approach 3 Focus on a deep understanding key project parameters and markets Open to different funding structures – Topco/SPV/ESCO – options and warrants Realistic view on suitable level of debt and overall cost of capital Momentum more important than best pricing

43 Funding Solutions 3 Early Development Capital – Private Investors – possible SEED EIS VCT Financing Restrictions and limitations as an institutional co-investor Full equity funding and subsequent refinancing Appropriate use of debt recognising the true risks and underlying asset values SPVs with Warrants and Options to reflect risk but bridges pricing issues Rollout deals can incentivise investors and balance risk but Fund will not give formal commitment as an open facility Government Support assistance via Foresight– but not soft money and does not incentivise commercial investors in itself: Foresight Environmental Fund ( London focused) UKGI Funds Financial Support mechanisms – e.g. RHI, ROCS, Landfill Tax – but not all necessarily seen as firm foundations

44 Summary 3 Not a stand-out must-have investment sector given risk/returns vs other opportunities and capital intensive nature But should be an important part of a portfolio for Investing Institutions Foresight does have dedicated Funds for the sector and access to Government based and institutional capital together with value add given our experience Clarity on the detail and markets – many of those investing in the sector have built up significant knowledge ( a plan not a strategy or concept) Flexibility and realistic banking expectations

45 ECA Court, South Park, Sevenoaks, Kent, TN13 1DU www.ForesightGroup.eu info@foresightgroup.eu Tel: 01732 471800 Fax: 01732 471810 Issued by Foresight Group LLP, ECA Court, South Park, Sevenoaks, Kent, TN13 1DU. Authorized and regulated by the Financial Services Authority: 25 The North Colonnade, Canary Wharf, London, E14 5H

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47 Erich Scherer Base Leeds City Region 11 September 2012 FINANCING RENEWABLE HEAT PROJECTS

48 48 GOVERNMENT POLICY FRAMEWORK The UK has a legally binding target of 15% renewable energy by 2020. Renewable energy also delivers carbon reductions and reduces dependency on foreign oil/gas. The Government has put in place the following subsidy schemes: The Renewables Obligation has provided support for large-scale renewable electricity since 2003 Feed-in Tariffs have been available for small-scale renewable electricity from April 2010 The Renewable Heat Incentive has launched as of November 2011

49 49 TENTATIVE CONCLUSIONS FROM RECENT GOVERNMENT ACTION Case study 1: The RHI capped the solar thermal tariff at 8.5p/kWh rather than the ~16p which it required. The government also cut large-scale solar support back to 8.5p/kWh. Conclusion: –In meeting the UK 2020 renewables target, the government tries to avoid paying more per kWh than it is paying offshore wind (2 ROCs or ~8.5p/kWh) Case study 2: The government has cut FITs for small PV installs by 50+% since the start of 2012. Conclusion: –The government is still willing to give higher tariffs than 8.5p where they pursue a community engagement purpose (ie small scale PV) –But government not interested in commercial investment in such more expensive tariffs

50 50 RENEWABLE ENERGY TECHNOLOGIES Solar PV (photovoltaic) Wind turbine Hydro powerSolar heating (thermal) Heat pump (ground source) Biomass boiler Anaerobic digestion Combined Heat & Power Feed-In TariffsRenewable Heat Incentive Specialist Generic

51 51 THE OPPORTUNITY: THE RENEWABLE HEAT INCENTIVE BACKUP HEAT RENEWABLE HEATING (FOR EXAMPLE BIOMASS) OPTIONAL BACKUP HEATING (OIL/GAS) HEAT USE (FLATS/ HOUSES/OFFICES ETC) Compared to FITs/ PV: Bigger impact on carbon (heat use is a greater part of onsite emissions than electricity) Long-term tariff certainty (RHI is mission-critical to reaching the legally binding UK 2020 target – PV is not) Good returns (at least for biomass): typically around 20% project IRR Simple technology (low technology risk) Currently eligible: anything other than individual residential installations RENEWABLE HEAT FOSSIL FUEL BACKUP

52 52 RENEWABLE HEAT INCENTIVE TARIFF LEVELS Energy sourceScaleTariffs (pence/kWh)Duration (years) Small biomass< 200 kW 8.3 *20 Medium biomass200-1,000 kW 5.1 *20 Large biomass (including municipal solid waste) > 1,000 kW1.020 Biomethane (including biogas combustion < 200 kW) All sizes7.120 Small ground source heat pumps < 100 kW4.720 Large ground source heat pumps (including deep geothermal) > 100 kW3.420 Solar thermal< 200 kW8.920 * Up to 1,314 peak load hours per year, followed by 2.1p/kWh for any higher heat load. (as of April 2012)

53 53 PROJECT FINANCE ESCO STRUCTURE ESCO (energy services company) OFGEM FEEDSTOCK SUPPLY (biomass only) OPERATION & MAINTENANCE TECHNOLOGY SUPPLY INSTALLATION BUILDING USER (gets cheaper heat) RHI income Heat sale income BUILDING OWNER Lease & access FUNDER PROJECT DEVELOPER

54 54 WHAT’S THE BENEFIT? Heat user: No upfront installation costs Cheaper heat Certainty on future energy bill rises PR boost No hassle or worry about maintenance Reduction of carbon footprint; free contribution (£12/t CO2) towards Carbon Reduction Commitment (if electricity use > 6,000 MWh power) Project sponsor: Additional margin purely from developing an ESCO: the profit remaining after heat user has received cheaper heat funder has received finance return. Up to 100% third party finance Little or no investment risk since the project will be “non-recourse”

55 55 Acquisitions Monthly Awards – Mid-market Deal of the Year 2008 and 2010 M&A Awards – Accountancy Firm of the Year 2008 and 2007 Unquote British Private Equity Awards – Corporate Financier of the Year 2008 Accountancy age – Deal of the Year 2008 Midlands Dealmakers Awards – Transaction Services Team of the Year 2007 and 2008 ABOUT BDO 200+ UK: 206 partners working with over 2,600 staff 14 14 offices across the country 6 Sixth largest national firm of accountants Within BDO’s UK corporate finance arm, we have raised over £400 million of renewable energy funding for clients (Probably) only major financial advisory firm with in- depth and wide-ranging experience on RHI projects and RHI finance: currently engaged on seven RHI ESCO projects.

56 56 Our current view FUNDERS IN THE MARKET SENIOR DEBT/ ASSET FINANCE 80% of project cost Developer contributes remaining 20%, retains 100% equity Interest rate 6%-9% VCT/ EIS/ PRIVATE EQUITY Up to 100% project costs Funder will require around 49% shareholding in Newco Any interest payment typically set off against the funder’s return from equity stake Re-finance after 3-5 years into senior debt Limited use to renewable heat at this stage: Little familiarity with renewables and renewable heat in particular -> long and painful process Increasingly require corporate guarantees and large existing balance sheets (ie not project finance) Require an equity contribution from the project developer (20%) Attractive funder group for renewable heat : Only funder group where some players know the technologies -> due diligence process much easier VCT/ EIS keen on RHI since FITs projects no longer eligible for VCT/ EIS VCT IRR requirements can be met at current RHI tariffs for biomass and sometimes for GSHP

57 57 CONCLUSION Too much focus still on PV as regards on-site energy initiatives Renewable heat still an overlooked opportunity Can be combined with action on energy efficiency RHI can deliver attractive returns Enough subsidy to pay the funder and make a profit Comparatively high level of policy certainty on the subsidies Major benefits for energy users in the form of reduced heating bills and less exposure to volatile fossil fuel prices Success in finding funders EIS/ VCT money available Waiting for senior debt/ asset finance lenders to catch up

58 58 CONTACT DETAILS ERICH SCHERER Assistant Director Renewable Energy Finance BDO LLP 55 Baker Street London W1U 7EU T +44 (0)20 7893 2349 M+44 (0)7 854 517 296 Eerich.scherer@bdo.co.uk

59 The proposal contained in this document is made by BDO LLP ("BDO") and is in all respects subject to the negotiation, agreement and signing of a specific contract. It contains information that is commercially sensitive to BDO, which is being disclosed to you in confidence and is not to be disclosed to any third party without the written consent of BDO. Client names and statistics quoted in this proposal include clients of BDO and BDO International. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Services Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO Member Firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms. Copyright ©2011 BDO LLP. All rights reserved. www.bdo.co.uk Acquisitions Monthly Corporate Finance award winner 2010

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