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United Kingdom

United Kingdom

UK government takes steps to reassure investors

UK: There has been a flurry of activity from the UK government in the wind market recently, focused on increasing investor confidence, particularly in the offshore sector.

Invested… Stake in Little Cheyne Court wind farm was part of RWE’s deal with a government-backed investment fund (pic: Simon-Tunbridge)
Invested… Stake in Little Cheyne Court wind farm was part of RWE’s deal with a government-backed investment fund (pic: Simon-Tunbridge)

First came the announcement in mid-March that the government would be offering "investment contracts" to developers of renewables projects with proposed generating capacities of 50MW or over. These contracts have been introduced to counteract uncertainty around the government's electricity market reform (EMR) which is being legislated through the energy bill currently going through parliament.

A key part of the EMR will introduce a new support system for renewables: known as contracts for difference (CfD), this is a type of feed-in tariff (FIT) under which generators will receive a top-up payment when the wholesale electricity price is below a pre-agreed "strike price" and pay money back when the price rises above it. This mechanism will be introduced in 2014, although generators will be able to choose between the current renewables obligation (RO) system and CfD until 2017.

However, many developers, particularly those with large offshore wind projects with long lead times, complained to the government that without knowing what the strike price would be until 2014, they would have to delay final investment decisions (FID) on their projects until that time, when they would know what the likely income earned on any investment would be. The government's answer has been to introduce these "investment contracts", which will be legally binding contracts between the Department of Energy and Climate Change (Decc) and developers that agree to pay the draft strike prices, which are due to be set later this year.

"By helping developers make final investment decisions this year, this process should allow construction to start on a number of projects sooner than otherwise would have been the case," a Decc spokesman said at the time of the announcement.

However, some question whether the contracts will be enough to reassure developers and investors. "You look at this enabling instrument, and there's nothing in it that answers the question about who's going to buy the power," says Fintan Whelan, corporate finance director at developer Mainstream Renewable Power.

No purchase obligation

Unlike under the RO system, there is no obligation for utilities to buy power from renewable projects. Most big offshore projects have some kind of utility involvement so that this does not become an issue. But there are others, such as Mainstream's own 4GW Hornsea project off the Yorkshire coast - which it is developing in a joint venture with Siemens - that do not have the luxury of immediate access to a power buyer.

Pascale Vogel, a lawyer at Norton Rose specialising in renewable-energy projects, agrees that this route to market issue with the CfD could still be a stumbling block for projects looking to make their final investment decisions before the energy bill is passed.

"The investment contract doesn't solve the (route to market) problem for independent generators, but it is something that is being worked on by Decc and the industry," she says. "They are looking at working on standardising terms for power purchase agreements (PPAs) and alternative structures for offtake. There is no solution as yet, but it is an issue being considered."

Far from perfect

Not only does the government's attempt at removing uncertainty fail to give full certainty for independent generators but, Vogel admits, even for those who do decide to take up the contracts, investment decisions on their projects will only be brought forward by six months, due to the legal processes involved.

Investment contracts are conditional on the energy bill being formally passed into law by Royal Assent and state-aid clearance, she points out.

"Royal Assent is currently anticipated for December 2013. It will then take two to three months for state aid approval, assuming there is no issue. CfDs are expected to be signed at the earliest in August 2014, so the investment contract will bring forward some investments by at least six months or so."

Significant investment

However, while the CfD investment contracts look as though they will have minimal impact on the market, a far more significant announcement for the future of wind financing in the UK soon followed. In late March, the UK government, confirmed it was investing £108 million (EUR 127 million) in offshore wind via both the Department of Business, Innovation and Skills (BIS) and its newly created Green Investment Bank (GIB).

The GIB invested £57.5 million to take a 24.95% equity stake in RWE's Rhyl Flats offshore project. RWE also sold a 24.95% stake to Greencoat UK Wind, a new fund backed by the UK government launched on the London Stock Exchange (LSE) with its initial public offering (IPO) in March. The fund will buy operational UK wind farms from utilities RWE and SSE.

It will take stakes in six onshore and offshore wind farms comprising a net capacity of 126.5MW. In addition to the Rhyl Flats stake, Greencoat's will also be buying a 41% stake in RWE's Little Cheyne Court wind farm, a 59.8MW project in Kent. Greencoat's total investment in the two UK projects is £107.7 million.

Greencoat's IPO raised £260 million, with buyers including BIS, which subscribed for 50 million shares at £1 per share, and SSE which took ten million shares. Whelan welcomes both the GIB's investments and the government's backing of the Greencoat IPO - which add up to an investment of £108 million - as means of allowing cash-strapped utilities to free up their balance sheets to build more projects. RWE said it would be reinvesting the £162.5 million it earned from the Rhyl Flats and Little Cheyne sales into other projects.

"The BIS investment in Greencoat, I suspect, was made because government thought that Greencoat was exactly the kind of mobilising of capital markets that it is looking to encourage," says Whelan. "The fund is an instrument for recycling capital. I love the fact that Greencoat has already invested in an offshore wind farm. If you as a 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 Greencoat."

However, both the GIB and BIS investments are based on the assumption that longer-term bank debt is not available anymore for the project financing of wind farms. This is a claim that can be relatively easily disputed just by looking at the wind project financings that closed in the UK in 2012, with the vast majority offered loan terms of the construction period plus 15 years.

If there are any restrictions on lending for wind, it is largely a local problem driven by the UK's two state-owned banks Lloyds and RBS, some experts say.

Bruce Valpy, director of renewable-energy consultancy BVG Associates, points to the financing of C-Power's Thornton Bank offshore wind farm in Belgium, which was financed in just nine months and was oversubscribed with banks wanting to lend. The problem is that European banks face exchange rate risk with UK projects, which pushes their prices up, while the UK banks' interest rates are already high, he says.

Longer-term loans

Jerome Guillet, managing director of Green Giraffe Energy Bankers, adds that the shortage of wind financing deals coming through may mean that the UK banks have to start cutting the cost and increasing the length of their loans. "Japanese, German and French banks are still able to provide long-term debt," he says.

"UK banks like RBS and Lloyds, with more severe restrictions 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 investments in the UK, they will need to increase maturities again in order not be undercut by foreign banks."

Government-owned RBS and Lloyds may well feel pressure to crank up their UK lending, after the news in March that UK banks' earnings on international investments have collapsed. Last year, the UK earned £1.56 billion more on its investments abroad than foreigners earned on their UK holdings, compared to a 2011 investment surplus of nearly £26 billion. Doing so could benefit the wind sector, and make the GIB seem slightly less vital than it does right now.

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