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United Kingdom

Financing solutions sought

Prospects for future financing of renewables in Britain received a boost when the Department of Trade and Industry (DTI) awarded contracts worth £160,000 for three separate studies into renewable energy financing. Two feasibility studies will look at investment funds -- one for renewable energy (multi-technology) and the other for wind energy -- while the third study will concentrate on small project finance packaging and contract term standardisation.

Energy Minister Tim Eggar announced details of the studies at a seminar in London in December attended by around 140 financiers.

The feasibility study into a multi-technology investment fund is being carried out by chartered accountants Ernst & Young. Worth £76,000 the four month study will determine the optimum structure for a fund to offer equity to suitable projects and provide reasonable financial returns to the investor. According to Ernst & Young's Mike Nelson, the risks associated with renewable energy projects are not yet fully proven as they rely on a long term view and each project will vary. "The idea of an investment management vehicle to diversify risks for investors is likely to be an attractive means of encouraging more of these projects to full operation," he says. At Ernst & Young's Exeter office where the study will be conducted, Jonathan Johns is confident that innovative fund raising structures can be developed. The government's plans to introduce new venture capital trusts as well as enterprise investment schemes give new avenues to explore, he says.

The second study -- into a wind energy investment fund -- is being carried out by Cornwall-based Windelectric Management Ltd. The DTI is providing £18,000 towards the £30,000 four month project. It will look at whether such a fund could provide a suitable vehicle for private and institutional investors wishing to target funds specifically at wind energy. Peter Edwards from Windelectric, which built Britain's first wind farm at Delabole in Cornwall, believes there is a need for a source of finance expressly for wind energy. We are extremely concerned about where the finance is coming from for smaller wind farms," he says. "With larger projects, banks are falling over themselves to provide finance, but for schemes in the £1 million to £5 million bracket, nobody really wants to know." An investment fund that concentrates on wind energy alone has an advantage, Edwards believes. "With wind the risks are now largely known whereas risks associated with multi-technologies are more difficult to assess."

The Windelectric project is not the only study into a wind energy investment fund however. The DTI is already contributing 60% towards the £31,000 cost of a study by Mercury Provident which started in September. The DTI hopes that if the studies find that investment funds feasible, they could be established in time to help the financing of projects in the third round of renewable energy orders expected soon under the Non-Fossil Fuel Obligation (NFFO).

Small project packaging

There are two parts to the third study into small project finance packaging and contract term standardisation. It is being conducted over five months at a cost of £66,000 by Bulman Cooper -- a firm of solicitors whose partners have been involved with several renewable energy projects. One of the study's aims is to produce a suite of sample contracts that could be adopted by developers of renewable energy projects. "The objective is to minimise the involvement of professionals in the exercise of producing documentation in support of a development proposal that is going to be acceptable to financiers," explains David Bulman. He expects this to be of particular benefit to developers of smaller projects. He says that standardised terms are already evolving in the UK. Taking the example of the wind industry he points to the emergence of terminology from the US, seen particularly in wind leases with landowners. "We are seeing an industry norm developing with the same basic terms appearing in various documents and leases," he says. "These are usually borrowed from the US and Anglicised."

The other aim of the study is to examine the feasibility of grouping small schemes together for project financing. "We aim to see if we can aggregate projects to make a package that will be more interesting to investors," says Bulman. Usually banks are only interested in projects of £5 million and above, he says. "Our experience is that many banks won't even look at schemes below £10 million." Advisers to the study are Barclays Bank, Bank of Scotland, Sedgwick and the Association of Independent Electricity Producers.

The December seminar, Renewable Energy -- A Commercial Opportunity, was organised by the DTI. The event gave the financial community a chance to learn more about investment opportunities in Britain's growing renewables industry -- worth up to £2.5 billion over the next five years. Eggar said that renewable energy offers a major opportunity to institutional and individual investors. "There is a total prospect of up to £2.5 billion of private capital investment over the next five years which is driven by the government's policy of working towards 1500 MW of new renewable energy capacity by the year 2000," he said. Eggar added that financing renewables will be the key to their success. "These studies together with this seminar will I hope play an important role in facilitating the funding of renewable energy."

Peter Chappell from the Energy Technology Support Unit -- the renewable energy support arm of the DTI -- organised the seminar to give the financial community some information about renewable energy technologies and to make them more aware of the third round of the Non Fossil Fuel Obligation (NFFO). "We expect that applications for finance for renewable projects under the forthcoming tranche of NFFO will soon be landing on their desks, and we want to make sure they will be receptive," he says. Two new guides were issued at the seminar -- one about the opportunities for financiers and the other a guide on financing renewable projects intended for developers.

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