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United Kingdom


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A British government project to ease the way for investment in renewables has entered its third and final phase. The Department of Trade and Industry (DTI) -- through its Energy Technology Support Unit (ETSU) -- is now seeking a fund manager to carry out preparatory work for a renewable energy investment fund. Its aim is to encourage the establishment of a source of equity finance, particularly for smaller projects. The DTI has been working towards this goal since December 1993 when it commissioned accountants Ernst & Young (E&Y) to study the feasibility of a multi-technology renewable investment fund.

E&Y's report -- published in October 1994 -- concluded such a fund would be viable and suggested a structure and investment strategy. But while conducting its study, the accountants had identified a lack of understanding among the investment community about the attractiveness of investing in renewable energy projects. This could pose a major obstacle to the DTI's aims being realised. Without a strong marketing effort, a fund large enough to help NFFO-3 developers was unlikely to be launched, E&Y advised.

The DTI therefore again sponsored E&Y -- this time to embark on a marketing programme targeting potential fund managers. "Our role has been to communicate information to the financial institutions and provide any explanations about renewable energy as required," explains Ernst & Young's Mark Williamson.

He claims the marketing effort has led to interest among institutions. To start with there was little understanding in financial circles about renewable energy and its potential, but today the industry can show investors there are a number of projects with track records, he says. "There is now a pattern of returns and risks. We are no longer talking about just projected income streams but about income streams that have already happened."

Williamson admits, however, that some of the people interested in setting up a renewables investment fund were already involved in the field and had no need to be persuaded about the attractiveness of renewable energy investments.

An example is Impact Capital, a dedicated corporate financial adviser and arranger for renewable energy projects. According to Mark Woodall from Impact Capital, the company specialises in raising equity finance for renewable energy projects and has been active in this field since late 1993.

At the moment finance comes from the United States through venture capital development funds, but Impact Capital has ambitions to establish its own fund. To this end it is one of the companies that have tendered for the DTI contract to carry out the next stage of preparation towards setting up a renewables fund.

help for small fry

Woodall envisages the fund will primarily help independent developers who do not have large or corporate backers. Independent developments may range in size, up to tens of millions of pounds. He expects to invest not only in projects with Non-Fossil Fuel Obligation (NFFO) contracts, but also in those technologies -- like waste to energy -- which he believes would be able to operate without the NFFO subsidy.

The fund will also cast its eyes beyond the UK to projects elsewhere in Europe. "We hope at least 50% of investments will be UK based, but it will depend on the quality and quantity of the projects coming forward," says an enthusiastic Woodall.

The fund will be unquoted and is to be set up with three other partners in the form of a private limited partnership, with Impact Capital as the fund manager. However he recognises that one of the key criteria to persuade people to invest in the fund is provision of an exit. "We are looking to raise between £20-30 million -- probably from financial institutions, not just private investors," he says. "We hope to have the fund up and running by June 1996."

Woodall claims that already some financial institutions are interested in investing in it. Moreover conditions for investing in renewables have never been as attractive as at present he maintains. This is helped by the 15 year contracts available under the third and fourth rounds of renewables support. With a guaranteed income for 15 years, NFFO-3 projects are much better liked by investors than the shorter-term contracts under the first two NFFO tranches.

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