United Kingdom

United Kingdom

A bold step into private equity -- Innovative UK finance deal

A groundbreaking wind farm financing deal has proved to the UK wind industry that the City, London's financial district, is ready to invest substantially in wind projects. Under the £400 million deal, German-owned RWE Innogy is to sell a majority stake in its UK operating wind plant -- including the UK's first offshore wind farm at North Hoyle and plant built over the next three years -- to two equity investors. This will free up funds to allow RWE's wind energy subsidiary, National Wind Power, to continue to develop more wind capacity.

RWE Innogy's CEO, Andrew Duff, says wind is a vital part of the company's portfolio. "The increased leverage this brings to our development capabilities and balance sheet strength will ensure that we remain at the forefront of this growing market," he says.

Englefield Capital, First Islamic Investment Bank (FIIB) and RWE Innogy will each hold one-third of the share capital of Beaufort Wind Ltd, which owns RWE Innogy's operating wind portfolio -- the UK's largest green power generating business with 13 wind farms totalling nearly 200 MW. Wind projects completed by National Wind Power over the next three years will be sold to Beaufort Wind after completion. The completed portfolio could total up to 430 MW. The three partners in Beaufort will between them invest £100 million, with £300 million raised as debt finance from around 12 banks.

National Wind Power will continue to manage the projects. Power and Renewable Obligation Certificates (ROCs) from the wind projects will be sold under long term contracts to npower, RWE Innogy's electricity retail subsidiary, helping it meet its renewables obligation under UK energy legislation.

Double first

The deal is the first wind farm portfolio financing under the ROC market mechanism and is the first to finance a British offshore wind farm. Andrew Lee from Augusta & Co, which advised Englefield and FIIB, says the deal represents a bold step for renewables into a new area for private equity. "We are taking the industry in the UK as regards financing to a new level by breaking down development activities from operating activities," he says.

"Operating plant have a completely different risk and reward profile from development, and the industry is realising that you need to finance them from completely different pools of capital," he says. He points out that RWE Innogy's portfolio makes an attractive investment due to its large size, diversification of turbine type and make, geographical diversity and diversity of wind regime.

Since news of the transaction broke, Lee says that Augusta has received many enquiries about further financing deals. "There is interest being shown by developers with large portfolios across Europe."

Challenging future

The City has been eyeing the financing with interest. "This is an incredibly important deal," comments Carl Tishler from Babcock & Brown. "It is hard to overstate its importance, but it would be easy to overstate its potential," he cautions.

"The critical thing that will define the future of the wind sector is the cost of capital. Deals like RWE Innogy's where they are outsourcing the capital are only viable for companies which have a very low cost of capital," he says. "Everyone is thinking about it as a model for future wind farm financing, but it's a big step to the second or third such deal, and replicating it may be very challenging."

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