United Kingdom

United Kingdom

New finance solutions

A big question for wind developers is whether the financial community will take an upbeat view of renewables under Britain's new market mechanisms (outlines in main story, "Still lacking shape but has potential," in this issue). "The difficulty will be in getting long-term contracts," says one developer. This article looks at some of the financing dilemmas and solutions already at hand.

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A big question for developers is whether the financial community will take an upbeat view of renewables under Britain's new market mechanisms (main story). "The difficulty will be in getting long-term contracts," says Chris Shears from developer Renewable Energy Systems. "But we do have some confidence that the mechanism will work and that contracts will be bankable, otherwise there will be a lot of egg on faces."

Jonathan Johns from Ernst & Young points out that the contract length poses a dilemma for generators: the longer the length of contract, the smaller share they will be granted of the pools of cash created by suppliers "buying out" of the obligation and by the Climate Change Levy (CCL). Both these sources of revenue will make up elements of the overal price paid for a wind kWh. A supplier (retailer) agreeing a long-term purchase contract with a renewables generator will want something in return for that long levity; the longer the contract, the less the supplier will want to pass on of its share of revenues from the buy-out pool. In the same way, a business buying renewables to avoid the CCL will be increasingly unwilling to share that benefit with the renewables generator the longer the contract. Johns warns that renewables should carefully consider how they position themselves in the relationship with suppliers and business customers. "If they just sit on the sidelines and do not try to influence the chain between the generator and customer, they will only get that element of the price that the supply community and the business community allow them." But the expected shortage of renewables gives them bargaining power to get the correct value for their electricity.

Typical contract terms being discussed are either £0.03.5-0.04/kWh for five years, or the wholesale electricity price plus 40% of both the supplier's share of the revenues from the £0.02/kWh buy-out price and the £0.0043/kWh CCL price over ten years. "These types of arrangements will need new types of financing because wind will have more of a merchant type quality," he says.

Johns adds that financing solutions are already being developed, particularly by new entrants to the field. In the past, the lack of a liberalised market was a barrier to investors and institutions, he explains. "They are now becoming interested in the market for renewables because it is a proper market, and they see the opportunity of getting recompense for coming up with solutions."

The financing community, however, does not like the continuing uncertainty of the market.

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