Company profile: A small independent with big support

Backed by one of Italy's most powerful industrial families, small independent power producer Falck Renewables is steadily spreading its wings across Europe.

At the core of its business strategy is strict financial discipline and a determination to respect local people and ensure they benefit fully from its project plans.

Falck Renewables likes to think of itself as different from other independent wind farm operators in Europe. Working closely with local partners and offering local communities the opportunity of a stake in its wind farms, the company says it usually enjoys good relations with its neighbours. This community ownership approach, which is a feature of most of Falck Renewables' 400 MW of operating wind farms, is part and parcel of the company's ethos. "It's the proper thing to do and it's good business," says managing director William (Willie) Heller. "We are going to be there for 25 years in that location. They are going to see our wind farm every day; we won't."

Based in the Marylebone area of the UK's capital, London, the small independent power producer (IPP) has been the wind division of Gruppo Falck of Milan, owned by the Italian Falck family, since 2002. Once the largest privately owned steel producer in Italy, Falck built hydroelectricity power stations in the early 20th century to power its factories. It later moved into gas-fired co-generation, becoming Italy's second-largest IPP, and then turned its back on co-generation in 2002 to refocus on renewables and sustainable energy. Also in the Falck stable is waste-to-energy and biomass firm Actelios, along with a biofuels business.

Heller's relationship with the Falck Group goes back to the 1980s when he was working at management consultants McKinsey & Company. Their paths crossed again in 2002. Heller, a Canadian, had been CEO of Edison Mission Energy (EME), an IPP. He bought out the London-based renewables operations of EME - "for very little" - when its parent company, Edison International (EIX), was disposing of non-core businesses following financial turbulence. EIX kept the assets, he says. "All I got was their contacts and their people."

Needing a backer with financial clout, he approached the Falck family. "I said: 'I know you guys are trying to remake yourselves; how would you like to add wind to the portfolio?'" Heller explains. "They said: 'That makes perfect sense.'" Today, the company's major areas of operation are Italy and the UK. "The UK because that was what our entry strategy was based on," says Heller. And Italy is the company's home market, where it can call upon the Falck capabilities and reputation.

Power purchase prices, based on green energy certificates, are good in both countries, he adds, despite the volatility of wholesale prices, which affect the returns for wind plant operators. The green certificates system, whereby suppliers purchase a certificate for every unit of power they source from renewables, is theoretically better than fixed prices, he says philosophically. The latter can be used as a bit of a blunt tool, he says. "But it (a green certificates system) leads to more risk and therefore the banks tend to be a bit more conservative." The company has 230 MW of wind capacity operating in the UK and as yet only 52 MW operational in Italy. "If you take everything running, in construction and permitted, we are reasonably evenly balanced between the UK and Italy," Heller says.

In addition to Britain and Italy, Falck Renewables also operates two wind farms in Spain totalling 122 MW - La Muela and Cabezo San Roque near Zaragoza in Aragon. "Spain is a great market, but they are overloaded with projects so they've closed the door on new development," Heller says. A newer market for Falck is France. Here it has recently closed its first financing on a cluster of three wind farms totalling 32 MW in Pays de la Loire and Oise and has a further 300 MW in development. Heller notes that the fixed price for wind power in France is not particularly attractive, but taking projects through the French planning system is cheaper than many other countries and success rates are higher. Onshore wind prices in France are currently set at EUR0.082/kWh for the first 10 years of operation, with the rate for the following fives years then varying according to the productivity of the site - ranging between a low of EUR0.028/kWh for wind farms operating for an average of 3600 hours or more to a high of EUR0.082/kWh for 2400 hours or less. In addition, for projects built after January 1, 2008, these initial rates fall by 2% a year, although there is some adjustment to take account of inflation.

Other markets Falck is considering include Poland, where it has set up a joint venture with local developer Bonwind. "Everyone is looking at Poland; it is a fundamentally interesting market," Heller says. As well as having to double green energy output under its 2020 EU renewables target, Poland's power purchase prices for renewables are reasonable. The country's wind farm owners sell their production for the average wholesale price of electricity and augment that revenue by selling the green certificates associated with their generation - last year the combined price wind power producers got was about PLN 0.37/kWh (EUR0.08/kWh). On the downside, wind resources in the country are highly variable so developers have to be very selective, he says, and with its lack of transmission capacity, getting a grid connection can be a challenge.

Heller stresses that unlike many other independent developers, Falck Renewables does not have its own large in-house development team. "Development is a very local activity," he explains. He believes it would be arrogant for the company to assume it could manage the local wayleaving and permitting processes. "We prefer to back local people who have more knowledge of the landowners and of the planning process." he says. "We help them but we play a secondary role during that initial phase." The company has 12 joint venture partners across Europe. These find potential sites for projects, while Falck provides technical and financial support.

"Once permission is granted," Heller explains, "the relationship flips and we take the lead responsibility to discharge the requirements to start construction. We'll do the final micro-siting, buy the turbines, get it built, own and operate." Falck offers its partners either a one-off fee, based on a proportion of the projects's net present value, or a carried interest in the project. "One hundred per cent of the time our partners have always said: 'We'll take cash.'"

The only country where the company has not been able to pursue this strategy of local partnerships is India. Falck is anticipating a change to the incentive rules that the Government hopes will encourage international investors to enter the market. "When that happens I think the economics will probably be attractive," he says, "but they have been promising it for a couple of years."

British anomalies

In all, with a team of just 40 people worldwide - and working through its partners - Falck has some 1800 MW in development, mostly in the UK, Italy and France. Despite the widespread assumption that the UK's is amongst the lengthiest planning processes in Europe, Heller observes that it takes around the same amount of time to permit a project in any of the markets in which Falck operates. "It's just the process that's different." The average time to take a project through the building permitting process is three-and-a-half years, he says, or "five years from origination to planning permission".

The UK, he adds, has proved the most expensive country in terms of getting a project permitted: "Easily double anywhere else we've looked." The reason is its "Anglo-Saxon approach," he says. "It has to follow a very proper route." Satisfying the concerns of the plethora of statutory consultees takes time and often involves additional studies of fauna, flora, transportation or visuals. Moreover, any change to the project, such as a reduction in the number of turbines, has to result in a resubmission of the planning permission application. "And you are always doing a rework. There are virtually no wind farms, ours or anybody else's that we know of, that have been approved as (originally) submitted." It costs a wind developer £500,000 to £600,000 to go through the UK planning process, he says. An additional £200,000 can be added if the project runs to a planning inquiry. "So you're in for up to £800,000 before you even know whether you've got permission or not."

Once a Falck project receives building permission, the company offers up 4% of it for local ownership. In the UK, where community ownership is still rare, it is usually local co-operatives set up with help from not-for-profit organisation Energy4All that take up the offer. Everybody in the company, right up to the Falck family, is committed to the concept of community ownership, Heller says. "It's a high yield bond from their perspective," he explains. The investment has a targeted return of 10% and investors are guaranteed a return of 6.5% as well as receiving their money back at the end of the project life. "Could we find cheaper money? Oh yes," he adds. "But to have the local community saying 'we own a piece of this wind farm' is important to us."

Community ownership takes different forms at Falck's Italian and Spanish projects. In Italy, the firm negotiates a deal with the local community, which then receives a proportion of the revenue stream. In Spain, the regional government of Aragon owns a 5% slice of the wind farms. "The common element is that there is a local feeling that people own part of the wind farm," Heller says.

Another characteristic of the company is the strict financial discipline it follows - a discipline that led it to walk away from its first project in Turkey during the past year. "That was our one victim of the credit crunch," Heller says. With the permits in place and the company ready to start construction, the banks pulled the rug out from under the 60 MW project by retracting their offer of debt during the construction phase. They offered to reconsider financing, but only after Falck had built the wind farm on balance sheet. "We are a relatively small privately owned company, so to carry 100% equity on a EUR100 million project, with no commitment from the banks and in the middle of a credit crunch, we couldn't do it," says Heller. "We sold the project just to get our costs back. We still like the Turkish market but that was the worst possible timing to get a permit."

Credit crunch

All Falck projects are built with non-recourse finance deals, whereby the bank is only entitled to recourse from the project itself rather than the assets of the borrower. Since the credit crunch hit, the company has closed two project financings, but it now takes twice as much work to reach financial close, Heller says. Syndication - where one bank would arrange the deal involving a number of lenders - is no longer available. "What we have to do now are club deals working with up to half a dozen banks" he says. "So we are trying to deal with six different credit committees and keep it all coordinated. The margins have gone up enormously, base rates have come down a little bit, so all in all money's more expensive, but not obscenely so."

Still, non-recourse debt is a good discipline, Heller insists. "It's a very efficient way for us to leverage our money," he says. "If you can't convince a bank that lending to a project is a good thing, maybe you should be worried about your equity."

One option the company does not want to pursue is to sell off projects to raise operating cash. It sees itself very much as an owner of wind farms, which again comes back to the Falck family ethos, says Heller. The Falcks see themselves as an industrial family and like to own their generating assets for the life of the project. "Building projects and flipping them wasn't of interest to me either when I started this up," Heller adds. This may limit growth, he concedes, and yet the company has doubled its annual turnover in each of the past three years. It reported revenues of £40 million last year, rising closer to £90 million this year.

Looking to the future, Falck says it has no intention, as yet, of taking on the challenge of offshore wind development-a somewhat ironic decision considering it started its wind business with developer RDC by securing a site licence for the British Rhyl Flats offshore project, later bought by Npower Renewables. "We thought there was no money in Rhyl Flats so we sold it to get our money back," says Heller.

"For the time being we are small and we have plenty of growth opportunities in our onshore projects," he says.Although, not one to turn his back on an opportunity that comes his way, he adds: "Never say never." The company, he admits, did look very carefully at participating in the UK's Round 3 offshore wind bidding process. "But these will require huge investments of £1 billion minimum," Heller says. "We don't like the idea of being a ten per cent owner of a wind farm. We want to be equal partners."

Operating and under construction
Falck Renewables powers across Europe

Project Supplier MW
Operating
UK
Cefn Croes, Wales GE 58.50
Boyndie, Scotland Enercon 16.65
Earlsburn, Scotland Nordex 37.50
Ben Aketil, Scotland Enercon 23.00
Kilbraur, Scotland Nordex 47.50
Millennium, Scotland Nordex 50.00
SPAIN
Cabezo San Roque, NEG Micon 23.25
ARAGON
La Muela, Aragon NEG Micon 25.74*
ITALY
Minervino Murge, Nordex 52.00
Puglia
FRANCE
Les Cretes Nordex 10.00
Le Fouy Nordex 10.00
Breteuil Nordex 12.00
Total operating 366.14
Under construction
Italy
San Sostene, Calabria GE and Nordex 80.00
Petralia Sottana, Sicily 27.20
Budduso' - Ala dei sardi 138.00
Total under construction 245.20
Total operating and 611.34
under construction
* Falck owns 26% of 99MW

More than 1 GW planned
Falck's wind development pipeline
Project/Country MW
CONSENTED
Plouigneau, Brittany, France 20
Millennium extension, UK 15
IN DEVELOPMENT
France > 300
UK > 600
Poland > 100
India > 100

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