For many farmers and landowners 2011 has been the year of decision regarding whether or not to invest into a renewables venture. For most, this has involved submitting a planning application for their preferred technology. Typically this will be a mid-scale Wind Turbine (sub 250kW) or an Anaerobic Digestion (AD) / Biogas plant (sub 500kW) now also representing a significant number of applications. The 2010 and 2011 amendments to the Northern Ireland Renewables Obligation have given both technologies the required level of NIROC support to make them commercially viable on a farm scale.
So, you’ve got your planning approved, and you want to progress with a G59 application for Grid connection of your project. Almost simultaneously you will need to firm up how you are going to finance your entire project. Grid connection offers for projects of this scale can range from £70k to £500k depending on distance from sub stations and the level of additional infrastructure required. Grid connection offers will require you to pay 20% of the amount to reserve the connection within 90 days.
Banking your Project
You’d think that with the enhanced levels of NIROCs available that securing finance for your project would be relatively straightforward? Well, as many are now finding out – you’d be wrong.
The banking crisis of 2008 has resulted in many of our local banks having to recapitalise, and as such they have been unable to meaningfully support the renewables sector. While most of them have long term commitments to the N.I. farming sector, they have struggled to convince their credit departments to provide additional facilities for what are essentially ‘new’ technologies, particularly when there are so few local examples of the technology up and running.
The present reality is that the early projects already commissioned or under construction are 100% self-funded or have a modest level of bank debt secured against land based security AND alternative income streams. For many prospective projects in the pipeline, this funding scenario is not an option.
Thankfully, as with any gap in a market, other financial players have moved to pick up the slack left by the banks. There are currently a number of private and public funds active in the local market that may be interested in helping with specific projects. This takes us into the world of ‘Project Financing’ which carries a whole new set of funding parameters compared with the regular secured loan facilities that farmers will be most familiar with.
Project Finance for Anaerobic Digestion
If we take an AD project as an example; a Project Finance facility from an investment fund will offer up to 100% funding for your project. Funding is currently available from several funds between a minimum of 5 to maximum of 10 years. The Fund will typically cover all the primary costs of construction and technology plus costs of grid connection, feedstock storage, tractors, trailers and other necessary items for effective operation of the plant.
The following is an outline of the likely Investment Criteria required to secure project financing for an AD plant.
1. Planning Approval
2. Feedstock Supply Security: The funds need to be convinced over the security of feedstock supply for a minimum period of 7 years
3. Technology Approval: A full due diligence will be undertaken on the preferred technology vendor to ensure that they are suitably experienced, credit worthy and able to contract under UK based construction terms for the project supply and associated warranties.
4. Grid Connection: The offer of grid connection will need to be confirmed and the costs factored into the overall financial model to ensure project viability.
5. Funding Vehicle: A new special purpose company (SPV) would act as the recipient of the funding. It would then enter into a supply contract for the supply of the feedstock to the plant. These contracts will be between the SPV and you and/or your primary supplier of feedstock.
6. Operation: The SPV will contract with the farmer for the day to day running and operation of the plant.
7. Feed Stock Supply: The SPV will contract with the farmer for the supply of feedstock to the plant. The SPV will pay for the supply of feedstock on a % of dry matter basis. Digestate removal will often also form part of this agreement.
8. Power Purchase Agreement: The SPV will also negotiate and agree terms for the supply and sale of electricity to an approved energy company. NIROC income will also be secured via the SPV.
9. Site & Access: The location of the plant will need to be established with full and unhindered access. A long term lease will be held by the SPV over the plant site, silos and include access rights over any lanes. The SPV will pay the landowner for the lease over the site.
10. Costs & Structure: The costs of funding from a VCT fund will generally be higher than that generally on offer from banks. However, everything is negotiable and precise deal structure will depend on various factors such as feedstock security and the precise percentage of funding required. Funds will retain an active and majority shareholding in the SPV until the debt is repaid whereupon equity is transferred back to the farmer / landowner.
As with anything, this funding model is not prescriptive but provides an overview of the likely process to secure Project Financing for an AD project. I’d like to be able to confirm that this model also works for mid-scale wind turbines, however, unless you’ve got 3 or more turbines to finance – it doesn’t. The funds offering Project Finance for renewables generally start with transactions of £1.5m+ and hence the wind turbine projects of up to £500k need a different approach.
Wind Turbine Financing Options
While there is a level of debt available from banks to support wind turbines most of it is directed at the large wind farms with only a trickle available for small projects. The options for individual famers to raise 3rd party finance for single turbines are almost non-existent unless you are able to secure the support of your bank in the form of a secured loan facility. While there is some banking support for projects under £100k, Loans, Leasing or Hire Purchase facilities are still not available from any UK based institution for wind turbines of this scale. Many farmers are therefore considering self-financing their turbine with a second-hand turbine to keep the cost as low as possible.
1. Some farmers are teaming up with a few neighbours to put together a portfolio of sites that may be of interest to an investment fund.
2. Independent wind development companies are offering attractive lease options to landowners with suitable sites. Landowner investment options are also becoming a feature of this route.
Financing a Wind Turbine Portfolio
There are only a few investment funds currently interested in funding N.I. portfolios of wind turbines. The funding criteria for Project Financing portfolios of wind turbines are stringent and must be considered before settling on a particular brand or development strategy.
Typically this will involve:
1. Planning Approval
2. Reasonable costs for Grid Connection (sub £150k)
3. Sites should have an average wind speed greater than 6m/s, with independent verification from recognised consultants.
4. New Turbines only
5. Turbines must have a track record of performance in the sector and be able to adhere to all planning conditions.
6. Turbines must carry manufacturers warranties for at least five years
7. Turbines must be competitively priced and be supplied via suitable qualified construction contractors.
8. Operation and Maintenance Arrangements must be established with suitably qualified contractors.
I hope this article has given you a useful insight into the current financing options for your AD or Wind Turbine project. An early understanding of the likely financing options is very important to ensure there are few surprises when the bills need to be paid. I’ve no doubt that Northern Ireland landowners are well positioned to benefit from what renewable installations offer both in terms of income and the ability to offset the high cost of farm energy bills.
For further details contact:
Trevor Finlay – Managing Director
Vision Asset Finance
T: 028 2565 6000