ENERGY: Where is the funding coming from to finance renewable energy initiatives?Tom Riordan, chief executive, Leeds City Council (chair)Mark Cumbo, business development manager, Co-operative BankStephen Cirell, independent lawyer advising on low carbon and renewable energy projectsAndrew Page, head of environment, Foresight GroupErich Scherer, assistant director – renewable energy corporate finance, BDO

WHERE IS THE FUNDING COMING FROM TO FINANCE RENEWABLE ENERGY INITIATIVES?

A Senior Debt Providers Perspective

Mark Cumbo

Renewable Energy, Energy Efficiency and Asset Finance

11 September 2012

Agenda

• Brief introduction to The Co-operative Group and The Co-operative Bank

• Specialist Energy Team – Our experience, objectives and mandate

• Honest appraisal of the current market dynamics

• Senior debt funding structures and real life examples

• Funder’s ‘tick list’

About Us – The Co-operative Group

Member Direction

Specialist Energy Team – An overview

Renewable Energy & Energy Efficiency Team• Dedicated specialist team• Manchester, Edinburgh and Glasgow

bases• Work independently of traditional regional

corporate lending teams

Mandate• UK only• National coverage

Funding Structures• Project/Transaction lending versus

relationship lending• Specialists in Project Finance & Asset

Finance• Long term (>7yr) commitments

Capital• £1bn Fund• c£760m of committed facilities

Deal Size• Min: £2m (consideration of smaller if replicable

transaction/portfolio)• Max £25m (per project not borrower)

Technologies• Capable of providing financing solutions across

a number of technologies

• Generation technologies, including:– On-shore Wind farms– Hydro– Solar PV (not domestic ‘rent-a-roof’)– AD

• Efficiency & Heat technologies include:• Biomass• GSHP• CHP• District heating• Energy efficient boilers/BMS/Lighting

Specialist Energy Team – Our mandate

The largest dedicated energy team by resource and transaction volume of any UK lender….

•The delivery of low carbon energy generation

•Promote energy efficiency and the efficient use of resources

•As passionate about heat as electricity

•Promote affordable warmth and the alleviation of fuel poverty

•Work to reduce carbon footprint in the UK

•Keen to support co-operative ownership models with community benefits

… committed to a triple bottom line (Economic, Environmental & Social)

Our Target Borrower & Current Market Dynamics

We are a senior debt lender: by definition we charge lower margins but expect minimal default risk and a strong security position….

Renewable Energy Generation• Planning approval secured• Established counterparties (e.g. turbine supply, civil engineers, etc)• Equity contribution secured• Requirement for long term commitment (7yrs +) and ‘fair’ operational terms• Recognises ‘low cost’ project finance solution for smaller (<£30m) projects• Likely a Project Finance funding solution

Renewable Heat & Energy Efficiency• Strong operating background (established, credible, profitable, equity base)• Developed relationships into high credit quality end users (public est., blue chip etc)• Likely long term contracts (5yr+) and service obligations• Robust contractual documentation• Limitations on existing working capital lines / seeking full life payment certainty• Likely an Asset Finance and Receivables funding solution

Our Target Borrower & Current Market Dynamics

Market Dynamics

• Fluid support policy (FITs, RHI, RO’s, EMR)

• Lack of ‘long term’ bank capital

• Historic low levels of long term ‘cost of funds’

• Introduction of catalyst organisations (Green Investment Bank)

• Lack of grant or low interest subsidised funding

• Development of frameworks (RE:Fit, CEF, etc)

Funding structuresD

ocum

ent

atio

n c

ompl

exity

Low

High

Non FullRecourse

Secured lending

Receivables funding

HP/ lease

Project finance

Funding structures – Project Finance

Features• Most complex (documents and due

diligence)• SPV established• SPV contracts with third parties• Non recourse solution• Equity requirement

Terms• 10 to 15 year term• Requires detailed financial model and legal due

diligence (therefore costly)• Requires long term income certainty• Bank will take a charge over assets plus step ins• Costs tend to be prohibitive to all but largest projects

(£2m+)

End User(s)Special Purpose Vehicle (“SPV”)

Senior debt

Equity

Project income (e.g. electricity generation ROCs / FITs) used to repay bank debt

3rd party service providers

(e.g. delivery partners, legal advisers etc.)

Example project – Community Scale

Tiree Renewable Energy Limited

• Community Feed in Tariff scheme• 0.9MW turbine, cost £1.9m• Received bank debt of £1.2m plus Big

Lottery funding of £0.7m• 90% of island residents are Co-op

members• Turbine will produce over 3,100,000 kw/h

of energy a year – sufficient for 700 households

• Average capacity factor in UK of 30%. Tiree can expect 44.5%.

BenefitsAnticipated to return a minimum of £100k

back to the community per annumMonies generated to be used by

community projects; supporting local clubs, schools, charities etc.

Funding structures - Receivables

Delivery partner

Installation, operations and maintenance

Service charge: assigned to Bank

Managed service contract

Features• Complex documentation• Single end user• Service charge must contain a ‘hard

deck’ element• Guaranteed performance / savings• Termination provisions

Terms• 10 to 15 year term• Same delivery partner to install, operate and maintain• Requires high credit quality end user• Potential to aggregate small projects: batch approach

End User

Example project – large scale public building

Natural History Museum, London

• Provision of energy efficient solution - Introduced CHP and re-engineered the delivery systems to maximise efficiency.

• Guaranteed Savings Solution over 16yrs for the Museum

• KPI’s for performance and efficiency supported by penalty payments

• CFS contributed £3.6m in funding.

Benefits

Projected savings for the Museum for year 1 of £500,000, actual savings £650,000.

C02 reductions of 1,800 tonnes pa.

£3m investment fund –previously made available for plant refurbishment - can be assigned elsewhere.

Example project – Social Housing

Aberdeen Heat & Power, Scotland

• £1m of debt support for the installation of a CHP energy centre.

• The energy savings have generated additional revenue and this has been used to alleviate fuel poverty.

• The Local Authority purchases the excess energy.

• Extension of pilot scheme to nearby leisure centre – development of DH network

Benefits Alleviating fuel povertySubstantial reduction in fuel billsBetter quality of heat for the buildingReduction in void periods – waiting list Infrastructure is future proofed

Funder’s ‘tick-list’

• Business Case (driver?)• Savings vs. generation• Payback• Underlying business performance• Planning approval?

• Project Counterparties• Credibility• Credit quality

• Technology• Credentials• Warranty• Credit quality of guarantee (LD’s)• Maintenance• Installation lead time

• Metering• Accuracy• Base load assumptions• Complexity (single site versus DH)

• Demand side risk• Anchor users?• Minimum take or pay?• Base fuel price risk taker

• Policy• Which support mechanisms used?• Accreditation risk?

• End user• Credit quality• Demand issues

• Security• Requirement for charge over asset• Security over income stream

Thank you – any questions?

BASE Leeds City Region

11 September 2012Bradford

Stephen Cirell

Problem Areas

• Strategy

• Organisation

• Budgets

• Targets

Therefore this Council believes that by 2015:

• all vehicles procured by the Council should be electrically powered or run on liquefied petroleum gas.

• there will be at least 500 electric cars running on the streets of the city as we will develop the electric charging infrastructure.

• 50% of electricity used by the Council should be generated from renewable sources.

• the City Council's energy consumption will be reduced by 25%.• 10% of Birmingham homes will be linked to district heating systems.• 10% of Birmingham homes will have retrofit insulation.• there will be at least 10 "low carbon communities" similar to the successful example of Summerfield Eco-neighbourhood.

Birmingham City Council

The Birmingham Declaration

Funding Renewable Energy

Projects (1)• Reserves

• Slippage on other projects

• Public sector borrowing

• Commercial borrowing

Funding Renewable Energy

Projects (2)• Equity stakes

• Institutional investors

• An offering to the public

Regional Issues

• Experience from Cornwall Council

• The lessons from abroad

Lessons LearnedStable, Long Term Policy Public /Private Differentiation

Determining Priorities Development of strategies

Financial and Business cases Be Prepared to Borrow

Gain Confidence Raise Your Ambition!

Stephen Cirell

mobile: 07774 451 587email: stephencirell@me.com

twitter: @stephencirell web: www.stephencirell.co.uk

Renewable and Waste to Energy Funding

Andrew Page, Head of Environmental Infrastructure September 2012

Foresight Overview

3

•Multi- asset class, multi-sector, multi-fund, multi-geography business

•Institutional and Retail Funds

•Over 50 People operating in UK, Europe and US

•Independent and Privately owned by team who co-invest alongside investors

•c.£1bn of Funds under management and Managed account frameworks

•Deep expertise in specific areas

• Transaction structuring and Value creation

• Private Equity, Project Finance, PFI

• Waste, Renewables ( chiefly Solar) , Carbon, Energy Efficiency

• Differentiated as a Fund Manager by the team mix and level of team experience

operating in the sectors in which we invest

Funding Hurdles – Renewables and Waste to Energy

3

•Shortfall of Funding or Shortfall of Fundable propositions?

•Over-optimism on potentially available returns?

•Typically capex intensive capping upside potential

•Appropriate risk/return balance vs .other investment opportunities

•Challenge in discerning the difference between debt and equity risk and

appropriate structure

•Diverse, complex and changing markets with a multitude of influencers

•Financial performance can vary hugely with location

•Upfront investment in planning, design-work, diligence and deal costs

•Level of understanding of the complexities of the markets and solutions by all parties

– financiers and developers

•Industry skill-sets

•Limited number of interested financiers with mix of sector understanding

Approach

3

•Focus on a deep understanding key project parameters and markets

•Open to different funding structures – Topco/SPV/ESCO – options and warrants

• Realistic view on suitable level of debt and overall cost of capital

•Momentum more important than best pricing

Funding Solutions

3

•Early Development Capital – Private Investors – possible SEED EIS

•VCT Financing Restrictions and limitations as an institutional co-investor

•Full equity funding and subsequent refinancing

•Appropriate use of debt recognising the true risks and underlying asset values

•SPVs with Warrants and Options to reflect risk but bridges pricing issues

•Rollout deals can incentivise investors and balance risk but Fund will not give formal

commitment as an open facility

•Government Support assistance via Foresight– but not soft money and does not

incentivise commercial investors in itself:

• Foresight Environmental Fund ( London focused)

• UKGI Funds

• Financial Support mechanisms – e.g. RHI, ROCS, Landfill Tax – but not all

necessarily seen as firm foundations

Summary

3

•Not a stand-out must-have investment sector given risk/returns vs other

opportunities and capital intensive nature

•But should be an important part of a portfolio for Investing Institutions

•Foresight does have dedicated Funds for the sector and access to Government

based and institutional capital together with value add given our experience

•Clarity on the detail and markets – many of those investing in the sector have built up

significant knowledge ( a plan not a strategy or concept)

•Flexibility and realistic banking expectations

ECA Court, South Park, Sevenoaks, Kent , TN13 1DUwww.ForesightGroup.euinfo@foresightgroup.eu

Tel: 01732 471800 Fax: 01732 471810

Issued by Foresight Group LLP, ECA Court, South Park, Sevenoaks, Kent, TN13 1DU. Authorized and regulated by the Financial Services Authority: 25 The North Colonnade, Canary Wharf, London, E14 5H

Erich Scherer

Base Leeds City Region

11 September 2012

FINANCING RENEWABLE HEAT PROJECTS

48

GOVERNMENT POLICY FRAMEWORK

The UK has a legally binding target of 15% renewable energy by 2020. Renewable energy also delivers carbon reductions and reduces dependency on foreign oil/gas.

The Government has put in place the following subsidy schemes:

• The Renewables Obligation has provided support for large-scale renewable electricity since 2003

• Feed-in Tariffs have been available for small-scale renewable electricity from April 2010

• The Renewable Heat Incentive has launched as of November 2011

49

TENTATIVE CONCLUSIONS FROM RECENT GOVERNMENT ACTION

Case study 1:

The RHI capped the solar thermal tariff at 8.5p/kWh rather than the ~16p which it required. The government also cut large-scale solar support back to 8.5p/kWh.

Conclusion:

– In meeting the UK 2020 renewables target, the government tries to avoid paying more per kWh than it is paying offshore wind (2 ROCs or ~8.5p/kWh)

Case study 2:

The government has cut FITs for small PV installs by 50+% since the start of 2012.

Conclusion:

– The government is still willing to give higher tariffs than 8.5p where they pursue a community engagement purpose (ie small scale PV)

– But government not interested in commercial investment in such more expensive tariffs

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RENEWABLE ENERGY TECHNOLOGIES

Solar PV(photovoltaic)

Wind turbine Hydro power Solar heating(thermal)

Heat pump (ground source)

Biomass boiler

Anaerobicdigestion

Combined Heat & Power

Feed-In Tariffs Renewable Heat Incentive

Specia

list

Generic

51

THE OPPORTUNITY: THE RENEWABLE HEAT INCENTIVE

BACKUP HEAT

RENEWABLE HEATING (FOR

EXAMPLE BIOMASS)

OPTIONAL BACKUP HEATING

(OIL/GAS)

HEAT USE (FLATS/

HOUSES/OFFICES ETC)

Compared to FITs/ PV:

• Bigger impact on carbon (heat use is a greater part of onsite emissions than electricity)

• Long-term tariff certainty (RHI is mission-critical to reaching the legally binding UK 2020 target – PV is not)

• Good returns (at least for biomass): typically around 20% project IRR

• Simple technology (low technology risk)

• Currently eligible: anything other than individual residential installations

RENEWABLE HEAT

FOSSIL FUEL BACKUP

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RENEWABLE HEAT INCENTIVE TARIFF LEVELS

Energy source Scale Tariffs (pence/kWh) Duration (years)

Small biomass < 200 kW 8.3 * 20

Medium biomass 200-1,000 kW 5.1 * 20

Large biomass (including municipal solid waste)

> 1,000 kW 1.0 20

Biomethane

(including biogas combustion < 200 kW)

All sizes 7.1 20

Small ground source heat pumps

< 100 kW 4.7 20

Large ground source heat pumps

(including deep geothermal)

> 100 kW 3.4 20

Solar thermal < 200 kW 8.9 20

* Up to 1,314 peak load hours per year, followed by 2.1p/kWh for any higher heat load.

(as of April 2012)

53

PROJECT FINANCE ESCO STRUCTURE

ESCO(energy services

company)OFGEM

FEEDSTOCK SUPPLY(biomass only)

OPERATION & MAINTENANCE

TECHNOLOGY SUPPLY

INSTALLATION

BUILDING USER(gets cheaper heat)

RHI income

Heat sale income

BUILDING OWNERLease & access

FUNDERPROJECT

DEVELOPER

54

WHAT’S THE BENEFIT?

Heat user:

• No upfront installation costs

• Cheaper heat

• Certainty on future energy bill rises

• PR boost

• No hassle or worry about maintenance

• Reduction of carbon footprint; free contribution (£12/t CO2) towards Carbon Reduction Commitment (if electricity use > 6,000 MWh power)

Project sponsor:

• Additional margin purely from developing an ESCO: the profit remaining after heat user has received cheaper heat funder has received finance return.

• Up to 100% third party finance

• Little or no investment risk since the project will be “non-recourse”

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Acquisitions Monthly Awards – Mid-market Deal of the Year 2008 and 2010 M&A Awards – Accountancy Firm of the Year 2008 and 2007Unquote British Private Equity Awards – Corporate Financier of the Year 2008 Accountancy age – Deal of the Year 2008Midlands Dealmakers Awards – Transaction Services Team of the Year 2007 and 2008

ABOUT BDO

200+UK: 206 partners working with over 2,600 staff

1414 offices across the country

6Sixth largest national

firm of accountants

• Within BDO’s UK corporate finance arm, we have raised over £400 million of renewable energy funding for clients

• (Probably) only major financial advisory firm with in-depth and wide-ranging experience on RHI projects and RHI finance: currently engaged on seven RHI ESCO projects.

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Our current viewFUNDERS IN THE MARKET

SENIOR DEBT/ ASSET FINANCE

• 80% of project cost

• Developer contributes remaining 20%, retains 100% equity

• Interest rate 6%-9%

VCT/ EIS/ PRIVATE EQUITY

• Up to 100% project costs

• Funder will require around 49% shareholding in Newco

• Any interest payment typically set off against the funder’s return from equity stake

• Re-finance after 3-5 years into senior debt

Limited use to renewable heat at this stage:

• Little familiarity with renewables and renewable heat in particular -> long and painful process

• Increasingly require corporate guarantees and large existing balance sheets (ie not project finance)

• Require an equity contribution from the project developer (20%)

Attractive funder group for renewable heat :

• Only funder group where some players know the technologies -> due diligence process much easier

• VCT/ EIS keen on RHI since FITs projects no longer eligible for VCT/ EIS

• VCT IRR requirements can be met at current RHI tariffs for biomass and sometimes for GSHP

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CONCLUSION

Too much focus still on PV as regards on-site energy initiatives

• Renewable heat still an overlooked opportunity

• Can be combined with action on energy efficiency

RHI can deliver attractive returns• Enough subsidy to pay the

funder and make a profit

• Comparatively high level of policy certainty on the subsidies

• Major benefits for energy users in the form of reduced heating bills and less exposure to volatile fossil fuel prices

Success in finding funders

• EIS/ VCT money available

• Waiting for senior debt/ asset finance lenders to catch up

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CONTACT DETAILS

ERICH SCHERERAssistant DirectorRenewable Energy Finance

BDO LLP55 Baker StreetLondonW1U 7EU

T +44 (0)20 7893 2349M +44 (0)7 854 517 296E erich.scherer@bdo.co.uk

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