Project Finance
Growth of the European renewable energy markets offers great opportunities for project finance in the UK, with ambitious targets and greater certainty in regulatory environments, stimulating investment in renewable energy projects.
The EU is driving investment in renewable energy projects with its target of 20% of energy to come from renewable sources by 2020. Under the Renewables Obligation (RO) licensed electricity suppliers must source an annually increasing percentage of their electricity from renewable sources. The current level for 2008/09 is just 9.1%, so there’s room for growth.
The system of Renewables Obligation Certificates (ROCs) under the RO has supported revenue streams for renewable energy projects, facilitating project finance. Banding the RO by technology should see increased support for post-demonstration phase or marginal technologies and see a diversification of renewable energy projects. We expect a move away from onshore wind, hydro and land fill gas and towards offshore wind and biomass, ensuring the UK remains a most attractive investment destination for renewable energy projects.
Banks have shied away from lending to certain renewable energy projects, but technology is advancing, projects are succeeding and banks are now investing. The full potential of offshore wind farms may be unlocked, as there seems to be considerable appetite from banks to invest and trends indicate they are accepting more relaxed debt service coverage ratios and covenant protections. They are even taking on development risks by supplying advance payments for turbines and are more willing to finance projects that have a reasonable level of market exposure.
Private equity houses and capital markets are getting involved, with some specialist banks willing to supply mezzanine finance for onshore and offshore wind, biomass and CHP projects. This is particularly useful for smaller sponsors with limited equity or where a larger sponsor is developing a number of projects.
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Globally, project finance in renewable energy projects is increasing dramatically, with debt to equity ratios typically around 80:20 and likely to improve as the technology advances and the market matures. Bank finance for biofuels can often be obtained against the security of off-take contracts with oil companies, but high levels of equity finance are often needed. Project finance should become much easier to obtain for biofuels once second generation biofuels become more commercially viable.
Project finance will be essential to increasing the number of renewable energy projects in the UK and it can provide a systematic approach to structuring, assessment and allocation of risk to optimise the capital structure of low-carbon projects. Project finance as expected to play an important role in the development of nuclear energy, now the Government is in favour of it, again – watch this space.
We have extensive experience in assisting project developers, investors and funders of domestic and international capital projects, funded on a non-recourse or limited recourse project finance basis. We have the expertise to help you deal with these issues:
- onshore and offshore renewable energy projects
- processing plant
- waste management and recycling projects
- PFI and PPP projects in the education, transport and health sectors
- biofuel projects and generation plants such as CHP
- advising on project documentation and funding documentation.
Catherine Burke
Partner, Head of Capital Projects
T: 44(0)870 763 1552
E: catherine.burke@martineau-uk.com |
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