Sustainable banking
Forces of nature

The forecast is mostly bright for banks funding the growth of the UK’s renewable energy sector, reports ANDREW STONE, although some uncertainties loom.

The UK and, in particular Scotland as Europe’s windiest country, is backing offshore wind in a big way. It is also investing heavily for the first time in solar energy while interest in biomass, anaerobic digestion and combined heat and power schemes is soaring. This all bodes well for banks seeking profitable renewables schemes to back.

The most significant renewables sector by far – wind – is now a well-established one with proven funding models. Although newer, the feed-in tariffs backing solar schemes are also working well so far.

The Royal Bank of Scotland (RBS), which has been providing funding to renewables projects since the 1990s and has financed 9GW of generating capacity to date, knows what it is looking for in future schemes.

“Whether wind, solar or another type of renewable scheme, we look for a strong deal in terms of the people involved in putting the transaction together,” says Jamieson Thrower, Senior Director for Energy & Infrastructure Structured Finance at RBS. “A transaction needs an experienced sponsorship group, utilising proven and robust technology. It needs to be the right size with strong underlying metrics. It is always reassuring when the sponsors are like-minded and have identified some of the risk issues we might have ahead of financing.”

Plans not settled

Offshore wind is set to provide a major chunk of growth – 24-32 terawatt hours of renewable electricity generating capacity by 2020 – in UK renewable energy generation in coming decades. While marine energy generation – both wave and tidal – remains experimental and unproven at this stage – although Barclays has just recently financed the first marine/tidal scheme – the advent of solar electricity feed-in tariffs in the UK has created a market in solar PV for the banks almost overnight.

“Historically wind has been the main story, and in terms of debt quantum it will continue to be so, but we’ve recently seen lots of activity on the solar side,” says Thrower. “The biggest deal we have closed to date this year has been the financing of the installation of up to 37,000 solar photovoltaic panels on the roofs of social housing throughout the UK. We led a group of five banks in a £225m scheme and we expect to see similar opportunities.”

There is also significant capacity for a great deal more onshore wind energy generation as well, adds Thrower. “There are onshore projects with good technology, good sponsorship and good levels of diligence done on them.”

But the path to greater investment in sustainable energy is not without its risks. The full details of the government’s ambitious Energy Market Reform white paper released in July are still not settled and, until they are, some uncertainty will reign, says Thrower

The uncertainty over the future level of the feed-in tariff for solar is also clouding the outlook for new solar schemes both domestic and commercial, says Steve Moore, Relationship Manager on the environment team at Triodos Bank, one of the UK’s early renewables pioneers. “The price of the product continues to fall but investor confidence simply isn’t there.”

Further out, it’s not entirely clear if enough funding will be available to back the mass of offshore schemes that need to come online if the UK is to meet its renewable energy targets. Banks will need a means to sell on their loans to offshore projects if they are to be able to recycle the capital to back new ones once they start being constructed in large numbers, says Paul Bourke, Head of Economics and Delivery at wind industry body RenewableUK.

A number of risks

“A wider range of financial instruments is required, including asset-bac ked bonds and project bonds. In particular, products that refinance construction investments, using long-term funds, are needed for lenders to continue to finance the high-risk construction phase of new projects. This, in turn, requires the participation of new investors prepared to lend directly to operational projects or, in time, to invest in bonds secured against projects and their cash flows. The Green Investment Bank could encourage this by, for example, providing a first loss tranche or by packaging assets and ensuring these can secure investment grade credit ratings,” Bourke adds.

But Thrower believes it’s too early to tell if a bond-backed scheme can work. “The challenge is that offshore wind is so new. You have an awful lot of risks involved. Can a bond investor be confident that these schemes will produce the level of income they are expected to? Wind risk is a variable that will be difficult for institutional investors to mitigate. They also need to see a consistent and visible pipeline of transactions of some scale.”

Happily, in the short to medium term Thrower believes this should not delay the immediate market for lending to new offshore wind projects. “There is capacity in the market to finance the immediate term. But when you look out over the next 10 years and see that £100-200bn of investment will be required it is important to find new financing solutions.”

While much of the focus is on these large-scale projects, smaller-scale schemes will make up a significant “long tail” of the UK’s renewable generating capacity if it is to hit the ambitious targets it has set out.

This spells opportunity for the smaller players too, although it takes expertise and flexibility to make smaller schemes bankable, says Moore of Triodos. “We’re always looking for embedded generation being generated close to where it will be used. We are able to make it work by keeping legal, technical and duediligence costs down because of our experience and the flexible way we look at these projects.”

The Co-operative Bank, which has been backing small-scale renewables schemes of up to £30m since 2002, believes there is plenty more scope at the smaller scale. Many of its customers are energy service companies serving large organisations, such as hospital trusts, which have significant heating and cooling requirements and great scope to profit from renewables as well as energy efficiency schemes.

Chris Matthews, the Co-op’s Senior Manager in charge of renewable energy asset finance, says the bank has increased its lending pot to £1bn this year backing wind, hydro, combined heat and power (CHP) and a few pioneering anaerobic digestion schemes.

Renewables expertise also helps cement long-term customer relationships, for example by sharing valuable insights into the tax and capital allowances available. Its schemes also support local and rural businesses and communities, factors which promote sustainable profits. “It’s a good, long-term business,” says Matthews.

Back to Special Report contents
Back to Magazine contents