| Sectors & Activities/Project Finance Project finance & climate change The growth of the European renewable energy markets has bought great opportunities for project finance in the UK. Ambitious targets and greater certainty in regulatory environments are proving key to stimulating investment in renewable energy projects. The EU is driving forward investment in renewable energy projects with its target of 20% of energy to come from renewable sources by 2020. Under the Renewables Obligation (RO) the UK has been setting increasing binding annual targets of electricity supplies to come from renewable sources. With the current levels of renewables being about 6.5% in Europe and 2% in the UK there is a lot of room for growth. In the UK, the system of Renewables Obligation Certificates (ROCs) under the RO has supported revenue streams for renewable energy projects which has facilitated project finance. Firm proposals to band the RO by technology should see increased support for post-demonstration phase or marginal technologies. This should mean a diversification of renewable energy projects, away from onshore wind, hydro and land fill gas, and towards offshore wind and biomass. These measures will ensure that the UK remains one of the most attractive investment destinations for renewable energy projects. Banks have often shied away from lending to certain renewable energy projects due to risk. This is particularly so for wind, where technological and development risks have hindered progress. But technology is advancing, projects are proving successful and banks are investing on a portfolio basis to diversify risk. The full potential of offshore wind farms may be about to be unlocked, as there seems to be considerable appetite from banks to invest. 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. Investor profiles are changing – an increasing amount of equity is being provided by private equity houses and capital markets and some specialist banks are willing to supply mezzanine finance to projects for onshore and offshore wind, biomass and CHP. This is particularly useful for smaller energy project sponsors with limited equity or where a larger sponsor is developing a number of projects. Globally, project finance in renewable energy projects is dramatically increasing, with debt to equity ratios of, 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 (typically 30-40%) are often needed due to certain market exposures. Project finance should become much easier to obtain for biofuels once second generation biofuels become more commercially viable. Project finance will be key to increasing the number of renewable energy projects to ensure a sustainable and clean energy mix in the UK. It can provide a systematic approach to deal with the structuring, assessment and allocation of risk in order to optimise the capital structure of low-carbon projects. Some commentators have flagged up project finance as playing an important role in the development of nuclear, especially now that the Government is, apparently, in favour of it. We have expertise and extensive experience in assisting project developers, investors and funders of domestic and international capital projects funded on a non-recourse or limited recourse project financed basis. Our experience includes:
Catherine Burke |
|
