renewable energy
With climate change and renewable energy high on the agenda,
Russell Davies finds that small could be beautiful
as far as energy and heat production is concerned.
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In January, in its directive on climate change, the European
Union called for significant cuts in greenhouse gas emissions. This
has brought back into sharp focus the financing of renewable energy
and low carbon assets. The EU’s target is to have 20 per cent of
its final energy consumption coming from renewable energy by 2020
to meet its greenhouse gas targets.
How well developed is renewable energy and its financing in
Europe? According to the EU’s directive, there are huge variances
across Europe, with the UK getting less than two per cent of its
energy from renewables, while Sweden gets almost two fifths.
In Austria, where the figure is almost a quarter, wind farms are
already highly developed to the point that the market for leasing
wind farm equipment there is almost saturated, says Günther
Fischer, general manager of BA-CA Leasing.
And with subsidies no longer at the level they were, renewable
energy operators in Austria are beginning to look at central and
eastern European countries, according to Manuela Pachoinig, head of
sales and vendor programmes CEE, UniCredit Leasing. She is getting
enquiries from these companies as to whether UniCredit Leasing is
prepared to come with them.
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By GlobalDataThe market for renewable energy in CEE is not that well
developed, however, she says. Russian oil and gas still dominates
and there are not the subsidies that have fuelled development in
the rest of Europe. She sees government assistance as essential to
getting this market moving, although the company has already funded
a few small biomass plants in CEE, mainly using project
finance.
In Italy, the contribution from the government to developing
renewable energy via its feed-in tariff is beginning to have a real
effect on the market, according to Fabio Mungai, marketing
director, Locat Leasing Italy. This tariff is currently only
applicable to solar, photovoltaic power but there are plans to
widen it out to include wind and biomass.
Locat Leasing Italy has specific products for renewable energy
projects, which are usually based on matching the repayment
schedule to the feed-in contribution. Mungai believes that there is
a much greater level of uncertainty in the renewable energy sector,
compared to traditional asset finance markets, largely because of
the way that the technology is evolving and developing.
In the UK, the development of renewable energy is in its early
stages in terms of the amount of power it supplies to the country.
Clearly there are a number of reasons for this low level, from
financing through to planning permission and getting connected to
the grid.
Then there is a general shortage of engineers – recently
highlighted by the Royal Society in its report on higher education
– especially ones with knowledge of renewable energy
technology.
The attitude of the leasing industry can probably be discerned
from a report by the Carbon Trust, published last year. While this
report relates to financing low carbon assets, its findings are
probably applicable to financing renewable energy as well.
The report showed that there was uncertainty among asset
financiers about client demand and their understanding of the
technology, and concerns about market structures, the technology
risk and government policy and regulation.
The Carbon Trust also offers an interest free loan of up to
£100,000 (£400,000 in Northern Ireland) for SMEs wanting to invest
in renewable energy, so maybe there is good reason for asset
finance companies to be wary.
Rod Barthet, sales director at Siemens Financial Services, says
that for investment in low carbon assets to take place there needs
to be a quantifiable return on investment, which is dependent on
three things: getting the product pricing right; having asset
financiers willing to invest and take some form of residual value
risk, probably backed up by some form of residual value guarantee
scheme; and a tax regime that is in harmony with the government’s
stated objectives on climate change and carbon reduction. Siemens
is focused on the low carbon asset market, although Barthet
believes that the issues are similar in both this market and the
renewable energy market.
For Chris Matthews, head of asset finance of Co-operative Bank,
renewable energy is part of a continuum that includes energy
efficiency and carbon reduction technologies. In looking at
buildings, he sees little point in merely replicating the existing
energy requirement.
Rather, what is needed is an assessment of the savings that can
be made either through insulation or more energy efficient lighting
which will bring the energy requirement down.
In 40% House, a report by the Environmental Change Unit at the
University of Oxford published in 2005, it was estimated that such
things as improvements to insulation, doors and windows in
residential housing could reduce carbon dioxide emissions by 60 per
cent by 2050.
Matthews also believes that there needs to be a focus on heat as
well as electricity generation. Around two thirds of the UK’s
energy requirements are needed for heating and cooling
technologies. There are financing opportunities for energy
efficient boilers, combined heat and power plants, solar thermal
power and trigeneration, which is the simultaneous production of
power, heat and cooling from a single source.
In terms of renewable energy, there are two distinct markets,
says Matthews. The large scale power plant, whether it is wind or
solar power, for example, is mainly funded through project finance
or structured finance through a special purpose vehicle. Then there
are the smaller scale generators, such as distributed energy or
microgeneration, where leasing could have a role to play.
Most of the deals that the Alliance & Leicester Commercial
Bank has done have been on a project finance basis, according to
Ian Lawrence, its head of infrastructure.
“We did originally look at doing some leasing but the legislation
changed and we weren’t able to do it in a way that would make it
efficient for the client,” he says.
This is also Ed Wilson’s experience. As head of energy and
environmental finance at HBOS, he works at the larger end of the
market where there has been limited use of UK leasing facilities
mainly because the product does not fit the current development of
the industry.
Developers are looking for financial flexibility as they build
their portfolios and take them from pipeline and development
facilities to operational assets.
“Developers need to move very quickly to secure sites and planning
consents,” he says. “Putting in long term complex financial
structures, which the UK big ticket leasing products now are,
doesn’t tie in with the nimble solutions they need to acquire a
portfolio of assets.”
Having said that, he does cite one example of a wind farm that has
been financed on a UK lease and he sees leasing having more of a
role to play when the plants are fully operational and these
businesses have a portfolio of assets which will need longer term
tailored financial solutions.
But it is at the smaller end of the market where leasing could
have a more significant impact, especially when it comes to
distributed energy and microgeneration. It is in this area that
much of the Co-operative Bank’s work has been done, says Matthews.
“We’ve invested quite a lot into embedded generation and
distributed heating schemes.”
With the new planning regulations, buildings are going to have
to have distributed heating and lighting systems. The distributed
energy model is one that excites Lawrence and Alliance &
Leicester is looking to do more business this year in this area. He
sees distributed energy working well with biomass because small
scale energy generation plants can be sited next to waste sites and
create a virtuous circle with the waste being converted to
energy.
Wilson believes that energy generation will become much more
localised over time. The problem with an energy source such as wind
power is that it cannot provide baseload generation – that is it
cannot keep a steady flow of power going – because of the
variability of wind supply.
If that is then coupled with wind farms being taken miles
offshore, then a constant level of energy generation to a remote
population becomes an increasing challenge for the utilities to
manage, making local solutions for heat and energy almost a
necessity.
Then there are the planning issues for wind farms. A current
case is the 181-windmill development on Lewis in the Hebrides. Some
reports suggest that it has been turned down by the Scottish
executive, although no decision has yet been made.
If large scale projects are far too prone to falling foul of the
planning regulations – and projects can take years to come to
fruition from initial concept to power production – all the better
to start thinking smaller and local.
A mixture of small, individual power plants, whether these are
wind, CHP, geothermal or solar (annual solar radiation reaching the
earth is over 7,500 times its annual primary energy consumption of
450 exajoules, reports the World Energy Council) in a distributed
network would seem to offer another route to meeting energy needs,
whether in the UK or the rest of Europe. Distributed energy also
looks like the kind of market where asset finance could make a
difference.
State support needed for success in clean
energy
The European Investment Bank has estimated a massive €700bn in
investments in renewable energy over the next 20 years but much of
this may have to come from the pockets of tax payers as
Russell Davies finds.
Financing renewable energy
Global investment in what it calls the clean energy sector, grew
by 41 per cent in 2007, according to New Energy Finance, the
renewable energy and low carbon technology analysts. New money
invested grew to $117.2bn (£59bn) from $83bn (£42bn) in 2006, with
the largest proportion going on asset financing at $54.5bn
(£27.4bn), an increase of 40 per cent on 2006. During the year
there was a shift in emphasis in asset financing from project
finance to on-balance sheet financing, with the latter making up 64
per cent of the total of asset financing activity. Investment in
Europe, the Middle East and Africa grew to $9.8bn (£4.9bn) in 2007.
According to the EU, market revenues from renewable energy sources
are expected to rise to around €150bn by 2016. With a turnover of
€30bn currently, the renewable energy sector in the EU provides
350,000 jobs.
The European Investment Bank estimates that the investment
needed over the next 20 years or so in renewables may reach €700bn
and that an equivalent amount, if not more, will be needed in
energy efficiency. At the end of August 2007, the amount of money
that the bank had agreed to lend that year to the sector had
reached €952m.
The EU directive
At the end of January, the EU published its directive on
renewable energy and climate change. This draft legislation, which
has to be passed by the European parliament and then be agreed by
all member governments before becoming law, calls for a target to
be set of 20 per cent of the EU’s final energy consumption to come
from renewable energy by the year 2020. Within this overall target,
some countries have seemingly more stringent objectives than
others. The target for the UK looks particularly difficult – 15 per
cent by 2020, compared with just 1.3 per cent in 2005 – while the
target for Austria is 34 per cent compared with 23.3 per cent. If
the target is achieved, the EU expects to cut between 600m and 900m
tonnes of carbon dioxide emissions per year and to reduce fossil
fuel consumption by 200m to 300m tonnes per year. It also expects
it to provide a boost for high-tech industries and create new jobs
and economic opportunities. It is estimated that costs will run to
€13bn to €18bn a year, although it predicts that this investment
will reduce the price of renewable energy technologies as they
begin to play their part in fulfilling the energy requirements of
the EU.
Distributed energy
Energy supplies mainly come from large power stations which are
connected to nationwide grid systems. This is the dominant model,
whether the supply is generated by gas or nuclear power. In the UK
government’s energy review, distributed energy was defined as
electricity generation technologies, which do not rely on the
electricity transmission network, and heating technologies not
connected to the gas grid. In effect, power and heat is supplied by
much smaller technologies which can supply a single house or
building, industrial sites or communities. These technologies can
be solar photovoltaic panels or small wind turbines – effectively
what is known as microgeneration – which can be fixed to individual
buildings, with any surplus being sold back to the local
distribution network, and small scale plants which can supply a
wider population, although still nothing like the centralised power
stations. Distributed energy also includes combined heat and power
plants, which can vary from the large plants which supply locally,
but are linked into the national networks, building or community
level CHP plants, or micro-CHP which can replace traditional,
domestic boilers. Other heat sources include biomass, solar thermal
water heaters, geothermal energy or heat pumps. Not all distributed
energy comes from renewable sources, however as CHP can use fossil
fuels.
Wind farms in Austria
BA-CA Leasing has been an innovator in the Austrian leasing
market in leasing big wind parks throughout this decade, according
to Fischer. One of its projects, financed in conjunction with
Austrian Wind Power, is a part of the Parndorf wind park, which,
with 250 turbines, is the biggest wind farm in middle Europe. 23
Enercon E66s produce 41.4 megawatts per year, supplying almost
25,000 households with sustainable wind-generated power. There have
been further projects at St. Pölten, Deutschkreutz and Pöttsching.
Nearly 90 per cent of Austria’s wind parks are located in the flat
eastern parts of the country. The potential value of renewable
energy sources was underestimated for a long time, he says, but
this branch of the energy industry has developed well over the last
20 years. It has been helped by a national green electricity law as
well as by a special tax regulation, the Investitionszuwachsprämie,
which granted tax concessions for equipment investments for 3 years
beginning in 2002. Government subsidies and tax incentives still
have an important part to play in the development of the renewable
energy sector, although the current schemes are not as attractive
as they were, according to Fischer. A new law later this year is
expected to improve the situation.
Manufacturers and finance
Developing a financial package, whether it is a full-blown
vendor programme or a less formal arrangement, is essential. Asset
financiers can do nothing on their own to develop these markets,
according to Barthet. They have to work closely with vendors. This
is as much about understanding the assets and the market as it is
about creating any vendor financing capability. At the Co-operative
Bank, a number of schemes have already been developed with
manufacturers, including geothermal technology, which is a
technology where heat is generated from the earth, micro-CHP and
large scale CHP. Matthews does not believe that this type of scheme
is as relevant to wind farm turbines, although he has looked at
potential schemes for micro wind turbines, but nothing has come
from this so far. In CEE, some form of vendor programme will be
necessary, according to Pachoinig, not least because for most of
these countries there is not enough capital to make the necessary
investments. From the discussions she has been having with
manufacturers and operators looking to break into the CEE renewable
energy market, it is clear that they want to have finance alongside
the specific technology they are attempting to develop.
Government role
It is probably fair to say that without some form of subsidy
regime, whether it is the feed-in tariff used in countries such as
Germany, Spain or Italy, or the renewable obligations certificate,
which is the UK’s subsidy regime, then it would have been very
difficult to finance wind and solar projects, given the cost of
generation of renewables against the cost of generation of fossil
fuel. “There is a price differential between the two,” says Wilson,
“and that is being bridged by the subsidy regimes at the moment.”
They are quite critical in facilitating the development of the
renewable energy industry. Over the longer term, international
governments expect their subsidy regimes to be reduced as the
technologies become more affordable and have been proven as
commercially viable. Where the UK government could currently do
more, says Barthet, is in the area of residual value guarantees and
enhanced capital allowances. He cites the WRAP residual value
guarantee scheme as one as being too narrowly defined in that it
related purely to waste recycling and was set up to support the
implementation of the WEEE directive. He also thinks that limiting
capital allowances to the lessee with certain types of asset
restricts the financing opportunities of lessors in this
sector.
Feed-in tariffs
The feed-in tariff scheme is a policy by which a government can
legally guarantee access to the national power grid at a specified
price to renewable energy providers. The aim is to offer an
incentive to invest in renewable energy schemes by pricing energy
from such sources at a higher rate than the price of fossil fuel
energy. While not immediately beneficial to the end user in terms
of the cost of the energy, the overall costs of sourcing energy
from renewables can be spread across all energy users, thereby
helping to keep the price down. Germany has used feed-in tariffs
substantially in developing its renewable energy sector, with its
wind farms now producing around 20,000 megawatts. Its solar power
schemes have also benefited and towards the end of last year, the
German government put back by a year to 2010 the scheduled
reduction in the feed-in tariff for renewable energy. Currently,
anyone producing solar power can sell it to the national grid for
around €0.50 per kilowatt-hour, compared to what it costs consumers
to pay for electricity, around €0.19 per kilowatt-hour. This
government largesse has helped in the creation of over 300,000
photovoltaic systems, mostly on homes and in small businesses.
Credit issues in the low carbon asset
market
These can be broken down into two broad areas, says Barthet. The
first is the risk in the asset which is down to the fact that these
are mostly immature assets. The second risk is the risk in the
vendor because quite often it is a small, entrepreneurial business
which has developed and is now selling the piece of equipment.
Coverage of the vendor risk can be overcome through finding another
manufacturer to take over the product in the event of the vendor’s
demise. “You are taking a risk in the people selling the product,
which you always do, but the risks tend to be higher because it’s a
much smaller business,” he says. The end user risk is still exactly
the same. The customer either has or does not have the ability to
repay over time. On the asset side, the risks also include whether
the equipment will deliver what it says it is going to deliver, how
well it will perform, and also its environmental impact in terms of
pollution – all new products have to be properly verified and
certified – as if things do go wrong it will probably be the
lessors who are pursued for compensation.
