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TRUSTED PARTNER DELIVERING TAILORED FINANCIAL SOLUTIONS
RENEWABLE ENERGY – WHERE IS THE MONEY COMING FROM?
09th November, 2011 Richard Simon-Lewis, Senior Director, Project Finance – Renewable Energy
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Executive Summary:
LBG Renewable Energy
UK RE Market Overview
Key Issues & Themes
Sector Snapshot
Looking Ahead
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UK RE
MARKETOVERVIEW
LBG Renewable Energy Overview
An integral part of the Lloyds Banking Group strategy is to deploy our balance sheet to support our core clients’ aspirations in the energy sector. The Renewable Energy Team (“Lloyds” or “the Team”) has an excellent track record over the last 7 years:
Team of 19 including 13 based in UK, 3 in New York, 2 in Europe and 2 in Australia;
Over £3bn of arranging / underwriting representing about 7 GW of Renewable Energy transactions to date;
Arranging / Underwriting positions in over 45 projects in the Renewable Energy sector – predominantly wind and solar;
We have a well structured portfolio with a balanced spread of tenors (52% of the portfolio having a term of over 10 years) underscoring our ability to provide the long term financing required for these assets;
We have financed Onshore Wind, Offshore Wind, Solar PV, Landfill Gas, Biomass and Bio-Fuels Projects.
Debt Focus:
Arranging & Structuring
Project Finance & Project Bonds (including Long-dated and Mini-Perm, Construction, Project, Bridge and Portfolio)
Interest Rate, Inflation and FX Hedging
Letters of Credit – PPAs, Grid connection, Energy Hedges
A dedicated industry team
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UK RE MARKET
OVERVIEW
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Historic Renewable Energy PF Activity
Significant downturn evident in the
UK since 2007
Impact across both deal value and
transaction numbers in the most
established RE sub-sector -
onshore wind
Liquidity has been available in
2011 for well structured
transactions with key relationships
Ongoing HMG support remains key
against the backcloth of economic
austerity and constrained budgets
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UK Low Carbon Energy Investment for 2020 Targets
Significant future investment required in various RE technologies over the next decade
HMG alive to the inherent challenges in attracting sufficient liquidity to fund this level of investment
Source: Green Investment Bank, July 2010
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KEY ISSUES &
THEMES
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Resilient Asset Class
Key Issues & Themes (1)
PF is more resilient as the risk profile is lower, requiring less capital
Renewables as an asset class is less correlated to the economic cycle
Significant non-discretionary investment required globally (e.g. £200bn in UK to 2020)
Selective Capital
Allocation
Each Bank will have preferences for Legislative Regimes / Sponsors / Sectors
Countries with the strongest legislative regimes such as the UK (subject to positive outcome post EMR consultation) and best margin pricing will attract the most capital
Banks
Focused on 10-15 Banks per geography, with those Bank groups differing in names across each market.
Participation of ECAs and EIB on larger ticket sizes is required, at least until proper underwriting returns
Relationships Important
PF banks are directing resource towards key clients in key sectors
PF banks are ‘creatures of precedent’ so will look for structural cues to aid understanding
The larger PF banks will gravitate towards larger deals with strong fundamentals
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Risk Profile
Commodities
Risk
Business
Revenue
Inflation
Risk
Credit Risk
FX Risk
Hedge
Portfolio
Debt
Liabilities
Interest Rate
Risk
Holistic review of risks required on a Project and Corporate Basis
Onshore
Wind
Project Co
Euro: £stg Exchange Rate
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2.50%
3.00%
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Key Issues & Themes (2)
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Wind Farm Finance - Indicative All- in LIBOR Cost of Debt (including Credit Interest Margin)
0.00%
1.00%
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10yr LIBOR swap rate Credit margin All In Cost of Debt
Lehman
TREND ALMOST FLAT
Northern Rock
Key Issues & Themes (3)
NB: Indicative onshore wind example.
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SECTOR SNAPSHOT
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Onshore Wind
Onshore wind continues to be viewed as an attractive asset class by commercial banks and multi-laterals such as the EIB albeit with the flow of onshore wind projects in the UK continuing to be hamstrung by issues such as planning, grid etc
Those projects with consent and grid access are pressing ahead mindful of EMR related issues on the horizon with PPA
availability becoming a potential constraint likely arising from uncertainty inherent in the OFGEM liquidity review etc We are seeing ‘cause and effect’ coming through with developers pressing hard to secure funding for consented projects
to fall the right side of the new banding regime/economics from 01st April, 2013.
Offshore Wind:
2011 will be a pivotal year in developing meaningful precedent across both debt and equity providers in the UK offshore
wind market as a precursor to more formative development rounds such as round 3 where capex requirements will be more significant
The lead banks in this sector are gearing up to respond to the inherent demands of taking construction risk etc which
introduces a need to understand all elements of the supply chain, technology and other factors, with the utilities to the fore in galvanising available liquidity
EMR is an issue that remains to be fleshed out for round 3 projects with light touch ‘change of law’ provisions in current deals.
Sector Snapshot (1)
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Solar PV FiT
HMG moved quickly via the ‘fasttrack’ review to curtail certain aspects of this nascent market mid-year (e.g. ground
mounted and large commercial schemes) with consequential impacts into activity in these PV sub-sectors. Recent announcement re further FiT reduction and compressed timing/enactment, may have a more profound effect
given likely curtailment of roof-based initiatives across both LA/RSL community and residential sectors.
Expectation is that key stakeholders will lobby against the timing of the cuts as may have elements of HMG ‘own goal’ given ‘localism’ and ‘decentralised’ generation agendas.
Difficult to view 2012 as anything other than a period of consolidation/aggregation in the UK PV sector unless continuing supply-side cost reduction brings the economics back into kilter as bridge into Green Deal, RHI etc initiatives.
Small-scale Renewables 2012 will likely be the year that we see small-scale renewable energy coming into the mainstream. AD and small scale wind likely at the vanguard with community schemes and rural generation to the fore.
The standardisation of financing (recourse-based) structures and documentation will be key to get traction into 2012
Sector Snapshot (2)
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Biomass Direct financing precedent in the UK for biomass projects is not deep with smaller, regionally based
schemes to the fore in 2011 with locally sourced feedstock DECC views large-scale biomass as a ‘potential’ source of baseload capacity albeit with recent RO banding
prima facie being less than compelling for the larger dedicated schemes
Development activity currently evident both for dedicated schemes and co-firing/coal-fired unit conversion initiatives but with weighting gravitating towards the latter
The introduction of RHI is a non-event for large scale biomass but remains a potential ‘game changer’ for smaller RE schemes to encourage heat use
Likely to see developers efforts gravitate towards more lobbying to mid-January, 2012, in an effort to move levels to where they need to be to attract funding
Sustainability of feedstock and security/diversity of its supply will be to the fore in funding discussions.
Sector Snapshot (3)
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LOOKING AHEAD
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THANK YOU
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Biography
Richard Simon-Lewis – Senior Director, Renewable Energy, Lloyds Bank Corporate Markets Email: richard.simon-lewis@lloydsbanking.com T: +44 (0) 207 158 8361 M: +44 (0) 7764 975 646 Richard is a senior project financier with over 20 years experience in leading specialised units in sourcing and executing transactions at MLA level across the power, utilities and infrastructure sectors at ‘Global Top 5’ project finance institutions. Richard has been involved in financing low carbon/renewable projects since the mid-1990s across various European markets together with a concurrent mandate across EMEA that encompassed more conventional gas-fired, clean coal and nuclear projects/technologies. In his previous role as Director and Head of Energy & Utilities PF at Lloyds TSB, he was responsible for building a £1bn+ energy and utilities portfolio taking the lead on a number of high profile MLA transactions including the Bank’s 1st onshore wind deal (Scoutmoor), the Bank’s 1st offshore wind deal (Project Boreas including Facility Agent, Security Trustee, Account Bank roles) etc. He was the principal involved in securing Partner Bank status for LBG in the UK Renewable Financing Programme with the EIB in 2009 and was the Bank’s representative on the related DECC EIB Intermediated Lending Working Group. More recently, Richard has represented LBG in discussions with DECC on financing biomass as a precursor to the biomass grandfathering consultation process and is currently involved in discussions with DECC re EMR. Transaction highlights during 20010/11 include acting as lead director on MLA transactions including the Euros 65m solar PV portfolio financing in Spain for First Reserve, the £340m, 270MW Project Boreas offshore wind transaction (voted PFI Offshore Wind Deal of the Year for 2009), and £35m Bickerfen & Walkway onshore wind financing for EdF (including Facility Agent, Account Bank & Security Trustee roles), Glenkerie onshore wind financing for Infinis which includes the EIB intermediated scheme and the £300m solar PV FiT portfolio financing for Eaga and InfraRed. Additional experience included Head of EMEA Project Finance at Abbey and Head of Infrastructure at Credit Lyonnais. Richard is a regular conference speaker with recent engagements including the REGEN SW event at the House of Commons and the BWEA Annual Renewable Energy conference. Richard has a BSC (Hons) in Financial Services (First Class) from UMIST and is ACIB and SFA Corporate Finance (CF30) qualified.
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