The document discusses various options for financing renewable energy projects, including through balance sheet and off balance sheet structures. It explains key concepts like non-recourse and recourse debt, as well as equity financing and mezzanine loans. The risks associated with different financing options are outlined, noting that own development carries the most risk but also the greatest rewards and control, while third party structures transfer most risks but also benefits.

1. Financing Renewable Energy
Session 1
Colin McNaught

2. Aim
Introduction of main finance options and key concepts
How finance options shape a project
Increase your fluency in finance matters
In short: How would you like to pay for that?
2

3. Scope
Focus is on renewable energy
– Solar, Wind, Hydro, Biomass etc.
– Investment up to around £10 million:
 Wind: Up to 7 MW
 Solar: Up to 6 MW (small projects)
 Hydro: Up to 3 MW
Key concepts also apply to energy efficiency
3

4. My Background
Energy sector experience over 20 years
Energy efficiency, CHP & renewables
Financial models for wind, solar, anaerobic
digestion
Background in engineering – so presenting
finance from a different perspective
4

5. Your Background
Renewable Energy?
Internal Finance?
External Finance?
Mortgage?
5

6. Agenda for Part 1
The Drivers – why invest and finance a project?
Risk and Reward
Finance Options
Decision Tree
6

7. Types of Drivers
Reduce energy bills
Invest capital and generate financial returns
Reduce greenhouse gas emissions
Improve corporate image
Enhance energy security
Address fuel poverty
7

8. See Copy of Guide: Page 4
Motivation Main benefits Influence on the set up of the project
Finance option which maximises and retains the value of energy
Reduction in energy bills generation potential should be selected.
Energy bills Hedging against future rises Finance must be set up so that developers can use the energy for their
in energy costs own use.
Projects that supply onsite energy demand will inherently offer this.
Finance option which maximises the rate of return on investment
Financial returns should be selected.
Investment
returns Greater rate of return than Different financing options and choices of incentive should be explored
investment in core activities to determine the option that maximises such returns, without incurring
significant risks.
The selected finance option, and any incentives claimed, will need to
Greenhouse Reduction in greenhouse gas allow the carbon value of the renewable energy generated to be
gas emissions claimed.
emissions Reduction in carbon footprint Energy from waste or biomass electricity projects that recover heat as
well as generate electricity may offer this.
Finance option needs to allow the developer sufficient control over real
Improved public perception of or perceived environmental risks.
Corporate
environmental values of the Finance should be setup so that local benefits are easily discernible
image
organisation and communicated in an appropriate manner.
Wind or solar PV projects may provide this opportunity.
Reduction in dependence on If energy security required on site, systems should be engineered so
fossil fuels and electricity that they can operate without a grid supply. This will add capital costs
Energy supplies and should be weighed against the cost of energy supply interruptions.
Security
Reduction of UK imports of For biomass and energy from waste this will require on site storage of
energy sufficient fuel.
Energy security for poorer
Finance set up should allow benefits of the project, e.g. lower energy
communities
Fuel poverty prices or a profit share, to be passed on to the communities in need.
Reduction in energy costs
For example, the roll out of solar PV to housing stock.
and impact of price rises
8

9. Types of Drivers
Reduce energy bills
Invest capital and generate financial returns
Reduce greenhouse gas emissions
Improve corporate image Most of these
drivers are
based on the
Enhance energy security income that
can be
earned
Address fuel poverty
9

10. Income from renewables
Feed in Tariff (FIT)
 Electricity systems up to 5 MW
 Solar PV, Wind, Hydro, Anaerobic Digestion…
 Tariff for 20 years
 Inflation indexed once registered
 But reduces for new schemes in future years
 Export tariff
10

11. Income from renewables
Feed in Tariff – Non domestic schemes (since April 2010)
11

12. Current FIT Technology Band (kW) Tariff (p/kWh)
≤15 21
Subject to 15-≤100 19.6
Hydro 100-≤500 15.5
change
500-≤2000 12.1
depending
2000-≤5000 4.48
on rate of ≤1.5 21
market >1.5-≤15 21
growth >15-≤100 21
Wind
>100-≤500 17.5
Solar PV >500-≤1500 9.5
needs to be >1500-≤5000 4.48
on a building ≤4 15.44
with an EPC >4-≤10 13.99
of D or >10-≤50 13.03
better to Solar
>50-≤100 11.5
earn > 7.1 p >100-≤150 11.5
>150-≤250 11
>250-≤5000 7.1
Standalone 7.1
Export All 4.5
12

13. Income from renewables
Renewable Heat Incentive (RHI)
 Heat systems
 Biomass, Ground Source Heat Pumps, Solar
thermal...
 Tariff for 20 years
 Inflation indexed
13

14. Current RHI Technology Band (kWth) Tariff (p/kWh)
≤200 Tier 1 8.3
Tier 1: ≤200 Tier 2 2.1
Commercial
< 1314 > 200 < 1000 Tier 1 5.1
Biomass
hours full > 200 < 1000 Tier 2 2.1
> 1000 1.0
load
Ground Source ≤100 4.7
Heat Pumps > 100 3.4
Tier 2:
Solar Thermal all 8.9
> 1314
Biomethane/biogas all 7.1
hours
14

15. Income from renewables
RHI – Non domestic schemes (since Dec 2011)
15

16. Risk & Reward
Risk increases the cost of finance, restricts the
options for finance and adds to the cost of
obtaining finance.
Identifying and managing risk will improve all
these finance issues.
Risk management may involve a partnership
approach.
16

17. Types of Risk
Financial risks, capital costs, energy prices,
credit risks and inflation
Development risks, the costs of undertaking
feasibility and the risk of planning
Construction risks, construction costs and long
lead in times
Technology risks, particularly around efficiency
and reliability of the technology
Operational risks, operational and maintenance
costs, fuel availability
Policy risks, changes to renewable energy policy
and incentive structures = investment returns
17

18. Risk Description
Capital costs higher than budget
See Copy Operational costs higher than budget (including maintenance, interest rates and insurance)
Cost of finance higher than expected
of Guide: Economic /
Borrowing conditions breached and associated risks
Page 5
Risks associated with energy price fluctuations
Financial
Carbon prices reduce
New competitors in the market
Rate of inflation
Currency risks (if cross-border projects, or if purchasing components in other currencies)
Cost of resource assessment and feasibility studies
Cost of environmental impact studies, EIA reports etc.
Cost of grid connection assessments
Development
Planning time longer – delay in generation income / possible lower incentive value received
Failure to gain planning consent
Development partners disagree and part company
Planning consent requires cost to comply with conditions
Construction costs higher than budget
Construction
Construction time longer, delaying income from generation
Connection to energy networks delayed
Costs of impact assessment (often a legal requirement) higher than budgeted
Environmental
Issues identified during impact assessment delay or prevent project development
/ social
Costs of mitigation actions higher than budgeted
Technology less efficient than predicted, so less energy produced
Technology
Technology less reliable than expected, less energy produced and higher maintenance costs
Renewable energy resource is lower than predicted (e.g. lower wind speed)
Access to site prevents repair or maintenance
Replacement parts required
Delays in supply or installation of spare parts
Operational
Fuel costs higher than expected (e.g. biomass fuel costs higher or there is an increase in price of
electricity for heat pump projects)
Fuel supply problems, (poor quality or interruptions in delivery)
Site energy use falls, reducing the value of avoided energy costs
Planning requirements changed
Capital grants removed or oversubscribed
Revenue incentive removed or reduced in value
Policy
Eligibility for capital grants or revenue incentives changed
Finance sector regulatory changes, reducing availability, and cost, of finance
Tax treatment changed
18

19. Assessing Risk
For each type of risk:
– How could your project be affected?
– How significant are the impacts?
– How could you reduce the risks?
– How could someone else reduce the risks?
19

20. Financing options
Type Examples
– Internal funding
Own – Debt finance
development – Equity finance
– Leasing
– Partnership – majority control
Partnership
– Partnership – equal split
structures
– Partnership – minority control
– Land lease agreements
Third party – Service concessions
– Energy Service Companies (ESCOs)
20

21. Own Development
Greatest control + Rewards + Risks
Internal Funding
– Business Case and internal reviews
– May not be deemed core business
External Funding
– Grants or low cost loans
– May be incompatible with income from the FIT or
RHI etc
21

22. Own Development
Debt Finance:
– Full ownership of rewards and risks
– Likely to be part of capex (so need internal funds)
– Added costs of interest payments
– Capital repayments
– May be step in-rights
22

23. Partnership Development
Many different forms of partnership
Different structures, benefits and risks
Majority control
– You closely control risks
– Partners bring niche skills or assets
Minority control
– Driver is not financial – reward share is low
– Partner controls
– Can you gain what you hope for without control?
23

24. Third Party
Transfer of almost all aspects
Best when you lack the skills and capital
Small income – e.g. land rent
24

25. Service Concessions
Useful for the public sector
Grant a right to develop and exploit a resource
Often long term (25 years)
Payments made to public authority
– (fixed + revenue elements)
Used for energy from waste contracts and other
renewables
25

26. Choosing an Option
What are your drivers and expected outcomes?
Does the arrangement provide these outcomes?
Which risks are retained?
26

27. Own Development Partnership Third Party
Financial risks
See Copy Rate of inflation / Capital
Will depend on which party
of Guide:
costs / Operational costs / All risks typically held by All risks typically held by
has access to the lowest
Cost of finance / Borrowing the developer. the third party.
cost of capital.
conditions
Page 11 Construction risks
All risks typically held by All risks typically held by
Longer planning time / the developer. the third party.
Will depend on which party
Planning consent difficulties
Potential to include some has responsibility for Potential to include some
or costs / Construction
risks (e.g. construction construction of the project. risks (e.g. construction
costs / Construction delays
time) in the contracts let. time) in the contracts let.
Environmental / social risks
Impact assessment costs /
Will depend on which party
Delays due to impact All risks typically held by All risks typically held by
has responsibility for
assessment / Costs of the developer. the third party.
construction of the project.
mitigation
Technology risks
All risks typically held by Will depend on the setup All risks typically held by
the developer. arrangements for the the third party.
project. Who has the
Lower technology efficiency Potential to manage these experience of the Potential to manage these
/ Lower technology through warranty with the technology and the through warranty with the
reliability equipment supplier and allocation of benefits (in equipment supplier and
through performance terms of energy savings through performance
contracts with the and revenue streams from contracts with the
equipment supplier. generation)? equipment supplier.
Operational risks
Lower levels of resource / Will depend on which party
Repair or maintenance has responsibility for
issues or delays / Higher All risks typically held by construction of the project, All risks typically held by
fuel costs / Lower site the developer. as well as on the setup the third party.
energy use falls / Carbon arrangements for allocation
prices / Market competition of benefits.
Policy risks
Planning requirements Policy risks are out of the All risks typically held by
changed hands of the developer or a the third party.
Changes in requirements or All risks typically held by third party. Neither can
the developer. manage these. So, Some tax benefits for the
eligibility for: Capital grants
appropriate to share these third party – e.g. enhanced
/ Revenue incentives / Tax
risks. capital allowances.
treatment
27

28. Sources of Finance
Two main options – but many variants
On Balance Sheet:
– Part of normal activities of the organisation
Off Balance Sheet:
– Separate company who owns the asset
28

29. On Balance Sheet
Balance Sheet Debt
– Usually through a bank as a loan
– Banks have the first claim on the assets of a
business (senior debt).
– Bank loans are lower risk = lower returns
– Two main types of bank debt:
 Non recourse
 Recourse
29

30. On Balance Sheet
Non recourse debt:
– Loan is secured on the value & income of the asset
– Bank focuses on the value and income of the asset
 Will it perform? Will it break down?
– Added scrutiny on the asset
– Not as suitable for higher risk projects
– Lender will limit the risk e.g. 75% debt
– Fixed at outset, all consents etc. needed
– Often needs special purpose company
– Higher costs to set up
– Typically larger projects (> £25 million)
30

31. On Balance Sheet
Recourse debt:
– Loan is secured by the borrower
– Bank focuses on the credit status of the borrower
– May suit higher risk projects
– May not suit borrowers with high levels of existing
borrowing
31

32. Practical example
Non recourse finance
– Large wind investments typically need 1 year of on
site wind measurements + detailed analysis
– Cautious use of wind data
– Adds to development cost
– Adds to development timescale
– May miss higher incentives
Recourse finance
– Farmers securing loan for 1 MW wind turbines
against the farm
– No met mast = saving 18 months + costs
32

33. Lessons from Non Recourse
The tests are tougher because they are external
Debt Service Cover Ratio: The operating cash
flow compared to the debt payments?
– Aim for at least 1.3 : 1 in any operating year
Loan Life Cover Ratio: The operating cash flow
compared to the debt payments over the entire
term of the loan?
– Aim for at least 1:5 : 1
33

34. Lessons from Non Recourse
Debt Service Reserve: The cash kept to cover
debt payments:
– In Project Finance – typically 6 months debt
payments
Maintenance Service Reserve: The cash kept to
cover maintenance:
– Often at least 3 months
P90 output: The output which will be exceeded
90% of the time.
34

35. Output and Cash Flow
Three hydro schemes in Argyll
Use bank thinking in the business case
35

36. Balance Sheet Equity
Raise funds by creating and selling new shares
Shareholders gain via:
– A share of the operating profits (dividends)
– Capital value in price of shares
– Must be possible to sell share – all investors need
an exit strategy
36

37. Mezzanine loans
Think of buildings = Half way between bank debt
and equity
Can take higher risk
Do not have highest call on assets
Short duration
Higher cost
Used to fill a funding gap
Replaced with lower cost finance once risks
reduced?
37

38. How much will finance
cost?
Guide Page 14
Debt Equity
Bank Senior Bank Mezzanine Infrastructure
Type of finance Pension Funds* Private Equity*
Debt Debt* Funds*
Proven Demonstrator / Proven
Type of risk technology proven Proven technology Demonstrator
typically taken Established technology technology Private technology
companies New Companies companies
Typical level of
return expected
by the various ~5.5% to 6% ~7.5% to 10% ~15% IRR ~7% IRR ~35% IRR
types of lender /
investor**
Only an indication:
• Your project, your risks, your security, all
influence the cost
38

39. Guide Page 15: Decision Tree
39

40. QUESTIONS PLEASE
40

41. BREAK
41

42. Financing Renewable Energy
Session 2
Colin McNaught

43. Agenda for Part 2
Illustrations of the income and finance options for
a renewable energy projects
More on incentives
Short case studies
Short exercise
43

44. Own Development
Risks
– Planning risk – upfront costs / 60% failure rate
– Requirement for equity can be as high as 30%
– Understanding project finance
– Selecting bankable technology –big issue under FIT
Benefits
– ‘Guaranteed’ income stream from electricity
generation – regardless of use
– Energy Security – Generation of your own
electricity for use on site
44

45. Debt example
Single Enercon E-48 0.8MW Wind Turbine
Bank provided Debt by way of :
– Stage Payment facility
– Term Loan
– Working Capital facility
– VAT bridge
45

46. Debt example (cont’d)
45 Documents to sign including :
– Banking documents
– Turbine Supply & Maintenance documents
– Land / Lease documents
– Grid Connection documents
– Planning documents (Section 75) /
Decommissioning Bond
– Insurance documents
– Civils construction documents
46

47. Debt example (cont’d)
18 weeks to reach financial close
3 sets of lawyers (Bank, SPV and Landowners)
18 different Parties Involved
– Lawyers, Accountants, Technical Advisors,
Insurance Advisors, PPA off takers, Turbine
Suppliers, Civil Engineering Companies, Grid
Connection provider, Project Manager /Planning
Consultants, Wind Report Assessors.
Turbine/ project performance to be monitored
continually
Which type of debt finance is this?
47

48. Project Finance Example
Bank will typically lend 70% - 90% of the project
cost (dependant on technology )
Landowner will need to invest the remainder
Term of up to 15 years
Lend of between £1m and £25m
Lent against the forecast future cash flows
Bank will require legal, technical, financial and
insurance overview
These costs to be met by the SPV – part of equity
investment
48

49. More on Incentives
FIT & RHI – Covered in Part 1
Renewables Obligation – generally for projects >
5 MW
CCL – Renewables is exempt worth £4.85/MWh
for electricity
CRC – Can be avoided – but better to claim FIT
49

50. More on Incentives
EU-ETS – Large sites only, renewable heat would
avoid purchase of fossil fuel and need fewer EU-
ETS allowances
CCA – Larger sites – Cant claim if earn FIT or RHI
Public Capital Grants – Cant claim FIT or RHI
– Some expenditure is eligible (development, heating
network)
– Private sector grants are OK
50

51. More on Incentives
Enhanced Capital Allowances – a benefit against
corporation tax paid. Not available if FIT or RHI is
earned
Business rate relief – Stepped by scheme size,
100% relief for small schemes, to 2.5%
51

52. Example
300 kW wind turbine
27% load factor = 710 MWh pa
372 tonnes CO2 pa
Capex £450k
Operating & Maintenance £13.2k
52

53. Example
Interest of 6.5% pa
Deprecation of 10%
Corporation tax 30%
53

54. Example – Scenario 1
Earn CRC at £12/tonne
CRC worth £4.4k
Electricity used on site worth £64k
Payback in year 14
IRR 9.6%
54

55. Example – Scenario 2
Earn FIT at 17.5p/kWh + 3.1p export*
FIT worth £124k
Export worth £22k
Payback in year 6
IRR 25.2%
* Guide and its examples were drafted when
export tariff was 3.1 – this is now higher at 4.5p
55

56. Example – Scenario 4
Earn FIT at 17.5p/kWh + 9 p/kWh on site use
FIT worth £124k
On site use worth £64k
Payback in year 5
IRR 38.9%
56

57. Guide Page 22
Scenario 1 Scenario 2 Scenario 3 Scenario 4
Electricity used on site 100% 0% 40% 100%
Electricity exported 0% 100% 30% 0%
Electricity wheeled 0% 0% 40% 0%
CRC savings £4,467 - - -
Electricity savings on site £63,860 - £25,544 £63,860
FIT - £124,173 £124,173 £124,173
Export - £21,996 £6,599 -
Extra for Wheeling - - £20,455 -
Exempt Services - - -£1,500
Total revenue (Year 1) £68,327 £146,169 £175,271 £188,033
Payback by: Year 14 Year 6 Year 5 Year 5
IRR 9.6% 25.2% 30.5% 32.9%
NPV £104,875 £727,786 £957,422 £1,058,483
ROI 12.3% 29.5% 36.0% 38.9%
57

58. Finance Options
Own Development (as per Scenarios 1 to 4)
Partnership 50:50
Third Party: Land lease:
– £3,200/MW + 6% of electricity sales
58

59. Guide Page 23
Partnership Land lease
Own development with
development with 50-50 arrangement with third
debt finance
split of risk and reward party developer
Annual turbine output 710 MWh 710 MWh 710 MWh
FIT value (generation & export) £206/MWh £206/MWh £206/MWh
FIT £124,173 £62,087 -
Export £21,996 £10,998 -
Land rent per MW - - £3,200
Percentage of electricity sales - - 6%
Land rental income - - £13,673
Total revenue (Year 1) £146,169 £73,085 £13,673
Payback by: Year 6 Year 6 N/A
IRR 25.2% 25.2% N/A
NPV £727,786 £363,893 N/A
ROI 29.5% 29.5% N/A
59

60. Worked Example
Company plans to build a 1 MW wind turbine on
their warehouse site costing £1.5 million
Expect to generate 2,600 MWh pa.
The relevant FIT is 9.5 p/kWh generated
The export tariff is 4.5 p/kWh generated
Operation costs are 1.7 p/kWh generated
They are offered a finance on 75%:25% debt
equity basis at 7% pa.
60

61. Knowledge Review
How much did they borrow?
What was the annual interest payment?
How much income (£/yr) from the FIT is due?
What is the net annual income?
61

62. Knowledge Review
How much did they borrow?
– £1.125 million (75% x £1.5 million)
What was the annual interest payment?
– £78.8k pa (7% x £1.25 million)
How much income (£/yr) from the FIT is due?
– £247k pa (9.5 p/kWh x 2,600,000 kWh)
What is the net annual income?
– (FIT + Export – Interest – O&M)
– (£247k + £117k) – (£78.8k + £44.2k)
– (£364k) –(£123k) = £241k
NB this is a Simple Example which did not include:
• Repayments, Insurance, Business rates, Land rent , P90
Output etc. 62

63. Further Resources
Co-operative Bank; project case studies
Financing renewable energy projects; A guide for
developers
Financing Renewable Energy Projects for Farmers
Private Financing of Renewable Energy; A Guide
for Policymakers
West Midlands Local Authority Low Carbon
Economy Programme; Local authority funding
guide
Scottish Future Trust; Report on the Commercial
Aspects of Local Authority Renewable Energy
Production
63

64. Questions
3.5
3
2.5
2
1.5
1
0.5
0
00:00 02:00 04:00 06:00 08:00 10:00 12:00 14:00 16:00 18:00 20:00 22:00

65. T: 0870 190 6191
E: colin.mcnaught@aeat.co.uk
65