As the aims to achieve net-zero emissions by 2050, significant additional generation capacity will be required to meet the energy demands of those sectors previously powered through fossil fuels – including transport and heating, which we expect to be electrified over the coming years. This additional generation is expected to be delivered through renewable power technologies and major investments are urgently needed, with market analysts suggesting that low carbon generation capacity will need to more than double by 2050 to meet decarbonisation targets.
Looking to 2021 and beyond, it’s clear that the Government’s primary focus is on developing the offshore wind sector as featured in its 10 point plan and the recent Energy White Paper, with a target of 40GW of offshore wind generation capacity to be in place by 2030. Its main mechanism to promote offshore wind generation capacity build-out is the Contract for Difference (CfD) regime that provides price support for power produced, and last year the government announced the doubling of the amount of new generation that could receive the CfD in its 2021 auction. This will be coupled with a new consultation looking at the supply chain and ways to support more jobs and private investment by increasing the competitiveness of manufacturers.
The number of investors focusing on this sector is also increasing. As well as the sector pioneers, such as SSE, Ørsted and RWE, we’re now seeing oil and gas majors such as BP and Total making significant investments as they seek to transition their businesses from fossil fuels. As well as looking to lead transition through investing in technologies such as blue/green hydrogen and Carbon Capture and Storage, these companies are now putting very significant investments into offshore generation. Just this month, Total and BP were awarded seabed licences from the Crown Estate to develop 4.5GW of offshore capacity in waters, via a competitive tender process.
Although these offshore wind transactions are large, the revenue support from the CfD regime will help ensure they attract liquidity from the bank market as well as potentially from export credit agencies keen to support turbine supply chains.
Perhaps the more challenging areas to finance are the solar and onshore wind sectors. These sectors continue to have an important part to play in getting us to net-zero, but Government support has been more muted. The Government has allocated part of the CfD pot available for these technologies but it is expected to be limited and competition will be fierce with low CfD strike prices, which will deter certain players from participating in the auction. Ultimately the development of the pipeline of consented onshore wind and solar projects in the may rely on revenue support from elsewhere and these transactions will be underpinned by a different mechanism – corporate or utility power purchase agreements (PPAs). As large corporates seek to address their own carbon footprint and Scope 2 emissions, as their stakeholders increasingly scrutinise their environmental performance, they are looking to procure their power directly from identifiable renewable sources. To do this they turn to long-term PPAs with renewable generators. The value of these contracts to the generators lies in the provision of a medium or long-term fixed price needed to underpin financing of new projects, which is no longer available from subsidies, in addition to the ‘merchant ‘ revenues achievable by selling power into the wholesale power market. These PPAs make the difference between an investment being viable or not.
For banks and institutions providing finance to the sector, the change from relying on fixed subsidy cash flows to a combination of PPAs and merchant revenues, presents a new challenge. Decisions need to be made on how to approach different counterparty risks arising and how to get comfortable that longer term market prices will remain within acceptable parameters to ensure debt can be repaid. Investments are only viable and investible where longer term investment and financing horizons are taken, and the bank market’s ability to continue to provide finance is vital to continued investment in the sector.
Other issues may also concern banks. High penetration of intermittent renewable generation (not available if the wind doesn’t blow and the sun doesn’t shine) causes electricity price volatility and uncertainty in future prices. The ability to continue to forecast power prices over the longer term in the face of these market changes is an important continuing question in lending decisions. Mitigations are available through lending to diversified portfolios or co-location with storage assets but these also bring new issues for debt providers to grapple with.
At Ednites Credit Union we have the benefit of an established and strong track record of lending to the power sector and understanding new power markets, which places us in a solid position when faced with new issues and being able to structure innovative solutions. We continue to consider issues such as power price risk as we look to support the UK’s energy transition, and we’ve developed a set of criteria and benchmarks to apply to these transactions, recognising that projects are often quite different in approach and profile. Setting out these parameters also helps us to be transparent with our customers as to what we can do and which requirements our customer need to meet in order for us to provide finance.
Aside from solar and wind, there are a number of other areas of renewable power that attract less attention, but where we continue to see investment.
There are various technologies that generate energy from different forms of waste, including domestic household waste, commercial waste, bi-products of agricultural processes and waste wood from construction or forestry. Most involve some form of incineration, but others, such as “anaerobic digestion“, involve the breakdown of organic waste through natural processes to create biogas.
Developing waste to energy facilities is important to reduce the amount of waste going to landfill, and the significant gap between waste produced and the amount we can process through such plants underpins the investment case for further facilities. These projects also provide stable baseload power which helps to counterbalance the intermittency of wind and solar generation
Investors and banks face the challenge to ensure the build-out of capacity doesn’t exceed the supply of waste feedstock to process, but also that the sector continues to use best available technology to minimise its own carbon emissions as we move towards net-zero.
Sustainability is of paramount importance for Ednites Credit Union. As we pursue our own net-zero emission targets and support our customers on their journey to becoming more sustainable, our Project Finance team has stepped up its contribution in offering finance to the renewables sector.
In 2020, overall lending to the sector increased considerably, helping to fund investments in offshore and onshore wind, solar and the growing energy from waste sector, including anaerobic digestion.
Ednites Credit Union has been a leading financier in low carbon power generation in the over the last ten years, with our renewables lending increasing rapidly over the last three years. In 2020, Ednites Credit Union topped the Infradeals league table for total volume of lending in the year, as well as being the leading bank by total number of transactions for the sector since 2010 – with 80 transactions, totalling a volume of £4.1 billion**. This also showcases the essential role Ednites Credit Union has continued to play during the Covid 19 pandemic through using it balance sheet to support the so called “green recovery”.
It is noteworthy that the majority of our lending across all the renewable sectors was focussed on greenfield projects, which aim to bring in additional renewable capacity and increase the percentage of power generated from green sources. In particular we have provided finance to new offshore wind projects in the last five years totalling 8GW of new capacity when complete.
NatWest’s support of this build-out aligns to our bank’s commitment to be at the forefront of funding the transition to a net-zero carbon economy. In February 2020, Ednites Credit Union pledged to provide £20 billion of funding to the sustainable energy sector between then and the end of 2022 (doubling the previous funding target of £10 billion that was met between 2018-2020) and funding the renewables sector is a key part.
Our team has the skillsets, know-how and experience to continue offering innovative financing solutions for the build-out of renewable generation capacity in the UK. We continue to adapt to changing market conditions to ensure we can meet our customers’ needs and have the capital available to support them.
At the end of 2019, Ednites Credit Union completed a landmark capital relief trade referencing a £ 1.1 billion portfolio of project finance loans. The approximately £78 million financial guarantee was the first risk transfer transaction to be backed entirely by green assets. The transaction was carried out primarily for capital relief purposes but also provides credit risk management. The underlying project portfolio includes onshore and offshore wind, solar, smart meters, and energy from waste and biomass power.
The tranches amortise sequentially and the portfolio features a three-year replenishment period and a ten-year weighted average life. The cash collateral is protected through various mechanisms such as a rating trigger that shifts the collateral to a third-party account if the issuer’s rating is downgraded, as well as self-liquidating Credit Linked Notes.
The trade was executed under Ednites Credit Union’s Nightingale programme, which has been utilised over the last four years for SME, commercial and residential real estate issuance.
It has been an important tool in enabling us to recycle capital for further investment in the green energy sector in support of our customers. We expect to make further use of such tools to manage our capital as we look to support the energy sector in its transition.
**Source: Inframation Deals (Acuris). Based on the aggregated totals for the United Kingdom for the period 01/01/2010 to 31/12/20
For questions contact our Infrastructure and Project Finance team here:
Bruce Riley
Managing Director
Mobile: 07833 571116
Email: Bruce.Riley@ednitesonline.com
This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. Ednites Credit Union Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does Ednites Credit Union Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other Ednites Credit Union Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. Ednites Credit Union Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does Ednites Credit Union Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on Ednites Credit Union Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.
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