Bioenergy has traditionally been a difficult sell to investors, both in terms of debt finance and equity. Challenges around security of supply, confidence in the management of technically demanding equipment and processes, and deal size, have created a risk profile outside their comfort zone.
The market has since moved on, with solar and onshore wind maturing both in terms of technology and as an investment opportunity. As a result, attention and expertise is now focusing elsewhere. Many investors, including traditional institutions and more niche funders, are now looking closely at biomass. Today, there is an appetite to provide straight debt funding or combined equity/debt propositions to a variety of bioenergy projects, particularly where the developer has a proven track record and the project is on a smaller scale (or part of a portfolio where the risks are aggregated). In these cases, risks over fuel supply and technology become more acceptable.
Clean energy is seen as a reliable investment and the launch by the UK government of a green finance taskforce will further position the UK as a global hub for green finance and attract increasing numbers of banks, renewable funds, infrastructure funds and pensions funds who are looking for a safe place for their money. This presents a real opportunity for bioenergy projects to secure funding that might not have been available previously. With an increasing number of players chasing the same opportunities, and with the traditional new-build large-scale solar and onshore wind farms facing challenges of their own, interest in bioenergy will continue to rise as investors look to grow and diversify their portfolios.
The key to capitalising on the UK's status as a global green finance hub will be to create projects that represent an easy investment from a risk point of view. While there will always be challenges over fuel supply and the reliability of technology, there are some underlying principles that can be addressed to help improve a project's viability. One of the biggest barriers to investment is the bankability of the contracts associated with the development. Taking time to prepare and negotiate bankable contracts that take the project from design to finance, development, construction and operation will be fundamental.
If robust documentation can be put in place for the entire project lifecycle, that will help increase the project's investment potential. Particular attention should be paid to the grid documentation, infrastructure agreements, land interests and planning permissions. Also important are preparing and negotiating turnkey construction contracts, operation and maintenance agreements, management services agreements and all other ancillary documents such as direct agreements, performance guarantees and retention guarantees. The security of supply – in its dual guise of legal and practical robustness – will remain a key driver for any project.
It is also worth considering the investment mix that a project may require. Equity investors are more likely to look at projects that have a higher risk profile, particularly where the developer has some skin in the game, while traditional debt funders will require more reassurances about a project before they invest. Predictably, we have seen a rise in projects being built-out with equity, and then re-financed once they are operational and have a proven track record. The UK's status as a global hub for green investment and the subsequent increase in investor interest may mean that this type of equity/debt split model will allow more bioenergy sites to come to market.
The UK government's Clean Growth Strategy, announced on 12 October, emphasises putting energy use in the hands of end users. This could see an increase in the number of small-to-medium scale sites which, by their very nature, are more bankable. Bioenergy is already used across a range of commercial and residential developments and it is likely that we will see a rise in the number of new mixed-use developments and retro-fit projects using bioenergy technologies to reduce impact on the grid or even make them grid neutral.
The UK may also see biomass-fired heat and power plants continue to replace the more traditional coal-fired plants, which are used for general power provision and grid balancing services. While securing funding for projects of this nature is more difficult, they are often funded by consortiums of investors who each take a percentage of the overall deal value, thus reducing the risk.
With the right project structure and the right developer, bioenergy projects are an attractive investment for both debt and equity funders. The changes in the clean energy market combined with the government's push to not only make the UK carbon neutral but also a hub for green finance, could be exactly the impetus that bioenergy needs to grow its market share.
Contributor: Gary Roscoe
This article first appeared in Bioenergy Insight magazine.
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