renewable heat incentive - the market explained

Renewable Heat Incentive

The market explained

Eversheds LLP

6 June 2011, London

Programme09:00 Michelle Thomas, Eversheds LLP

09:05 Paul Thompson, REA

09:30 Jean-Pascal Boutin, Eversheds LLP

09:55 Paul Carey, MVV

10:20 Q&A Session

10:35 Coffee Break

10:50 Stuart Campbell, E&Y

11:15 Peter Dickson, BNP Paribas

11:40 Lisa Shaw, NIBC Bank

11:55 Q&A Session with the panel including ‘Bernie’Bulkin & Amit Dewan

12:30 Lunch

14:00 Close

The Renewable Heat Incentive –

past, present and future

Paul Thompson

Head of Policy

June 2011

3

Who are the REA?

The UK trade association for the renewables sector

We are unique, in that:

650 members and rising

Members of all sizes – sole traders to

multinationals, with a democratic, one member one

vote structure

Cover all sectors and all renewable technologies

Activities include lobbying and policy development,

and information dissemination to stakeholders and

the wider community

4

What this presentation will

cover

Background

The RHI decision document

Some outstanding issues

2012 and beyond

5

The Renewable Energy

Directive

Published 2009. Imposes binding renewables

targets to be reached by 2020 across the EU.

Targets in the Renewable Energy Directive:

20% of energy across the EU to be renewable

15% of energy in the UK to be renewable

10% of energy used in transport to be renewable

6% reduction in GHG emissions from road

transport

6

7

Energy Act 2008

Section 100

contains powers to

set up a Renewable

Heat Incentive

Renewable Energy Strategy

8

Proposed increase in

renewable heat to 12%

- from around 1% now

Breakdown by technology

9

Current UK heat sources

10

Not just about climate

change

Global energy demand is forecast to increase by

around 40% between 2007 and 2030, with more

than three quarters of the rise from fossil fuels.

In 2008 the UK imported around 25% of its natural

gas.

Projections suggest that by 2020 this could rise to

around 60%.

11

Tariff

Consultation closed

26 April. Followed

by the general

election, a very long

wait…

12

13

..and a certain degree

of stress

14

Published March 10,

2011

Decision document –

not for further

consultation

£860million budget to

2014/15

What it might deliver in

2020

15

Likely timelineDate Action

June • Ofgem publishes draft guidance

• Final text of regulations laid before

Parliament

July Parliament approves regulations

September RHI starts

End 2011? Further consultation launched on

next phase of RHI

Spring/summer

2012

Decisions and Parliamentary

approval of new regulations

Autumn 2012 Phase 2 of RHI starts

16

Headlines

Tariffs for solid biomass, ground source heat

pumps, solar thermal, biogas and injection of

biomethane to the gas grid

Significant omissions and limitations, some of

which will be corrected in 2012:

> No bioliquids

> No biogas or solar thermal 200kW and above

> No dedicated tariff for deep geothermal

> No district heating uplift

> No air source heat pumps

> No domestic

17

Eligibility

Heat must be for space, water or process heating

and delivered by water or steam

Grants must be paid back

Plant must be new at time of installation

Plant only eligible if first commissioned on or after

15 July 2009

If 45kWth or less, kit must be MCS certified now –

installer must have been certified at the time

18

Setting the tariffs

Broken down into sizes and technology

Paid on p/kWh of metered heat

paid for 20 years – index-linked to RPI

Intended to cover the typical difference in cost

between fossil and renewable heat, and give 12%

return over tariff lifetime (for most technologies)

No ‘reference installations’ for CHP – heat from

CHP receives the same tariff as heat-only

generation by that technology/scale

19

Biomass

Two-tier tariffs for <1MW. Higher rate paid out

only up to tier break – installed capacity x 1314

Sustainability reporting for 1MWth and above

Air quality maximum limits to be set for <20MWth:

30g/GJ for PMs and 150g/GJ for Nox. To be

introduced 2012

21

Biomass in waste

Only municipal solid waste (not

commercial/industrial)

Similar ability to use deemed content of MSW as

RO (at 50%), BUT

Waste must have minimum 50% biomass content

Similar allowances for use of fossil fuel for

ancillary purposes as RO, but light touch for

<1MWth

22

CHP (1)

Power-only installations commissioned pre 15

July 2009 can claim RHI on heat if convert to CHP

after that date

Bands based on installed thermal capacity – how

is this to be calculated for CHP?

No CHPQA requirement

For many technologies, installations face a choice

between RHI and RO ‘uplift’. Outcomes of RO

Banding Review therefore crucial – proposals for

consultation due July 2011

23

CHP (2) – RO vs RHI

Installations accredited under RO to receive 0.5

ROC ‘uplift’ (including 1ROC for EfW) cannot

claim RHI

Installations accredited between 15 July 2009 and

1 April 2013 likely to have one-off choice between

uplift and RHI

RO uplift likely to be withdrawn from April 2013 –

REA pushing for some transition for already-

committed projects (2 years?)

Installations receiving RO uplift are not currently

grandfathered

24

There is scope for confusion..

Technology RO without

CHP

(ROCs/MWh)

RO with

CHP

(ROCsMWh)

RHI (p/kWh)

Biomass

(general)

1.5 2 <200kW - 7.6/1.9

200-999kW - 4.7/1.9

>1MW - 2.6

Biomass

(energy

crops)

2 2 As above

Biomass (co-

firing)

0.5 1 None (if less than 50%

biomass)

AD/advanced

gasification &

pyrolysis

2 2 <200kW – 6.5

Other scales – none

Energy from

Waste

0 1 As biomass – but only if

from MSW and not less

than 50% renewable

Geothermal 2 2 325

Domestic

Not in phase 1. Government has committed to

include in ‘phase 2’ – but no guarantee what form

this will take

As a stop-gap, ‘premium payments’ are planned:

£15million in one-off grants, but recipients will

then be able to claim RHI

Details were due to be announced last month.

Expected soon – later this week?

May have limited effect until details of full RHI are

known

26

Staying in budgetRHI funded from general taxation. Budget to 2014/15

must not be exceeded

Likely to be some form of ‘degression’ – ie rates reduce

for new entrants in pre-announced way

Strong industry preference for reductions on fixed dates

but Government concerned that this would not catch a

major bubble

Intention is to introduce ‘capacity-triggered’ degression.

Not easy to satisfy Government and industry

First planned review due to be implemented in 2015

27

Any questions?

28


Jean-Pascal Boutin, Eversheds LLP

6 June 2011

The Process

The Process

• Accreditation

• Who can claim?

• Multiple sites

• New plant/extensions/conversions

• Ongoing obligations

• Payment terms

• Grants

• Contract challenges

Accreditation

• Critical dates

• Preliminary

• Commissioning

• Meters

Who can claim?

• Non-domestic

• Owners

• Assignment/nomination/agents

Multiple Sites

• Site

• Common heating system

New plant/extensions/conversions

• New plant

• Replacing old plant

• Extensions

Ongoing Obligations

• Real requirement

• Reporting

Payment terms

• Quarterly

• RPI

• Reviews

Grants/Other benefits

Contract Issues

• 20 year offtake agreement

• Early termination

• Backup plan

• Community schemes/JVs

• Heat supply not regulated

The Renewable Heat IncentiveRenewable heat – project economics

Stuart Campbell

Agenda

► Introduction to Ernst & Young

► RHI – uncertainties

► Renewable heat – indicative CHP project economics

31 March 2011 The Renewable Heat Incentive

Stuart Campbell

Assistant Director – Energy and

Environmental Infrastructure Advisory

Ernst & Young

[email protected]

Tel:+44 (0) 20 7951 6973

Mob: +44 (0) 7824 609692

mailto:[email protected]

Ernst & Young global network of renewable energy specialists


Tax Assurance

Business Advisory

Services

UK global

centre of

renewable

expertise

Transaction

Advisory Services

RHI – market profile


Technology EfW with CHP Medium to

large scale

solid biomass

CHP

Biomethane

injection and

biogas

combustion

Deep

geothermal/

Ground source

heat pumps

District

heating

Solar thermal

Industry

player

► Corporate

waste

management

operators

► Local

authorities

► Utilities

► Renewable

project

developers

► Utilities

► Industrial

commercial

offtakers

► Agricultural

sector

► Corporate

waste

management

operators

(food waste)

► Local

authorities

► Renewable

project

developers

► Commercial

property

developers

► Industrial

commercial

offtakers

► Home owner

► Local

Authorities

► Local

authority/

public sector

schemes

► Commercial

property

developers

► ESCO

► Home owner

► Commercial

property

developers

► Local

authority

schemes

Typical

financing

► On balance

sheet

► Project

finance

► PFI/PB

► Project

finance

► On balance

sheet

► Equity funds

► Asset finance

► Project

finance

► PFI/PB

► On balance

sheet

► Asset finance

► Project

finance

► PB

► Green Deal

► PB

► Project

finance

► On balance

sheet

► Equity funds

► Private equity

► Tax based

equity (?)

► Asset finance

► Project

finance

► Green Deal

RHI – uncertainties impacting investment

19 May 2011 The Renewable Heat Incentive

Uncertainties

► Review of support level – triggers for early review

► Degression mechanism – rate and triggers

► Impact on CHP technologies of RO banding review due in 2013

► Feedstock constraints

► Availability of high quality heat off take

► £860m cap limit

► Air quality limit levels

► Phase 2 technologies and roll out:

► MSW specific tariff

► Treatment of non-MSW waste (inc SRF)

► Large scale AD/biogas tariff

► Heat from CHP tariff

► ASHP tariff

► Bioliquids

► DH uplift

► Domestic

► Investors require certainty over project revenues

► Longer development time frames for RHI technologies, planning regime implications

RHI indicative CHP project economics

Biomass CHP project (Heat to Power 50:50)


RO uplift RHI

Post-tax project IRR 13% 12%

► RHI scheme marginally underperforms RO uplift for 50:50

ratio

► Project economics driven by heat to power configuration

RHI indicative CHP project economics (cont’d)


Biomass CHP project (heat to power 60:40)

RO uplift RHI

Post tax project IRR 11% 12%

► RHI scheme marginally outperforms RO uplift for 60:40

heat to power ratio




RHI no heat

sales

RHI low heat

sales

RHI high heat

sales

Post tax project IRR 12% 13% 14%

Heat price £0.0/MWh £7.8/MWh £13.3/MWh

► Heat price of c. £10/MWh required for returns comparable

with RO uplift on 50:50


District heating network with Biomass CHP

► Heat to power ratio 50:50


RO uplift RHI

Post tax project return

Heat price

10%

£0.0/MWh

9%

£0.0/MWh


Heat price

13%

£38/MWh

12%

£36/MWh

► Additional network capital costs require support over and

above RHI

► Project viability driven by connection costs




RHI no heat

sales

RHI low heat

sales

RHI high heat

sales

Post tax project IRR 12% 13% 14%

Heat price £0.0/MWh £7.8/MWh £13.3/MWh

► Heat price of c. £10/MWh required for returns comparable

with RO uplift on 50:50

Impact on EfW project economics

ROC uplift for CHP vs RHI


65% Heat 65% Power

No ROCs

No RHI ROCs RHI

No ROCs

No RHI ROCs RHI

Post-tax

project IRR10.9% 12.3% 12.7% 11.8% 13.4% 12.3%

► Ratio of power to heat is key driver in comparative impact

► Other characteristics of the RHI to be considered


District heating network with Biomass CHP

► Heat to power ratio 50:50


RO uplift RHI


Heat price

10%

£0.0/MWh

9%

£0.0/MWh


Heat price

13%

£38/MWh

12%

£36/MWh

► Additional network capital costs require support over and

above RHI

► Project viability driven by connection costs

Impact on funding for EfW/CHP plants


► Funder view of heat offtaker

► Part of project revenues for debt sizing or equity upside?

► Appetite to size debt from optimised power configuration

Impact on EfW project economics

ROC uplift for CHP vs RHI


65% Heat 65% Power

No ROCs

No RHI ROCs RHI

No ROCs

No RHI ROCs RHI

Post-tax

project IRR10.9% 12.3% 12.7% 11.8% 13.4% 12.3%

► Ratio of power to heat is key driver in comparative impact

► Other characteristics of the RHI to be considered

Impact on funding for EfW/CHP plants


► Funder view of heat offtaker

► Part of project revenues for debt sizing or equity upside?

► Appetite to size debt from optimised power configuration

This presentation pack necessarily represents only part of the information which we

considered in carrying out our work, being that which we considered to be most relevant

to our understanding of your needs, in the light of this seminar.

The information in this presentation pack will have been supplemented by matters arising

from any oral presentation by us, and should be considered in the light of this additional

information.

If you require any further information or explanations of our underlying work, you should

contact us.

The information in this presentation pack is confidential and contains proprietary

information of Ernst & Young LLP. It should not be provided to anyone other than the

intended recipients without our written consent.

Anyone who receives a copy of this presentation pack other than in the context of our

oral presentation of its contents should note the first two points above, and that we shall

not have any responsibility to anyone other than our client in respect of the information

contained in this document

Important information

Thank you

Ernst & Young LLP

Assurance | Tax | Transactions | Advisory

www.ey.com/uk

The UK firm Ernst & Young LLP is a limited liability

partnership registered in England and Wales

with registered number OC300001 and is a member firm

of Ernst & Young Global Limited.

Ernst & Young LLP, 1 More London Place, London SE1 2AF.

© Ernst & Young LLP 2011. Published in the UK.

All rights reserved.

BNP ParibasClean Energy Fund

The Renewable Heat Incentive – Private Equity

Investor View

6 June, 2011

Clean Energy Fund 92|07/06/2011

|

BNP Paribas Clean Energy Fund – key points

1. Little technology risk in investments● Proven technologies will demonstrable track record● Performance guarantees from robust suppliers● Volume of opportunities

2. Steady return with exit uplift● Reasonable returns reflecting style of risk appetite● Infrastructure assets - low correlation● Largest proportion of return locked in at investment

3. Non-recourse debt● Leverage at asset level● Enhanced return● Increased diversification

4. Cash yield though life● Secure income streams● Feed-in tariffs provide transparency● Inflation linkage

Attractive

return profile

Proven

technologies

Cash yield

Leverage


|

Diversified investors with common requirements

Investor Sector Investor Base

Non-strategic investor base requiring clear investment criteria


|

Clean Energy Fund

Attractiveness of clean energy assets

1%2%

6%7%

13%14%

25%

-1%-3.60%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Coal Oil Total

Energy

Hydro Geo

thermal

Biomass Tidal &

Wave

Wind Solar

Per Annum Growth in European Generation 2005-2015

Themes

Source: IEA Alternative Scenario

● Ongoing Environmental

Concerns

● Desire for Energy

Independence

● Government Support

Mechanisms

● Advances in Technological

Innovation

● Increased Energy Demand

• Renewable energy has provided investors with secure cash yielding asset class

• Pricing becoming difficult – market becoming saturated.


|

Clean Energy Fund

● Large market consistent growth

● Individual projects typically

between 20-50 MW

● European core of experience

● No pricing risk

● Volume according to wind

resource

Wind Power

Small scale Hydro

● Small niche market

● Individual projects <30MW

● Secondary investment

opportunities

● Unique engineering and volume

assessment

Biomass

● Individual projects up to 50MW

● Power from proven

technologies

● Fuel supply risk

● Base load supply

● Strong growth in UK

● Regulatory changes creating

pricing risk

● Slowing market

● Individual projects up to 50MW

(PV)

● Little volume risk

● No pricing risk

Solar

Sector consists of a number of proven generation technologies –The “Core Technologies”


|

Fund structure geared to deliver solid returns and steady income

Clean Energy

Investment Period

Year 1 – 2 (indicative)

“Harvesting” / Management

Interim period

Exits / Realisations

Year 10 (max)Phase

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

€ m

n

Income Yield

Divested Capital (incl Capital Gain)

NAV

Cumulative Called Capital

Capital at Risk (Called Less Distrib)

Income YieldInvested Capital + Capital Gain


|


The Issues

●Biomass-based power generation pricing

●Sustainable heat production – 12% of heat from RES by 2020

● Technological development

●Create long-term market security

Private Infrastructure Compatibility

●Secure cash yield

●Reduced risk

● Increased bankability

● Inflation hedge

Clean Energy Fund

RHI vs RO

99|07/06/2011

|

Biomass CHP with

ROCs

Biomass CHP with RHI

Cash generation Proportionate to

electricity sales

Proportionate to heat

sales

Validity To end of Renewables

Obligation 2027

20 years from

accreditation

Bankability ROCs proven bankability,

pending EMR

Presumably secure,

related to counter-party

Risk - Price Reduced No

Risk - Volume Covered by PPA Yes

Risk - Inflation No No

Market Scale Yes Unknown

Exit / consolidation

Options

Yes Unknown


|

Conclusions

●The CEP focuses on power production

●The RHI brings secure value to the heat element of

biomass-based chp

●Increased complexity of projects

●Lack of clarity of bankability

●Unproven market for exits

●No proof of increased market

101101 101

Will the RHI encourage bank funding of biomass projects?

Renewable Heat Incentive: The Market Explained

6 June 2011

102

Focus from Multiple Angles

Client Coverage

M&A

Specialised Finance

Providing senior debt

solutions including, project,

asset based, corporate and

leveraged financing across

the sector

Specialists throughout our

offices in The Hague,

London, Frankfurt and

Brussels

Strong focus on the

renewable energy and utility

sector within the 23-strong

Infrastructure & Renewables

team

Structuring of alternative

financing transactions and

fund initiatives

>25 specialists in The Hague

& Brussels

Experienced M&A Utility

Team

Recent buy side mandates

include

– Leading European

energy company

– Disposal of Dutch

integrated waste

company

European Infrastructure Fund

Investments in primary

project market with stable

long-term cash flow

characteristics

Geographical focus:

Benelux, Germany, UK

Managed from London,

Frankfurt and The Hague

offices

Fund size EUR 350m

Renewable

Energy

Sector

Renewable energy

is a key client sector

at NIBC for which

we have a pan-

European mandate

NIBC Infrastructure

& Renewables has

built up substantial

network of equity

fund investors and

strategic developers

active in the

renewable energy

sector

Treasury

Treasury products offered

include interest rate hedging,

FOREX hedging and

structured tax deals

Specialists in The Hague

NIBC Approach to the Renewable Energy Sector

103

Key Lender IssuesRegulatory

Welcome a dedicated support mechanism for heat

– Direct payment from Ofgem

– Encourage variety of technologies

Reporting regime

– Generally in line with RO

– Sustainability of fuel supply an ongoing risk

Government funding

– £860m available to support the RHI to 2014

– Will not implement previous administration’s proposals for an RHI levy

Sustainability of tariff

– Set at level to ensure fast uptake

– Right retained to review at an early stage

104

Key Lender IssuesPracticalities

Timing risk

– Tariff applies at point of commissioning

– Uncertainty until this point

Usage

– Measured at point of use, not generation

– Long term credit risk taken on heat user

Assignment

– Assignment & transfer of RHI to lenders prohibited

– Recouping of payments must be contractually agreed

105

BankabilityWill the RHI encourage bank funding of biomass projects?

Biomass projects

– Generally ancillary element

– Fuel supply will always be key concern

– Similar criteria to RO CHP uplift

– Possible heightened regulatory uncertainty

– Lengthy construction periods exacerbate problem

– Usage risk is key

Other technologies

– Deep geothermal, solar thermal

– UK natural resources