2. Programme
09:00 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
3. The Renewable Heat Incentive –
past, present and future
Paul Thompson
Head of Policy
June 2011
3
4. 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
5. What this presentation will
cover
Background
The RHI decision document
Some outstanding issues
2012 and beyond
5
6. 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
11. 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
16. Likely timeline
Date 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June • Ofgem publishes draft guidance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 Decisions and Parliamentary
2012 approval of new regulations
Autumn 2012 Phase 2 of RHI starts
16
17. 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
18. 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
19. 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
21. 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
22. 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
23. 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
24. 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
25. There is scope for confusion..
Technology RO without RO with RHI (p/kWh)
CHP CHP
(ROCs/MWh) (ROCsMWh)
Biomass 1.5 2 <200kW - 7.6/1.9
(general) 200-999kW - 4.7/1.9
>1MW - 2.6
Biomass 2 2 As above
(energy
crops)
Biomass (co- 0.5 1 None (if less than 50%
firing) biomass)
AD/advanced 2 2 <200kW – 6.5
gasification & Other scales – none
pyrolysis
Energy from 0 1 As biomass – but only if
Waste from MSW and not less
than 50% renewable
Geothermal 2 2 3
25
26. 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
27. Staying in budget
RHI 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
69. The Renewable Heat Incentive
Renewable heat – project economics
Stuart Campbell
70. Agenda
► Introduction to Ernst & Young
► RHI – uncertainties
► Renewable heat – indicative CHP project economics
Stuart Campbell
Assistant Director – Energy and
Environmental Infrastructure Advisory
Ernst & Young
scampbell4@uk.ey.com
Tel:+44 (0) 20 7951 6973
Mob: +44 (0) 7824 609692
Page 70 31 March 2011 The Renewable Heat Incentive
71. Ernst & Young global network of renewable
energy specialists
Business Advisory
Services
UK global
centre of
Tax Assurance
renewable
expertise
Transaction
Advisory Services
Page 71 31 March 2011 The Renewable Heat Incentive
72. RHI – market profile
Technology EfW with CHP Medium to Biomethane Deep District Solar thermal
large scale injection and geothermal/ heating
solid biomass biogas Ground source
CHP combustion heat pumps
Industry ► Corporate ► Renewable ► Agricultural ► Commercial ► Local ► Home owner
player waste project sector property authority/ ► Commercial
management developers ► Corporate developers public sector property
operators ► Utilities waste ► Industrial schemes developers
► Local ► Industrial management commercial ► Commercial ► Local
authorities commercial operators offtakers property authority
► Utilities offtakers (food waste) ► Home owner developers schemes
► Local ► Local ► ESCO
authorities Authorities
► Renewable
project
developers
Typical ► On balance ► Project ► Asset finance ► Asset finance ► PB ► Private equity
financing sheet finance ► Project ► Project ► Project ► Tax based
► Project ► On balance finance finance finance equity (?)
finance sheet ► PFI/PB ► PB ► On balance ► Asset finance
► PFI/PB ► Equity funds ► On balance ► Green Deal sheet ► Project
sheet ► Equity funds finance
► Green Deal
Page 72 31 March 2011 The Renewable Heat Incentive
73. RHI – market profile
Technology EfW with CHP Medium to Biomethane Deep District Solar thermal
large scale injection and geothermal/ heating
solid biomass biogas Ground source
CHP combustion heat pumps
Industry ► Corporate ► Renewable ► Agricultural ► Commercial ► Local ► Home owner
player waste project sector property authority/ ► Commercial
management developers ► Corporate developers public sector property
operators ► Utilities waste ► Industrial schemes developers
► Local ► Industrial management commercial ► Commercial ► Local
authorities commercial operators offtakers property authority
► Utilities offtakers (food waste) ► Home owner developers schemes
► Local ► Local ► ESCO
authorities Authorities
► Renewable
project
developers
Typical ► On balance ► Project ► Asset finance ► Asset finance ► PB ► Private equity
financing sheet finance ► Project ► Project ► Project ► Tax based
► Project ► On balance finance finance finance equity (?)
finance sheet ► PFI/PB ► PB ► On balance ► Asset finance
► PFI/PB ► Equity funds ► On balance ► Green Deal sheet ► Project
sheet ► Equity funds finance
► Green Deal
Page 73 31 March 2011 The Renewable Heat Incentive
74. RHI – uncertainties impacting investment
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
Page 74 19 May 2011 The Renewable Heat Incentive
75. RHI – uncertainties impacting investment
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
Page 75 19 May 2011 The Renewable Heat Incentive
76. 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
Page 76 31 March 2011 The Renewable Heat Incentive
77. 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
Page 77 31 March 2011 The Renewable Heat Incentive
78. 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
Page 78 31 March 2011 The Renewable Heat Incentive
79. 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
Page 79 31 March 2011 The Renewable Heat Incentive
80. RHI indicative CHP project economics
(cont’d)
Biomass CHP project (heat to power 60:40)
RHI no heat RHI low heat RHI high heat
sales sales 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
Page 80 31 March 2011 The Renewable Heat Incentive
81. RHI indicative CHP project economics
(cont’d)
District heating network with Biomass CHP
► Heat to power ratio 50:50
RO uplift RHI
Post tax project return 10% 9%
Heat price £0.0/MWh £0.0/MWh
Post tax project return 13% 12%
Heat price £38/MWh £36/MWh
► Additional network capital costs require support over and
above RHI
► Project viability driven by connection costs
Page 81 31 March 2011 The Renewable Heat Incentive
82. RHI indicative CHP project economics
(cont’d)
Biomass CHP project (heat to power 60:40)
RHI no heat RHI low heat RHI high heat
sales sales 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
Page 82 31 March 2011 The Renewable Heat Incentive
83. Impact on EfW project economics
ROC uplift for CHP vs RHI
65% Heat 65% Power
No ROCs No ROCs
No RHI ROCs RHI No RHI ROCs RHI
Post-tax
10.9% 12.3% 12.7% 11.8% 13.4% 12.3%
project IRR
► Ratio of power to heat is key driver in comparative impact
► Other characteristics of the RHI to be considered
Page 83 19 May 2011 The Renewable Heat Incentive
84. RHI indicative CHP project economics
(cont’d)
District heating network with Biomass CHP
► Heat to power ratio 50:50
RO uplift RHI
Post tax project return 10% 9%
Heat price £0.0/MWh £0.0/MWh
Post tax project return 13% 12%
Heat price £38/MWh £36/MWh
► Additional network capital costs require support over and
above RHI
► Project viability driven by connection costs
Page 84 31 March 2011 The Renewable Heat Incentive
85. 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
Page 85 19 May 2011 The Renewable Heat Incentive
86. Impact on EfW project economics
ROC uplift for CHP vs RHI
65% Heat 65% Power
No ROCs No ROCs
No RHI ROCs RHI No RHI ROCs RHI
Post-tax
10.9% 12.3% 12.7% 11.8% 13.4% 12.3%
project IRR
► Ratio of power to heat is key driver in comparative impact
► Other characteristics of the RHI to be considered
Page 86 19 May 2011 The Renewable Heat Incentive
87. 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
Page 87 19 May 2011 The Renewable Heat Incentive
88. Important information
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
Page 88
91. BNP Paribas
Clean Energy Fund
The Renewable Heat Incentive – Private Equity
Investor View
6 June, 2011
92. Clean Energy Fund | 92
07/06/2011
|
BNP Paribas Clean Energy Fund – key points
Proven 1. Little technology risk in investments
technologies ● Proven technologies will demonstrable track record
● Performance guarantees from robust suppliers
● Volume of opportunities
Attractive
2. Steady return with exit uplift
return profile
● 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
Leverage ● Enhanced return
● Increased diversification
4. Cash yield though life
● Secure income streams
● Feed-in tariffs provide transparency
● Inflation linkage
Cash yield
93. Clean Energy Fund | 93
07/06/2011
|
Diversified investors with common requirements
Investor Sector Investor Base
Non-strategic investor base requiring clear investment criteria
94. Clean Energy FundFund
Clean Energy | 94
07/06/2011
|
Attractiveness of clean energy assets
Per Annum Growth in European Generation 2005-2015
Themes 30%
25%
● Ongoing Environmental 25%
Concerns
● Desire for Energy 20%
Independence
14%
15%
● Government Support 13%
Mechanisms
10% 7%
● Advances in Technological 6%
Innovation 5%
2%
● Increased Energy Demand 1%
0%
Coal Oil Total Hydro Geo Biomass Tidal & Wind Solar
-1% Energy thermal Wave
-5% -3.60%
-10%
Source: IEA Alternative Scenario
• Renewable energy has provided investors with secure cash yielding asset class
• Pricing becoming difficult – market becoming saturated.
95. Clean Energy FundFund
Clean Energy | 95
07/06/2011
|
Sector consists of a number of proven generation technologies
–
The “Core Technologies”
Wind Power Solar
● Large market consistent growth ● Slowing market
● Individual projects typically ● Individual projects up to 50MW
between 20-50 MW (PV)
● European core of experience ● Little volume risk
● No pricing risk ● No pricing risk
● Volume according to wind
resource
Small scale Hydro Biomass
● Small niche market ● Individual projects up to 50MW
● Individual projects <30MW ● Power from proven
● Secondary investment technologies
opportunities ● Fuel supply risk
● Unique engineering and volume ● Base load supply
assessment ● Strong growth in UK
● Regulatory changes creating
pricing risk
96. Clean Energy Fund | 96
07/06/2011
|
Fund structure geared to deliver solid returns and steady income
Invested Capital + Capital Gain
Income Yield Income Yield
Divested Capital (incl Capital Gain)
NAV
Cumulative Called Capital
Capital at Risk (Called Less Distrib)
€ mn
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Investment Period “Harvesting” / Management Exits / Realisations
Phase Year 1 – 2 (indicative) Interim period Year 10 (max)
Clean Energy
98. Clean Energy Fund | 98
07/06/2011
|
Renewable Heat Incentive
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
99. Clean Energy Fund | 99
07/06/2011
|
RHI vs RO
Biomass CHP with Biomass CHP with RHI
ROCs
Cash generation Proportionate to Proportionate to heat
electricity sales sales
Validity To end of Renewables 20 years from
Obligation 2027 accreditation
Bankability ROCs proven bankability, Presumably secure,
pending EMR related to counter-party
Risk - Price Reduced No
Risk - Volume Covered by PPA Yes
Risk - Inflation No No
Market Scale Yes Unknown
Exit / consolidation Yes Unknown
Options
100. Clean Energy Fund | 100
07/06/2011
|
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
101. Renewable Heat Incentive: The Market Explained
Will the RHI encourage bank funding of biomass projects?
6 June 2011
101 101
101
102. NIBC Approach to the Renewable Energy Sector
Focus from Multiple Angles
Renewable energy Specialised Finance European Infrastructure Fund
is a key client sector Providing senior debt Investments in primary
at NIBC for which solutions including, project, project market with stable
we have a pan- asset based, corporate and long-term cash flow
European mandate leveraged financing across characteristics
the sector Geographical focus:
Specialists throughout our Benelux, Germany, UK
offices in The Hague, Managed from London,
London, Frankfurt and Frankfurt and The Hague
Brussels
Client Coverage
offices
Strong focus on the Fund size EUR 350m
renewable energy and utility
sector within the 23-strong Renewable
NIBC Infrastructure Infrastructure & Renewables Energy
& Renewables has team
built up substantial Structuring of alternative
Sector
network of equity financing transactions and
fund investors and M&A
fund initiatives Treasury
strategic developers >25 specialists in The Hague Treasury products offered
active in the & Brussels include interest rate hedging,
renewable energy Experienced M&A Utility FOREX hedging and
sector Team structured tax deals
Recent buy side mandates Specialists in The Hague
include
– Leading European
energy company
– Disposal of Dutch
integrated waste
company
102
103. Key Lender Issues
Regulatory
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
103
104. Key Lender Issues
Practicalities
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
104
105. Bankability
Will 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
105
