Barclays backs renewables

Barclays is putting its money where its mouth is and getting behind renewables. Giles Crosse looks at today’s funding issues.

On 30 August, Barclays launched a GBP100m fund for UK farmers investing in renewable energy, tracking the massive groundswell of interest from farmers seeking to cut energy bills and generate new income.

New figures released by the bank reveal that more than 37% of the UK’s 200,000 farmers are expecting to invest in renewable energy, with the majority doing so within the next year. Farmers are further expecting the investment to generate returns averaging GBP25,000 per year.
Developed with sector specialists including National Farmers Union (NFU), the funding is available for solar, wind, and hydro projects in the UK, with Barclays including projected feed-in-tariffs (FITs) when assessing each loan.

From the farm to the sea

However, the bank is not just looking at the agricultural sector. In other recent moves, Aquamarine Power has agreed a GBP3.4m loan with Barclays Corporate in a deal that could signal an important milestone for investment in the marine energy sector.

The transaction is, say the partners, the first time a UK marine energy project has succeeded in securing bank debt finance. Aquamarine Power’s Oyster wave power technology captures energy in nearshore waves and converts it into sustainable electricity. The newly-announced, five-year loan will provide the funds Aquamarine Power needs to complete a 2.4MW Oyster array, located at the European Marine Energy Centre (EMEC), Orkney.

The planned array should comprise three of the company’s Oyster wave power devices. Aquamarine successfully installed its first 800kW Oyster 800 device at Billia Croo near Stromness in Orkney in August. Two further devices are due for installation in 2012 and 2013.The company previously installed a single full-scale 315kW Oyster 1 device at Billia Croo in 2009.

Wind energy funding deal

The deal is the second completed this year by Barclays Corporate Renewable Energy Team. In April Barclays delivered a multimillion pound funding deal for the 28.6MW Drone Hill Wind Farm in the Scottish Borders. Drone Hill, owned by AES Corporation’s subsidiary AES Wind Generation, secured a combination of project financing through a long-term loan of GBP22.8m from Barclays Corporate and AES Equity of GBP15.8m, at a total project cost of GBP38.6m.

Whilst these sums may seem normal to those involved in the banking sector, considering the upfront costs of renewables technologies this new willingness to help develop opportunities might signal an important shift within the sector, especially given ongoing concerns surrounding economies and finance, particularly in the EU.

Describing incentives for banks to invest in renewables, a Barclays spokesperson told Industrial Fuels and Power they included, “A combination of good citizenship by supporting renewable energy, but also assisting our customers with a financial opportunity. Farmers can realise a good return on their investment, and at the same time as a bank we are helping our customers with their business,”
The spokesperson said Barclays is a big supporter of farmers in the UK, and the fund is designed to help agricultural customers who are looking to finance renewable energy projects. “We are also seeking to educate more farmers about the opportunity that exists here for lower costs and greater financial returns, as not enough are aware of what could be achieved.

“Finally, it will also support the government’s recent commitment for the UK to generate 15% of its energy from renewable sources by 2020,” But why is the agricultural sector so well placed to participate and benefit from renewable energy?

“Farmers have struggled for years with low commodity prices and increasing costs, and Barclays has already supported many farmers as they seek new ways of making money,” the Spokesperson continued. “Renewable energy production offers farmers a further opportunity to develop their businesses. It gives them the opportunity to use their land in ways that compliment agricultural use, putting solar panels on existing building structures, or siting wind turbines in fields, for examples.
“Our research reveals that more than a third of the UK’s 200,000 farmers are expecting to invest in renewable energy, as a consequence, many farmers are looking forward to many further years of lower energy costs and a potentially new income as they sell energy back to the grid.”

Barclays thinks that estimated time scales for payback from agricultural renewables will vary with the type and size of the renewable project. On average, they are expecting 10 years before the investment has paid for itself.

“While we cannot speak for other banks, as with any other lending, we’ll continue to have an appetite to lend at commercial rates to viable businesses and business projects. We do expect to see increased investment in renewable energy in general, with the costs of wind and solar projects likely to fall by up to 50% in the next three to five years.”

Not risk-free

Of course, none of this means that financing and debt finance remain a risk-free business. There is a need for both bank and renewable provider to understand the complexities and the responsibilities involved in the partnership. Jan Love, Director of Project Finance for Barclays Corporate Scotland, explained the major challenges surrounding debt finance to renewables firms: “At the current time the Electricity Market Review has raised some questions around the subsidy schemes going forward, in particular how the phase out of ROCs will occur. Further detail and certainty around this will assist firms in securing both debt and equity.

“For burgeoning renewables companies the challenges and risks are more around technology and uncertainty of future cashflows. The economic climate means there is also more competition for funding.”

Jan Love explained marine is a particularly exciting area for Scotland given the strong Scottish government support, the Round 1 Crown Estate’s-led leasing projects in Orkney and Pentland Firth and the EMEC centre in Orkney. “We have a huge natural resource of wave and tidal energy and there is significant potential for the local economy.”

She also revealed EU and UK governments could do more to enable a quick conclusion around areas of uncertainty within the EMR, to create certainty for investors around government subsidies going forward. “In addition, more of the same, the Scottish government works closely with the marine players already and has given some strong support in the sector already,” she said.

What lies ahead

Looking to the future, Love couldn’t predict exact percentages for UK marine device enablement in the future, but did say the Orkney and Pentland Firth area has plans for 1.6 GW of wave and tidal devices, enough to power 70,000 homes.

Martin McAdam, Aquamarine Power CEO, suggested financing for renewables overall would vary in the future, pointing to differences for example between financing onshore wind and offshore renewables, related into the maturity of the various technologies.

“There is the initial R&D and the equity development, which lays the path towards commercial viability, then there are the early stage capital costs and the bank debt which will be paid back by return on the revenues,” he explained.

“New technology is perhaps always to an extent high risk, but Barclays have an opportunity here to help educate the wider banking sector as to the advantages and the possibilities to engage with our sector. This is my fourth start-up business and I have no doubt that this is the most difficult economic and financing climate.

“Those who are involved in private equity really seem to moving away from anything which has a level of risk involved, and this of course makes things a lot tougher, it’s also seeming tougher to attract the venture capital.

“We need to see a broader recognition that marine can act as a companion to wind and solar and that there is no one technology which will provide everything. Historically, power plants were sited where the fuel was, and now we need to start moving and altering the grid to enable that to make the most of where the renewable resource in this country is.”

McAdam does see potential for a future pan European grid, but remains unsure surrounding precise timescales before its rollout. He feels Strategic Energy Technologies (SETs) still have an important role to play within wider EU development, and argues that with the billions presently spent on research into nuclear within the Union, there is plenty of space to pull more funding back to other renewable sources of power.

“Marine in the Atlantic and along the coast of Scandinavia has a huge amount to offer,” he concluded. “The resource in the Mediterranean is less positive overall as there are lower overall areas of energy density. Nonetheless we will probably see development there in the future as technologies become cheaper.”

This viewpoint appears to be shared by Barclays, which notes that 80% of the farmers questioned in the lead in to its funding release recognise that renewable energy can provide significant cost savings, with 60% expecting it to generate additional income for their business. In the medium term, increased investment in renewable energy appears even more likely, with Barclays predicting the costs of wind and solar projects to fall by up to 50% in the next three to five years. “What farmers see is a win-win, lower costs and increased income, and the majority expect the investment to pay for itself in under 10 years,” said Travers Clarke-Walker, Product and Marketing Director for Barclays Business. “Meaning they are looking forward to many further years of lower energy costs and a potentially new income as they sell energy back to the grid.

“When looking at a new renewable project, reliable technology, competent maintenance and management are all important considerations, though of course farmers should also keep an eye on the current feed in tariff rates offered to ensure it works for their business.”

It will be intriguing to keep an eye on take up levels for the new Barclays moves, and also to see whether the wider banking sector decides to follow its lead into the renewables arena. Certainly it is precisely the kind of move which might help the UK Prime Minister’s much vaunted “green economy” actually spring into life. Moves that provide new green jobs and cleaner energy are just what today’s politicians are calling out for.