Utility Week

Utility Week 12 12 2014

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Page 22 of 33

UTILITY WEEK | 12Th - 18Th DEcEmbEr 2014 | 21 Finance & Investment T he UK's wind energy industry has made remark- able progress over the past decade. Total installed capacity is approaching 12GW. This is set to continue, and we see over £35 billion of wind assets in construction or consented. However, despite continuing cost reductions, constructing onshore and offshore windfarms remains capex-intensive. Good progress has been made by spe- cialist developers, but major utilities will have to build most of these assets because they are the only organi- sations with the requisite combination of scale and expertise. Yet it is unrealistic to expect utilities to take all of these assets onto their balance sheets in perpetu- ity. Who, therefore, finances the development? The wider equity markets provide part of the answer. They are the deepest pools of capital and have an appe- tite for stable yield and inflation protection – the precise characteristics of wind generation revenue profiles. If credible long- term owners for wind assets can be identified, utilities will have the confi- dence to continue their much-needed development pipelines. The chal- lenge is finding a structure satisfying both sides. Investors are understandably timid about directly owning wind assets; it is a complex business requiring expertise and experience not oen present in typical investment teams. On the other side, utilities need a buyer with whom they can maintain a long–term relationship and potentially invest alongside. Greencoat UK Wind has a well-understood fund structure. We were keen to resemble utilities' financing in order to easily make a range of investments, and have transactions run smoothly. The simple corporate balance sheet containing only equity and senior debt is also easily understood. Since listing we have used short-term senior acquisition debt facilities to make new invest- ments and have refinanced twice with new equity issu- ance to free up further debt capacity for acquisitions. Following Greencoat's listing and the ensuing emergence of a "renewable infrastructure" sector, it has raised almost £2 billion – private capital that will help unlock the next generation of development. Finding the right long–term owners was always the challenge. Stephen Lilley, partner, Greencoat Capital "Despite continuing cost reductions, constructing onshore and offshore windfarms remains capex-intensive." Investor view Stephen Lilley Only major utilities have the requisite scale and expertise Analysis Not just splitting good and bad Jillian Ambrose says Eon's newly divested fossil fuel business could be attractive to some investors. T he seismic shi in European energy markets was bound to reveal fault lines, and for Eon these lie between innovation-led technologies and conven- tional thermal generation interests. The utility's dramatic decision, announced last week, to divest its beleaguered fossil fuel business into the so- called New Company has prompted many to draw com- parisons to the toxic asset-filled 'bad banks' formed in the wake of the economic recession. But tarring NewCo with the same brush overlooks the possible investor appeal it could offer when it is sold off in 2016. David Edwards, a partner in Baringa's markets divi- sion, told Utility Week that Eon's split is not necessarily a case of separating the good from the bad. "Investors who are interested in newer technologies will be pleased with the split but there are those who believe that the problems faced by conventional generators could partly be due to short to medium-term fundamentals, and that there could be a last hoorah for conventional generation." Weak wholesale market prices because of a glut of subsidised renewable generation are the primary driver of profit-hemorrhaging in the conventional generation space, a trend that could shi over the coming decade to make the NewCo an interesting investment prospect. "A general fundamental change to market condi- tions could see rising wholesale prices which would put NewCo in a positive position," Edwards agreed. Edwards said market prices could face upward pres- sure if Germany's economic recovery hastens and indus- trial demand picks up. Also, if reform of the EU ETS allows carbon prices to rise, the cost of electricity could follow with gas-fired generators at a natural advantage compared with coal power. The market may also offer greater opportunities for the generation and transmission of power as the Euro- pean market-coupling project continues to progress in creating a wider single energy market, he said. Beyond Europe, NewCo's global agenda – including LNG and interests in Russia and Brazil – could prove attractive to investors "if the right bets are placed in the right places," he added. "But none of these options have any certainty surrounding them. An investor would need to have a healthier than average risk appetite to take this investment on." But a bet on emerging, unproven technologies and the whims of politicians has its own risks. "In some cases if you look at what's le: the consumer business, distribution technologies and renewables; is this really any less of a gamble?"

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