AIB switches on €1 billion in new lending to the energy sector
KATHLEN BARRINGTON sheds light on Bernard Byrne’s plans for a major new lending programme to the energy sector over the next three years.
It is no surprise AIB is having a light bulb moment after analysing the scale of the opportunities in the energy sector. AIB Director Bernard Byrne, a former finance director at Ireland’s Electricity Supply Board (ESB), says that energy has been identified as one of the key lending areas on which AIB will now focus.
The scale of the opportunity is absolutely enormous. Take the domestic wind energy sector, for example. The wind in Ireland blows strongly and consistently – making it one of the top places in the world to construct a wind farm.There is also a very stable government backed scheme that guarantees a floor price for each unit of electricity generated by a wind farm. The pace of construction of wind farms is expected to increase over the next seven years, in particular the build rate in the next two years will reach record levels.
“The financial requirement for the domestic Irish wind market alone is estimated to be €5 billion,’’ says Byrne.
Wind farms are just one part of Ireland’s burgeoning energy sector that also includes energy efficiency and efficient transport.
It is a sector that AIB has targeted for major lending growth over the next three years. Byrne disclosed that AIB is earmarking €1 billion for lending to the energy sector in the three years from 2014 to 2017.
It is no surprise that Byrne has emerged as a sector champion since he joined AIB in 2010. Byrne has the advantage of being familiar with the energy sector following a career at the ESB where he can count among his achievements the establishment of Novusmodus, a €200 million cleantech and renewable energy fund, whose invest- ments includes companies like Nualight, a LED lighting specialist and Airvolution, an onshore wind-farm developer in the UK.
Byrne has brought his combination of financial and energy industry knowledge to AIB which has been seeking to identify suitable sectoral areas for lending growth.
The decision to lend to the energy efficiency sector has required substantial market research to identify clients’ needs and to build the bank’s knowledge of the sector. For example, the bank commissioned Amarach Research to survey over 450 small and medium enterprises (SMEs) to understand their requirements. It also held discussions with suppliers and expert partners such as the Sustainable Energy Authority of Ireland, the Irish Green Building Council and Crowley Carbon, the energy efficiency supplier headed by serial entrepreneur Norman Crowley. “The research has been invaluable in educating ourselves on what the market wants and shaping our products,” says Byrne.
The research was published in a report earlier this month, while a number of road- show events around Energy Efficiency are planned for early 2014.
AIB earlier this month also launched its new Energy Efficiency Finance propositions which are designed for SMEs taking on projects that cut their energy costs.The knock- on is that Ireland gets closer to meeting its energy efficiency target of reducing energy consumption by 20 per cent by 2020.
The bank announced, amongst other facilities available, that term loans of up to €300,000 for energy efficiency projects will have a discounted rate. These loans are supported by funding from the European Investment Bank (EIB). AIB also announced hire purchase and lending options to finance the likes of electric vehicles and general equipment.
The idea is to put sector specific financial propositions on the shelf so that businesses are prompted to think about cutting their energy costs and can know what they can avail of when then do decide to take action.
“If we don’t have something on the shelf, the customer won’t recognise AIB is open- for-business for energy efficiency projects when, in fact, we have a strong appetite for lending into this area,’’ says Byrne.
It is said that every cloud has a silver lining. And it seems that the economic downturn has prompted businesses to focus on energy savings as a way of cutting costs when revenue growth is slow. That in turn should help Ireland achieve its 2020 targets of reducing energy consumption by 20 per cent by 2020.
Businesses seeking to borrow for energy efficiency projects previously found that banks didn’t factor in the savings to be obtained from energy efficiency. However, Byrne says AIB has now put in place a way of taking into account the projected savings from the energy efficiency project when calculating the borrower’s repayment capacity. This is a game-changer in banking terms.When the reduced outlay on energy costs is factored in, the bank finds that the borrower may well generate the cash flow to pay for the energy efficiency project, whether it is a loan to a large hotel installing a new heating system or a small retailer making repayments on a loan to fund energy efficient lighting.
“We think manufacturing, food and beverage, retail and hospitality will be particularly interested due to their demand for energy and heat,’’ Byrne adds.
AIB is also planning to lend to the renewable energy sector given the government has been set a national target of increasing the share of renewable energy used in Ireland to 20 per cent by 2020.The EIB has provided a €100 million loan to support up to €200 million of renewable energy projects in areas like wind farms, hydro and biomass projects including anaerobic digesters.
The bank has also signed a memo of understanding with Enercon, the fourth largest wind turbine manufacturer in the world and the market leader in Germany. Enercon has significant market share in small and medium size wind farms in Ireland.AIB and Enercon will work together to streamline the due diligence process for wind farm projects seeking finance.
AIB has invested in up-skilling staff to lend to a sector where understanding cash flow is key. Different functions within the Bank have attended wind farm finance training with the Irish Wind Energy Association (IWEA) and already one member of the Energy Sector Team has completed Dublin City University’s Graduate Certificate in Sustainable Energy Finance and is working towards his Masters.
“The idea is that the experts on the Energy Sector Team established in 2013 will prepare materials for the bank’s network of lenders to help them with their lending decisions”, says Ray O’Neill, Head of Energy and Clean Technologies for AIB.
O’Neill, who has worked internationally in the renewable and tech sectors sees Ireland as a stable market with great potential to reduce our reliance on imported fuels.
“We are only seeing the tip of the iceberg right now in terms of potential. The challenge is to co-ordinate the market players and surface the potential that’s hidden in business across Ireland.”
The sector team will also serve as a resource to which branches can refer more complex lending proposals. Already, the bank has rolled out detailed manuals for branch staff to familiarise them with the issues on lending to the energy sector.
Like other players in the sustainable sector, AIB is also leading by example and has been recognised for its own internal energy efficiency projects (see panel). It is a case also of learning by doing:“If we are to be useful, we really have to understand the sector,’’ Byrne concludes.
Published in the Natural Capital Magazine, vol 1, Dec 2013/Jan 2014