In 2013 Ireland’s green asset managers won €3billion in new funding

Sustainability Gathering-66Investors around the world are looking for new opportunities and sustainable finance looks like it could just be that next big thing.This news could not be better for Ireland, which has already built up a credible reputation as a world leader in the area, which includes investment in the building of physical renewable energy plants on a global scale as well as the managing of environmental assets.

Public private initiative the Green Inter- national Financial Services Centre (GIFSC) has big plans for the sector and hopes to increase Ireland-based assets serviced or managed in green funds from US$20 billion today to $200 billion by 2017.

Lofty plans but achievable says Mike Hayes, chairman of the Global Green Asset Management Network, which was launched by GIFSC last year in NewYork to try and make these plans a reality.

“Underpinning GIFSC’s goal to become a global leader in green asset management is Ireland’s world-class international financial services centre, one of the best business environments in the world, a wealth of natural resources, innovative green economy companies with global networks, a support- ive government and an emerging talent pool ofgreenfinancespecialists,”saysHayes,who is also a partner at KPMG.

SO WHY IS GREEN FINANCE CURRENTLY IN VOGUE? 

Global investors, including institutional money, pension funds, life assurance money and insurance companies, are looking for alternative asset classes in which to invest. There are a number of reasons for this – not least the knock-on effects of the global economic crisis. Investors were burned by property, equity, bonds and other invest- ments and are looking for more secure investment opportunities.

They are looking for asset classes that will produce an annual income, are long-term, stable and relatively certain in outlook and are not necessarily correlated to the wider financial market. They also want diversification in their portfolio and there is a genuine interest in ‘being green’. Most of these investors are based in regions such as the US, Canada, Germany, the UK, Scandinavia and the Gulf Region.

“They have taken a particular liking to renewable assets that are on the point of being built or which are already built and operating. These assets are underpinned by long-term government support measures in different jurisdictions which have the effect

of stabilising the cash flow be it for wind or solar projects,” says Hayes. “While the returns, which are in the six to nine per cent range, are not hugely exciting, they produce sufficient income for this type of investor, particularly given the very low returns on other financial assets with a similar risk profile.”

Because these investors cannot identify these assets themselves, they are investing through green funds and Ireland has emerged globally as the centre of choice for the establishment of these funds.

“The desire to establish green funds in Ireland is driven by a number of factors.The first, and the most important, is the changing regulatory landscape whereby certain institutional investors are obliged – either for internal or external reasons – to invest in a regulated structure. In Europe, Ireland and Luxembourg are the two places that have well-developed regulated structures,” says Hayes.

Today Ireland services a record-breaking €3 trillion in its wider funds industry and is the number one hedge fund centre in the world looking after more than 40 per cent of the globe’s assets.

Another reason is that Ireland has a body of professionals who have been working in the industry for the last 20 years and have the necessary knowledge and expertise to support the investment activity of these funds.

“Ireland is punching well above its weight globally in this sector. A number of Irish companies have led the way in developing renewable projects all around the world. Examples include Mainstream’s activities in Chile and South Africa, NTR and Airtricity in the US market, various Irish-head- quartered solar companies on the continent of Africa and many different wind and solar companies operating throughout Europe,” says Hayes.

This has led to the beginnings of an explosion of green funds in Ireland with many more already in the pipeline in both renewable and the wider sustainability sector.

2013 FINANCE WON

During 2013, more than 3 billion in international funding was won by Irish firms to invest in global projects.These are being won across private equity, equity investment and enterprise.

One of the big drivers of this is Mainstream Renewable Power, which has close to 2 billion invested in its projects in Chile and South Africa as well as an equity investment of 100 million by Japanese investment bank, Marubeni.

Mainstream, which is focused on the development, construction and operation of generation assets, was founded by Eddie O’Connor in early 2008 following the sale of Airtricity (see full interview with O’Connor on page 52).The company operates in mature markets of onshore wind and solar in the US and Canada as well as emerging markets in South Africa and Chile. In Europe, it is primarily focused on the off-shore wind in the UK and Germany. It is also the company behind the Energy Bridge project in the Irish midlands which hopes to export energy to the UK.The private underground electricity network will, once it gets the sign off, transport electricity from wind farms in Ireland – both on land and at sea – under the Irish seabed and into the UK.

During 2013, the company did a large deal with Actis, an emerging markets focused fund manager, for a joint venture on 600 megawatts (MW) of solar and wind projects. “We develop the assets, we bring them to financial close and then the asset gets transferred into the joint venture.That joint venture, when it fully takes in the 600MW will have invested capital of $1.4 billion at that stage.We have also put our first project into that joint venture: a 33MW wind project, which we put into financial close earlier this year,” says Manus O’Donnell, chief executive of Mainstream Capital and Head of Corporate Finance.

Overall, the company has 330MW in const- ruction – €660 million in capital expenditure – and these will be operational next year. These include one wind project of 138MW and two 50MW solar projects in South Africa.Towards the end of 2013, it also won 360MW of wind projects (worth €666 million) in the latest round in South Africa.

At the corporate level, Mainstream has raised more than €200 million in corporate facilities over the last two years. “We did a €40 million senior debt loan note at end of 2011. In 2012, we did a €60 million corporate mezzanine debt facility of which we have used €40 million. In September, 2013, we did a €100 million equity investment from Marubeni, the Japanese trading house,” says O’Donnell.

The company has also submitted into planning process for two projects in its offshore business. One is a 1,200MW joint venture with Siemens and the second is a 450MW wind plant in Scotland, which will cost £1.3 billion capital expenditure. Mainstream hopes to own the Scottish plant 100 per cent and receive planning by the end of the year.

“When we get planning, we will look to bring in equity and debt consortiums to fund the project through construction. We are looking to stay involved in construction and long-term ownership and asset management of that project,” says O’Donnell.

Another major player is Blackrock’s Renewable Power, which was founded in 2011. Parent Blackrock is one of the largest fund managers in the world with $4.23 trillion under management in pension funds, insurance companies, sovereign wealth funds and individuals. Blackrock has one of the largest alternative asset management businesses in the world at around $100 billion. Then there is Kleinwort Benson Investors (KBI), a specialist asset management firm founded and based in Dublin with two main strategies: high dividend investing and environmental strategies. It has been managing assets since 1980 and as one of the first providers of environmental equities globally, it has developed a reputation for the company – and indeed Ireland – in that space.

“We are pioneers in environmental investing having been managing renewable energy strategies and water strategies since 2001,” says Steven Falci, the company’s Head of Strategy Development Sustainable Invest- ment. “We invest in publicly-traded equities, in companies providing solutions to low- carbon energy and the provision of water. Over the last five years, we have also been investing in companies providing agricultural solutions.”

Falci says KBI launched its water renewable energy strategy not to capture a trend in the market but as a long-term source of invest- ment return. “Getting in early allowed us to get ahead of the curve in terms of our expertise.”

At the start of 2013, KBI had €680 million worth of assets under management in its environmental equity strategies. The latest figures show that had grown to €928 million by the end of September. Net flows for the year 2013, to the end of September, was 143 million and the fourth quarter has continued the strong growth.

The company also sub-advises for other relationships around the globe. “We manage the Calvert Global Water Fund in the US. Calvert is one of the leading providers of sustainable funds in the US. We also sub- advise funds for OP in Finland and have seen nice flows come through there.We also sell to institutional investors generally pension funds globally,” says Falci.

SOLAR

There are many opportunities in the solar field with capital costs coming down massively over the past few years.The cost of solar is put at between €1.2 million and €1.6 million per MW, depending on where you build.As a rule of thumb, solar generates five jobs for every MW installed.

BNRG Renewables is an international renewable energy development company, specialising in developing utility-scale solar PV projects. Based in Dublin, the company has projects under development in seven countries and its work covers all aspects of development including: site assessment, obtaining planning and grid connection rights, construction management and long- term asset management.

“Typically we would develop projects from green field right through to operational asset. We place those projects with institutional investors, such as pension funds,” says Founder Director David Maguire.

The company started business in 2007 in Greece and was also active in Bulgaria and Romania. It went into the UK in 2010 and which now represents its biggest core market. The company has expanded into the Caribbean Basin, Latin America, west and east Africa and southern European niche markets.

In November 2013, the company started construction on a 20MW project called Sycamore Farm which will be one of the biggest solar parks in the UK. During 2013, the asset value of the constructed projects in the UK alone was €80 million. “New projects in the emerging territories will not be coming on line for another year and we do not know the value of them yet but it would expect to be developing three markets of that scale (or bigger) in around three years,” says Maguire. For more on BNRG see page 50.

John Mullins’ company Amarenco might be the “new kids on the block” as he says himself, but Mullins is anything but a novice in the energy field. The former Chief Executive of Bord Gáis (a state-owned energy provider) moved into the solar energy arena, establishing investment fund Amarenco at the International Financial Services Centre (IFSC) in mid 2013.

Stephen Nolan, Chairman of the Sustainabililty Gathering and Executive Co-Ordinator GIFSC & John Mullins, CEO Amarenco pictured at the June 2013 launch of Amarenco investment fund.

The fund, which is creating a pipeline of solar assets for investment, aims to raise up to €150 million and is focussed initially on France. It also has a UK pipeline but is concentrating on France at the moment, where the projects are supported under French renewable law. The company creates the pipeline, raises the capital to purchase the plants and manages the assets on behalf of the investors.

The maximum size of the plants in France are 12MW and the solar electricity it produces is sold over 20 years, index linked to EDF, which is one of the largest utilities in Europe. “It is ground mounted in fields, facing south. The electricity is produced and delivered to EDF at low voltage, distribution voltage so it doesn’t need pylons or large transmission lines: it’s done at a localised level,” said Mullins.

The company is in a fund-raising process at the moment and is working on closing out its first transaction, which it is imminent.

“Solar is the number one new form of power in the world. There are more solar farms being built than any other form of technology – ahead of nuclear, hydro, gas, oil or coal.The main solar investment is coming from China, Japan and the US. You are finding now that when it’s windy, for wind energy, and sunny, for solar energy, it is what we call in the industry ‘beating grid parity’.” This is also known as socket parity and means that the price of generating the electricity is actually less than what you ultimately pay in the market.

In France, for example, solar energy is being generated at 10.5 to 11 cent a kilowatt hour with the customer paying a minimum of 13.5 cent. France has one of the lowest rates of electricity in Europe, because of the amount of nuclear it has, so in Ireland, you would pay around 17 or 18 cent for the same amount. In Germany, it is as high as 26 cent. “In onshore wind, in Ireland, you are looking at 7 cent a kilowatt hour is the going rate but you are purchasing that in the high teens.”

The price of the turbines and equipment has been coming down over the past ten years, leading to a more efficient and cost-effective renewable technology. But the price of electricity generally is going up because of the closure of coal plants. “You have two separate movements in opposite directions but making wind and solar more economically successful.

The technologies have been well-proven. The power plants are fully insurable and look at the people who have got into this market, like Warren Buffet, who put together a $1 billion bond for solar in the US,” says Mullins.You also have plenty of infrastructure funds and pension funds who are investing directly.”

WIND OPPORTUNITIES

At the end of November 2013, Gaelectric, which develops and operates wind and energy storage projects in Ireland, the US and the UK, announced that it had agreed in excess of €90 million in additional financing for its business.This includes €30 million from BlueBay Ireland Corporate Credit and €56 million from German Landesbank, Nord/LB, to finance the build out of Gaelectric’s 42 MW wind farm at Dunbeg in Co Derry, in Northern Ireland. It also announced that Proventus Capital Partners had increased its existing portfolio finance facility with Gaelectric by €6 million.This followed €65 million in debt finance that was raised earlier this year for the development of its near-term pipeline of 165MW of wind energy projects in Ireland.

“Our progress in 2013 has been rapid, on both the corporate/funding side and on the project development/operations side of our business.This additional funding will allow us maintain the momentum we have created through next year and focus on our project milestones which ultimately create the value for our partners and investors,” said Chief Executive Officer Brendan McGrath.

There are 3,400 people employed full-time in the wind sector at present with huge opportunities for growth.

Over the past few years, progress in delivery and hence financing the wind industry has been slowed down by a number of regulatory issues that have now been resolved.There had also been an issue around the dates of support schemes which has now been extended from 2015 to 2017 and has been a major boost for the sector.

“Those issues have now been put to bed so it means that the level of policy certainty is there which helps the flow of finance,” said Kenneth Matthews, Chief Executive of the Irish Wind Energy Association (IWEA).

In 2013, IWEA members installed 250 MW of wind which is around 425 million business done this year. Over the next seven years, it is expected that between 400 to 500 million will be spent on average every year in this sector.

Applications for projects, totalling 3.900MW of wind, have now been accepted by Eirgrid and ESB Networks. First stage payments (which translates into €10,000 per MW) have been put down on 2,800MW, which translates to €28 million.

“It is estimated that developing 1MW costs between €1.7 million and €2 million, depending on the site.Taking the average of €1.85 million, there is a pipeline of €4.7 billion there if all of the projects go ahead,” says Matthews. “These are projects where people have put their money down, have put their skin in the game and said they are going to deliver.” For more see page 23.

Matthews says the sector was now seeing that the traditional model of raising debt was being augmented by institutional capital, with big hedge funds now interested in taking either a slice, or all, of a project.

“They know they can get a very steady and reasonably comfortable rate of return on their investment for a 15-year period which is government backed so it’s a safe place to put their money. It’s not a quick buck.And of course, there are risks but you have to manage those risks,” says Matthews, who added that Ireland was considered a safe haven for investment.

“We have one of the best wind resources in Europe – for once being on the edge of Europe is actually an advantage for us. But there are other EU countries which have retrospectively changed their supports for renewables or are slowing down their progress. This means there are more institutions, banks and hedge funds looking to Ireland as wind is delivered in a very cost- competitive manner for the Irish consumer – in fact we have the lowest support scheme in Europe – but we have a stable regulatory environment and that is key.”

 

Published in the Natural Capital Magazine, vol. 1, Dec 2013/Jan 2104

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