Ireland’s Sustainability Gathering – December 2013
Ireland’s Sustainability Gathering took place over two days in Dublin (11-12 December 2013) and was chaired by Stephen Nolan of the Green International Financial Services Centre (or GIFSC), which leads the cluster of Ireland’s growing number of green asset management companies. An array of high level speakers at the event, which took place just as Ireland exited the EU-IMF bailout programme, included Ireland’s Minister for Jobs, Enterprise and Innovation, Richard Bruton. At one point during the proceedings, the Minister shared the stage with his elder brother, former Taoiseach John Bruton (currently President of IFSC Ireland). Alongside the Brutons were a mix of senior businessmen, investors, civil servants and representatives of public agencies – as well as eminent historian Professor Diarmaid Ferriter, who offered insightful background on the need for Ireland to define prosperity in a new way than during the ‘Celtic Tiger’ era, with its emphasis on property investment.
The Irish Government is upbeat about its success in recovering from the severe recession which the country suffered after the property bubble burst. The exit from the EU-IMF bailout programme provided an opportunity to look forward to the potential for future growth based on more solid economic foundations – and deploying Ireland’s ‘Natural Capital’ (and indeed Natural Capital News is the title of a new publication launched to coincide with the event).
In the view of Minister Bruton, Ireland’s economy is undergoing a transition into a sustainable, innovative, exporting economy, using the nation’s natural advantages. Ireland’s natural advantages include enormous offshore resources of renewable energy from wave, tidal and wind power. These have been the focus of attention in the past (and marine energy remains an important focus in cities such as Cork and Galway). However, the consensus today is that there is no need to tap expensive offshore resources until the potential for (much cheaper) onshore wind has been fully exploited.
According to Eddie O’Connor, CEO of Mainstream Renewable Energy and keynote speaker at the dinner at Farmleigh House (a former Guinness family residence which is now owned by the Irish Government), the evening before the Dublin Castle conference:
“There is no sense in <Ireland> building offshore. Maybe post 2020 – but for now the priority is low. In Ireland it costs €7-€7.5 cents per kw/hour to build onshore wind – but it costs between €12 and €14 cents to build offshore. And it’s much more difficult to build offshore – so Mainstream won’t do it.”
This price differential is not new news: indeed, offshore wind prices, contrary to other renewable energy sources, are experiencing price rises. However, Eddie O’Connor is the CEO of Europe’s leading offshore wind project developer, with 4.45GW of secured grid connection – not to mention a total portfolio of some 19,000MW of wind and solar power globally – so his opinions count. We expect that the UK Government will have been taking note: it did not go unnoticed that the Sustainability Gathering took place during the week that Scottish Power (owned by Spain’s Iberdrola) became the third company to scrap plans for a UK offshore wind project, following similar announcements by RWE and Centrica.
Delegates at the Sustainability Gathering in Dublin were abuzz with debate on the potential for Ireland to export wind power to the UK. This potential, what Julie Sinnamon of Enterprise Ireland describes as Ireland’s “renewable energy export opportunity”, was one of the key themes for the event. The Irish renewable energy plan for 2020 is dominated by (onshore) wind power, and Ireland’s target for installed capacity of 7GW by 2020 assumes that there will be significant export potential by that date which, as Minister Bruton highlighted, will be accompanied by substantial job creation opportunities.
Mainstream’s O’Connor is upbeat on the potential for jobs. His company announced an agreement with the UK’s National Grid in January 2013 for its ‘Energy Bridge’ plan, which will export 5,000MW of Irish power from 2018. According to O’Connor, this Irish power, which is roughly equivalent to Ireland’s total peak electricity demand, will permit the closure of one UK coal-fired power plant. And it offers the potential to create 40,000 manufacturing jobs and a €2.5 billion energy export industry for Ireland (equal to the country’s dairy exports in 2011).
The bulk of the land to develop the wind projects to supply the Energy Bridge has been secured from landowners in the Irish Midlands and a public consultation process is under way. The HVDC system for the physical export of the electricity to the UK is to be provided by National Grid and REN of Portugal. The Energy Bridge goal depends upon the signing of an inter-governmental agreement between Ireland and the UK, which is currently being negotiated (a Memorandum of Understanding between the British and Irish Governments has already been signed).
The expansion of wind power is also core to the strategy of companies such as Coillte. Gerry Britchfield, CEO of Coillte, which owns about 7% of Irish land, spoke at the event about the company’s plans to roll out 400MW of wind power in Irish forests.
One company gearing up to benefit from the wind bonanza in Ireland is Longford based AIrsynergy, which had designed an innovative shroud which greatly enhances the efficiency of wind turbines and makes even low wind sites economically viable. Airsynergy turbines can operate at much lower heights than traditional turbines and have other advantages such as low noise levels. Although the first target market for the company is the small wind market and distributed generation opportunities, Airsynergy offers the potential, longer term, for Ireland (and other countries) to generate much greater volumes of energy from fewer resources of land. Airsynergy has successfully raised funds to roll out its business from private investors in Ireland – which in itself is a welcome sign of recovery in the economy.
Ireland: An Energy Test Bed
Ireland already has more wind power on its grid than virtually any other developed nation, at between 30% and 40% – and on occasions up to 50%. During the entire month of November 2012, an average of 39% of power on the Irish grid came from wind; the target is to achieve an average of 40% throughout a full year by 2020. This has provided the nation with unmatched expertise in grid management and related technologies, all of which will form part of the jigsaw in terms of job creation and export opportunities. EirGrid was described by one of the speakers as “the jewel in the crown”. Perhaps not the most appropriate description of an asset of the Irish Republic, but it makes the point!
Another industrial revolution is taking place across the world as utilities move from a stable grid and a well understood financial model for generation to renewables and variables with new requirements, from energy storage to more capital upfront. And there is an exciting opportunity for Ireland’s extensive knowledge in grid management to be deployed internationally. Combined with the energy export opportunity, the entire island might be viewed as a pilot case in how to build a ’green economy’. With a domestic population of just 4.5 million, the island of Ireland is setting itself up as an energy case study for the world.
The Energy Efficiency Opportunity
Amid all the excitement about the renewable energy opportunity, the importance of energy efficiency was also to the fore at the Sustainability Gathering. There was one dissenting voice on the energy export theme amongst the speakers: the CEO of Glen Dimplex, Sean O’Driscoll, opposes selling Irish renewable energy to the UK “while Irish people are heating their homes with oil”. Glen Dimplex has an innovative technology for electric storage heaters which permits excess wind power to be absorbed by the grid and stored in a highly efficient use of electrical energy. But perhaps the two goals, of energy exports and the supply of clean electricity for domestic heating in Ireland, are not mutually exclusive? Glen Dimplex is closely involved in energy efficiency projects with the Irish Government and opened its new research and development centre, in Dunleer, during the week of the Sustainability Gathering.
Jonathan Maxwell of Sustainable Development Capital LLP (SDCL) spoke on Ireland’s planned €70 million Energy Efficiency Fund, which SDCL will manage. Maxwell, whose company already manages the UK Green Investment Bank’s £50 million fund and a similar fund in Singapore, is “thrilled to be in business in Ireland”. In his view, very few governments have taken the step, as Ireland has done, to put in place a coherent overall energy policy combined with large scale investment in energy efficiency. He views the latter as being critically important. As the energy industry sees what Maxwell describes as “seismic shifts in business models” and comes under “existential threat”, he anticipates that renewable energy will step in to provide power – but foresees that energy efficiency will also be crucial:
“In terms of renewable energy and energy efficiency, we need both and as soon as possible”.
SDCL’s business is focused exclusively on energy efficiency and its Irish fund is the latest in a suite of new vehicles (which include the UK and Singapore funds). But the mandate for the Irish fund is more far reaching than the others. Unlike the UK GIB fund, it will be permitted to invest in demonstration projects, which may subsequently serve as a reference site for companies introducing new technologies into the market. Maxwell extended his congratulations to the Irish Government for creating the conditions for this rare measure – which will be a cornerstone of the Irish ‘energy test bed’ experiment.
While Ireland may boast “policy stability that is the envy of other countries” (in renewables), Maxwell points to the barriers to energy efficiency in the form of lack of capital and market failures. The fund will address these issues, and some 20 exemplar energy efficiency projects are being lined up at locations such as a prison, schools and hospitals. Since the Irish Government will have “skin in the game”, model contracts will be on hand and approval should be fast tracked to get funds flowing – and, Maxwell hopes, to move many forms of energy efficiency from the technology proving phase to the mainstream.
As the moderator of the conference, RTE’s Business Editor, David Murphy, pointed out, events such as the Sustainability Gathering are crucial in ensuring that the relevant players in the sector in Ireland get to know each other as the nation sets itself up as a test bed for renewable energy. Of course, all the networking in the world can’t help if there are no funds for investment and money was a key topic for discussion at the event.
Funding the Green Revolution
The financial focus was twofold: first the financing of the domestic sector, but also the scope for the Green IFSC to build upon its expertise in financing renewable energy internationally. The potential for the development of Ireland’s (already significant) green financial services industry cluster, established in Dublin around the Green IFSC, was much discussed.
In conjunction with the Sustainability Gathering, Mainstream Renewable Power announced the launch of Mainstream Capital, a platform targeting pension funds and insurance companies wishing to benefit from what Eddie O’Connor describes as “government-backed, long term cash flows through direct investment” into the company’s wind and solar projects.
Mainstream Renewable Power, which itself recently raised equity funding of €100 million from Japan’s Marubeni (which now holds a 25% stake in the company), can now secure “access to longer term, more reliable funding by developing its own capital-raising arm”, according to O’Connor.
Mainstream has an established record of collaborating with other investors. In Chile, for example, the projects it develops are sold, at financial close, to a joint venture company 60% owned by Actis and 40% by Mainstream – and the firm also works with Actis in South Africa. In Canada, Mainstream recently agreed to sell a wind project, on completion next year, to IKEA, the Swedish retailer, which has emerged as an important investor in renewable energy assets. O’Connor explains that pension funds are keen to co-invest with Mainstream:
”As the business has grown, the risk-adjusted return has moved from private equity towards long term, stable infrastructure returns”.
Crisis in Electrical Utilities
O’Connor believes the electrical utility sector is currently in crisis. The balance sheets of the major utility companies are no longer awash with cash and the traditional utility business model is under threat, forcing change. He cites the questions being raised by rating agencies such as Standard & Poors around whether energy utilities will be able to retain their ‘safe haven’ investment status. There is a danger (acutely evident in the UK) that if utilities are forced to freeze energy prices they may find it challenging to raise funds for investment in electricity generation in the future. O’Connor referred to the recent announcement from RWE that it plans to develop new partnership models with financial investors to fund renewable energy projects as evidence of the sorts of future business models which will be needed in the sector.
Renewables: A New ‘Safe Haven’?
According to O’Connor, Mainstream Capital will offer pension funds an alternative as they are forced to deal with the disappearance of the utility company ‘safe haven’ investment class. As he emphasises, renewable energy investments offer an alternative to these institutions – which means that developers such as Mainstream “need to attract big insurance companies and pension funds”.
Former Bord Gáis CEO turned solar investor, John Mullins, concurs that the energy market needs to reassess. He argues that long term planning is needed. To attract the institutional investment needed in renewable energy, intermediaries between capital markets are essential, according to Mullins, who recently established Amarenco, a company aiming to play exactly this role by attracting new sources of money into renewable energy industries. Amarenco’s first fund, the Global Solar Income Fund, established in the (Green?) IFSC, has raised €150 million for investment in European solar projects.
Mullins says he identified that pension funds and similar investors were becoming willing to invest in renewable energy assets when he was CEO of Bord Gáis. He points out that:
“Pension funds and insurance companies won’t come in for high risk (i.e. development risk stage offering 20% returns) – but they will come in at a later stage”.
Mullins cites cases where this has already happened and mentions Denmark’s Dong Energy, which brought in Danish pension fund investors, as a harbinger of things to come.
Amarenco’s Global Solar Income Fund is about to close its first solar deal, a 12MW project in France. The fund’s co-investors include German family offices and Mullins observes that, for these businesses, direct investment through a capital house is essential:
“These types of investors prefer direct investment. They are not keen on pooling funds and are definitely not prepared to pool fund for a project which is not listed on a stock market. Given the difficulties inherent in the sector, with development risk and construction risk, liquidity is essential for a global player to attract investment.”
Mullins points to Irish pension money and high net worth investors who want higher yields and who are migrating to renewable energy as an asset class. He observes that renewables fit the criteria for the type of investor (either institutional or retail) who traditionally targeted real estate.
Crowd Funding for Renewables
On the theme of retail investors, Louise Wilson of Abundance Generation spoke about the opportunities emerging in the crowd funding space. (Abundance Generation recently brought BNRG Gorse, a solar energy project seeking £730,000 and the first renewable energy investment in the UK with returns linked to inflation, to market through a joint venture with Ireland’s BNRG.)
Unacceptable level of uncertainty in UK renewables
While small-scale projects like BNRG Gorse are going ahead, there are questions about many of the larger projects in the UK. Mullins says Amarenco was building up a 250MW solar pipeline in the UK, but that the fallout from the recent comments by Ed Milliband (the Leader of the Opposition promised a freeze on energy prices until 2017 if Labour wins the election in 2015) has introduced an unacceptable level of uncertainty into the UK renewable energy sector.
Mullins believes a favourable investment regime is essential to ensure, for example, that tax benefits on renewable energy assets are optimised. This is the main reason that he currently favours France, which he describes as “one of the few markets offering opportunities for high levels of returns” and where Amarenco is rolling out a series of projects.
According to Mullins, Milliband’s comments created “enormous damage for the willingness of funds entering the space” by introducing political risk. He observes that the fear of investors is that the UK will “do what the Spanish did” (i.e. reverse previous commitments on incentives such as feed-in tariffs). He emphasises that “political risk is the real one they are worried about” and that the uncertainty has placed a “big halter on the development of assets in the UK”.
Meanwhile, Amarenco is also looking at Egyptian and Middle Eastern investments in solar, according to Mullins. If the new Irish investment vehicles under the Amarenco umbrella can tap into institutional (pension and insurance company) funds, this could become a model for the renewable energy sector globally.
Tailored lending programme for renewables from AIB
Of course a discussion about investment in renewable energy is pointless without the bankers. AIB was represented at the Sustainability Gathering by Bernard Byrne. Byrne is an unusual species of banker who comes originally from the energy world (he joined the bank in 2010 from ESB, Ireland’s leading electricity utility, where he had been Finance Director). His unconventional background, however, certainly provides him with insights into the needs of energy customers.
According to Byrne, AIB’s ambition is to lend €1 billion overall to the energy sector during the next year. The bank is not able to lend to renewable energy projects which require long term funding – its longest loans extend for just five years. However, AIB regularly co-invests with other banks, such as the European Investment Bank, which have a mandate for longer term investment.
During the week of the Sustainability Gathering, AIB announced a €100 million lending programme for energy efficiency projects for SMEs. The bank has committed to take into account the projected savings from the projects when calculating a borrower’s repayment capacity. Byrne commented that:
“The economic downturn has prompted businesses to focus on energy savings as a way of cutting costs when revenue growth is slow. On the broader canvas, that in turn should help Ireland achieve its 2020 targets of reducing energy consumption by 20 percent by 2020.”
This commitment from AIB for the SME sector looks set to complement the focus of the SDCL fund. Byrne pointed out that 50% of the SMEs which the bank expects to lend to will be for projects of less than €24,000 (the bank recently completed a study on the needs of Irish SMEs and has published a report with its findings). The CEO of Sustainable Energy Authority of Ireland (SEAI), Dr Brian Motherway, said:
“Energy efficiency is a great opportunity for businesses to reduce costs and improve competitiveness <..and..> new finance offerings, like those <launched by AIB>, make it even easier to act and are a welcome addition to the market”.
In addition to energy efficiency and renewable energy, AIB is also working on innovative lending models for the electric vehicles sector.
Ireland: much more than a “Land of Saints and Scholars”!
The Green IFSC is an initiative of Ireland’s Taoiseach, Enda Kenny. Minister Bruton claims that it is one of Ireland’s key strengths in attracting finance to the ‘green’ sector. Reflecting back on the success of the IFSC (which was established 26 years ago and now employs 33,000 people), Stephen Nolan points out that, as a result of that initiative, Ireland is now the world leader in hedge funds and in aircraft leasing. He says the Green IFSC aims to do for the global renewable energy industry what the IFSC did in aircraft leasing.
Ireland has experience of exploiting opportunities born out of problems: its success in aircraft leasing was due to the failure of one large Irish company, GPA. The financial crisis and the need to find new solutions and new business models for investment are giving birth to a new industry in Ireland. As Nolan points out, there is a “phenomenal cluster of expertise in Ireland”. Companies like Mainstream Renewables are advising the Irish Government and bringing their broad international experience into play. The 2014 Sustainability Gathering will take place on 10-11 December. We look forward to an update on progress on ‘green’ financing, renewable energy and the full range of ‘natural capital’ on offer in Ireland – which in the 21st Century is clearly much more than a “Land of Saints and Scholars’.
Published in Cleantech Investor, December 2013