Operational Renewables Projects – Part 2
With the Feed-in Tariff now closed to new applicants (from 1 April 2019), and the Smart Export Guarantee still a twinkle in the government’s eye, now is an opportune moment to assess where the opportunities and challenges lie for operational renewable energy assets.
In our first article in this series on maximising the opportunities from operational renewables projects, Jonathan Croley of Ashfords and Richard Palmer of Roadnight Taylor discussed the considerations involved in retrofitting equipment in the pursuit of improved asset performance and financial return.
In this second article Brian Farrell of Ashfords and Richard Palmer look at the actions that asset owners can take to improve the financial performance of renewable assets without altering the physical configuration of the facility.
Review the export tariffs
Subsidies aside, income from exporting energy for large scale front of meter schemes is often the most significant income stream in a renewables project. However, it is important to differentiate for behind the meter investments where the return on investment will be significantly driven by offsetting any electrical demand on site. As demand has grown amongst domestic and business consumers to use green energy, so have energy suppliers sought to improve their “green” credentials by actively including green energy sources in their energy mix. Combined with increased volatility in the wholesale markets, competition has driven the creation of more innovative energy export solutions, with longer-term Power Purchase Agreements (PPAs) (both with fixed- and variable-priced structures) and sleeving now far more common.
Richard shares his view:
“Optimising PPA income is a simple and effective way to improve returns on investment. The greater the flexibility of an asset, the greater the potential for more value to be extracted by access to real-time markets. Where there are variable inputs for an asset, it is important to consider the tenor and structure of the PPA. Suppliers are increasingly focussing on a partnership or affinity approach rather than straight forward supply, and they can facilitate long-term PPA contracts with end customers beyond the liquidity of wholesale traded markets. In addition, there will be greater opportunities to seek value from local distributed networks.”
“Innovation is not just restricted to the supplier/purchaser side of the market. We are seeing smaller producers of electricity – especially community-scale solar schemes - clubbing together to increase their selling-power to obtain more competitive rates.”
The cost of finance is a significant cost of business for many renewable installations. However, with fewer new solar projects coming on stream and requiring development capital, financiers are looking for other ways to invest their funds.
“A surplus in funds tends to increase competitiveness and lower rates of interest, and so now may be a good time to see if more competitive lending rates are available to fund operational solar assets.”
The opportunity extends beyond Landlords who host an enterprise investment scheme (EIS) funded solar project - we may also find that those initial investors are looking for their opportunity to exit. Such circumstances offer an ideal opportunity to purchase an operational asset that has passed through the often riskier construction and accreditation phase of the project’s life.
“Financing costs are a significant cost to many renewables projects, and any steps to reduce this cost and improve investment returns with minimal risk and initial outlay should be taken. After a few years of successful operations and real-world data, it should be possible for most asset owners to find funders with better lending rates than those obtained from the original financiers of the project, who would have priced a risker (pre-construction) project. Even those who have already re-financed post-construction (such as owners of early solar projects) may find better rates are available now that the focus of funders has shifted away from new projects to operational assets. This is supported by very low discount rates offered for operational solar farms by investors hunting for income returning assets. From a rates perspective, now is as good as ever to take out or refinance debt.”
Improving export income and reducing financing costs are two common ways of increasing the margins on a renewables project without making alterations to the physical configuration of the assets themselves.
Other aspects of operations and operational costs should also be the subject of a targeted review: insurance costs, and O&M costs – which will be discussed in the next article in this series.
The story needn’t – some might say shouldn’t – stop once cashflow efficiencies have been made. As Richard says, “Once cash has been freed-up in the business, the asset owner’s mind can turn to what can be done with that cash. Some asset owners might be happy to enjoy the enhanced returns, whilst others will be eager to see what can be done to invest that money back into the assets” – along the lines discussed in the first article in this series.
About the contributors:
Brian Farrell is a Partner at Ashfords LLP. Brian and his colleagues advise asset owners and funders on the finance and refinance of renewables assets with both equity and debt.
Richard Palmer is a Senior Consultant at Roadnight Taylor, a leading independent power and energy consultancy that provides strategic energy reviews and advises on optimal deployment of generation and storage technologies, as well as financial optimisation of existing assets.
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Read the next article in this series.