Financing Ireland’s renewable energy future
October 2019 | SPECIAL REPORT: ENERGY & NATURAL RESOURCES
Financier Worldwide Magazine
October 2019 Issue
With new legislation and incentives, as well as some of the fastest average wind speeds in Europe, Ireland has emerged as a leading destination for international renewable energy investment.
Domestic financing of Irish wind projects is well-established, and numerous local lenders have moved in on the most promising opportunities, laying the groundwork for overseas lenders to follow as the sector expands. The last decade has seen an acceleration of foreign direct investment in Irish wind energy from all over the world, with notably strong participation from Germany, Denmark and the UK.
UK investors – especially newer and more niche players with alternative financing products – have shown themselves to be particularly interested in understanding the regulatory regime in Ireland, and how this accommodates both traditional lending and alternative financing structures.
Among the alternative financing structures being tested are products that leverage income streams from lease agreements between landowners and wind farm developers, corporate power purchase agreements (PPAs) which effectively provide offtake financing for projects, and crowdfunding, which is starting to gain some notional acceptance as a potential investment approach.
Enter the alternative lenders
While the pillar banks have been quick to snap up opportunities to lend to large, ultra-low-risk energy projects in Ireland, there remains a gap in the market to finance smaller developments that do not meet the megawatt (MW) thresholds of large institutional lenders.
Alternative and specialist lenders that are willing to accept a greater degree of risk see this as a chance to gain a foothold in Ireland’s booming renewables industry, opting to insure against potential setbacks to keep the cost of lending down and provide flexible finance options.
This approach has significantly diversified the make-up of the renewables industry in Ireland, which is no longer dominated by a few big players with large-scale projects backed by major banks.
Alternative lenders in Ireland, both domestic and international, consist of a wide range of non-bank institutions with different strategies, including private debt, mezzanine, growth and distressed debt.
For many of these, renewable energy projects offer attractive opportunities to benefit from their typical combinations of property aspects, operating assets and fairly predictable revenue streams.
As well as opening up the industry, the trend towards more foreign and niche funds has the added advantage of introducing more expertise into the Irish renewables sector from investors who have experience of successfully financing smaller, potentially riskier projects in other jurisdictions.
From the old to the renewable
Part of the growth in Ireland’s popularity as a renewables hotspot has been thanks to its enticing support schemes for green energy development. Unlike the UK, which has taken the decision to wind up many of its financial incentive programmes as its renewables sector matures and approaches saturation, Ireland has opted to continue supporting its renewables industry.
The country is currently between support schemes, with the existing Renewable Energy Feed-in Tariff (REFIT) (where the state guarantees minimum prices for electricity) no longer being available to new projects. REFIT will shortly be replaced by the new Renewable Electricity Support Scheme (RESS), which uses a CFD model via an auction process. The aim of this scheme is to provide the framework for Ireland to achieve its goal of generating at least 70 percent of its electricity from renewable sources by 2030.
Although this target is widely regarded as ambitious, especially given that Ireland is set to miss the target set for it by the EU of 40 percent renewable electricity generation by 2020, it has galvanised political will to support the renewables industry with firm policy commitments. These include financial incentives as well as efforts to streamline the planning and consenting process for new wind farms and address the problem of grid connectivity for renewably-sourced electricity.
Heading offshore
One of the areas seen as presenting the greatest opportunity for developers and investors in Ireland is offshore wind. At present, Ireland has only one offshore wind farm – the relatively modest 25 MW Arklow Bank Wind Park off the coast of Wicklow in the Irish Sea.
But work is already underway on much larger projects, including two large proposed developments off Ireland’s east coast, and applications have been submitted by domestic and international companies to construct further projects with significant capacities. For these and other renewables projects to become a major part of Ireland’s energy mix, however, more attention needs to be focused on connecting projects to the Irish grid.
Other necessary measures
As in many countries, electric vehicles are becoming increasingly popular in Ireland and if the goal of powering most of these cars with renewably-generated electricity is to be achieved, the number of connection points needs to catch up with vehicle adoption.
Obtaining planning permission for renewable energy projects also represents a major barrier to the continued growth of wind energy in Ireland – something which is being looked at by the industry, as it seeks to lay a smoother path to receiving the necessary consents for projects with the backing of communities.
It has been indicated that the new RESS scheme will incentivise local participation in energy projects, although whether or not community support becomes a mandatory requirement for development remains to be seen.
Brexit
As things stand, Ireland’s renewables industry is not anticipating any direct impact from Brexit and there is little evidence to suggest that investors are altering their approach in anticipation of any negative consequences.
At the political level, RESS support for EU-backed projects will not be affected by the outcome of Brexit, although there is some concern that the UK’s departure from the EU on unfavourable terms will bring about different economic conditions in Ireland, which could dampen the environment for project financing.
Plans to export energy to the UK from Ireland via interconnectors to Wales and Scotland and potentially through further connections on to continental Europe across the UK land bridge may need to be revised, depending on the regulatory framework the UK adopts once it leaves the EU.
Energy exports are not currently a priority for Ireland, however, as domestic energy demand continues to grow rapidly in tandem with the number of new data centres being established in the country by global tech firms.
For alternative lenders in Ireland who have already locked in capital to various commitments, including renewables projects, Brexit could create further lending opportunities as pillar and even the smaller banks are likely to become more risk averse, particularly to sectors that rely significantly on the UK market.
This is likely to be the case for both alternative lenders who lend to trading businesses and for property acquirers and developers.
Feilim O’Caoimh and Elaine Traynor are partners at Fieldfisher. Mr O’Caoimh can be contacted on +353 (1) 828 0600 or by email: feilim.ocaoimh@fieldfisher.com. Ms Traynor can be contacted on +353 (1) 828 0600 or by email: elaine.traynor@fieldfisher.com.
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Feilim O’Caoimh and Elaine Traynor
Fieldfisher