Elgar Middleton completes sale of a 3.8MW anaerobic digestion facility

Elgar Middleton is delighted to have advised the shareholders of the Codford Biogas facility on their sale of 100% of their equity to JLEN Environmental Assets Group for £19.8 million.

Codford Biogas Limited is an operational anaerobic digestion facility based in Wiltshire, UK. The plant has been operational since 2014, has an electrical capacity of 3.8MWe, and processes up to 100,000 tonnes per annum of both liquid and solid food waste from the commercial and industrial sector. Revenues are secured from both the Feed-in-Tariff (FiT) and the Renewable Heat Incentive (RHI) schemes and the plant is able to supply up to 4,000 homes via the UK power grid.

The facility was successfully sold to JLEN, the listed environmental fund, for an initial upfront payment of £19.8 million. The sale has been structured to also include additional deferred payments relating to a number of post-completion expansion opportunities.

Elgar Middleton Infrastructure and Energy Finance LLP (“Elgar Middleton”) was the shareholder’s exclusive financial advisor on the transaction. This successful completion is further evidence of Elgar Middleton’s in-depth knowledge of the anaerobic digestion sector coming just a matter of days after the firm completed the £85 million refinancing of BioCapital’s anaerobic digestion portfolio.

Equitix and Helios reach financial close on £85m debt refinancing of Bio Capital Limited

Elgar Middleton is delighted to have advised Equitix Limited (“Equitix”) and Helios Energy Investments (“Helios”) on the refinancing of a portfolio of five operating anaerobic digestion plants in the UK.

Bio Capital Limited owns and operates anaerobic digestion (“AD”) assets in England, Scotland, and Northern Ireland. The completion of the £85m refinancing represents a further step in cementing the platform’s ambition to become a major player in the UK’s AD sector.

A non-recourse financing has been put in place to leverage five operating assets benefiting from strong revenue streams and a successful operational track-record. Senior debt facilities include a long-term amortizing credit facility, a debt service reserve facility, and a revolving credit facility. In addition, the financial structure allows for the platform’s growth through incremental debt features (accordion facility) which shall provide the sponsors with the dry powder they need to fuel Bio Capital’s expansion in the sector. With their sight on additional assets, the sponsors expect to continue investing in anaerobic digestion and grow the portfolio in the months and years to come.

The financing was supported by Allied Irish Banks (“AIB”), Banco de Sabadell (“Sabadell”) and NatWest Westminster Bank plc (“NatWest”). Burges Salmon LLP acted as legal advisor to the Sponsors, while Pinsent Masons supported the Lenders. Further specific transaction support was provided by Sweco, Ricardo, Baringa, Marsh, Validus, Mazars and Operis.

The Future Growth of Solar Power in the UK

The situation at present

UK solar deployment enjoyed steady growth from 2011 through to the end of March 2017 with over 13GWs connected to the UK grid. Over the past 4 years, only around 500MW have been added, with the majority of this being rooftop.

Following the abolishment of any meaningful Government support scheme, ground mounted solar deployment ground to a halt in the first quarter of 2017. While the cost of solar panels continues to plummet, power prices have also declined (exacerbated by the COVID-19 pandemic) in the UK and this has resulted in a total dearth of any meaningful deployment in the past four years. The underlying unlevered return on investment simply does not justify capital deployment given the subsidies typically represented 50% of previous revenue structures. It was the subsidy component of the revenue structure that enabled financial institutions to provide significant debt financing, on favourable terms, in order to enhance the overall equity returns. With the curtailment of subsidies, the mainstream banking sector has been unwilling to lend into ground-mounted solar in the UK.

Several studies have suggested the UK requires between 70GW and 185GW of solar as part of its energy strategy by 2050 and the UK Government’s own Energy White Paper modelling proposes between 80GW and 120GW; implying an annual deployment of 3GW per annum for the next 30 years.

So where will it come from

While there is a shortage of actual deployment of new solar on the ground, the rate of growth of planning and development is accelerating. By the end of 2018, there was approximately 3GW of solar development (at various stages) and this has expanded to over 13GW at the end of 2020 with 1GW of new developable solar being added to the pipeline each month. While over 8GW is at the screening/scoping stage, some 3GW is consented and ready to build out subject to the satisfaction of planning conditions. The vast majority of these sites are 49.9MWp thus avoiding the need to be approved by the Secretary of State for Business, Energy and Industrial Strategy (BEIS) which applies to sites over 50MWp. This is not to say seeking consent for larger sites is impossible – for example, Cleve Hill (350MWp) successful achieved statutory approval on 28 May 2020 and at least 10 further projects over 200MWp are at various stages of development. So over time it is almost certain the size of projects and the scale of investment will grow as utility scale solar deployment will become the norm.

The importance of CFDs, corporate & utility PPAs

Ground-mounted solar sites greater than 10MW will qualify for the forthcoming Contract for Difference (CFD) auction, although it is unknown how much capacity will be allocated to UK solar. At present 3GW of sites will qualify for the auction and given it may not happen for a further 12 months, in all likelihood there will be 5GW of qualifiable sites by then, most certainly far exceeding the capacity on offer in the auction. This will undoubtedly drive down the strike price to levels that potentially may even make investment unattractive.

The vast majority of new solar will almost certainly be built out without a Government support tariff and will have to rely on either a corporate or utility Power Purchase Agreement (PPA). With ever increasing demands for power and a desire for corporates to become carbon neutral more and more of the technology, power intensive orientated growth stocks (Google, Microsoft, Amazon etc.) will seek to enter into long-dated fixed-price PPAs. These contracts are the holy grail; the buyers really can dictate the terms of the contract and drive down the price of power because the quality of the counterparty and price certainty will enable any solar site with a top tier fixed price PPA to obtain significant levels of debt on extremely competitive terms from the debt market. However, these highly sought after corporate PPAs will be few and far between.

The alternative is a route-to-market utility PPA with one of the UK’s large energy suppliers (often referred to as the ‘Big Six’). These contracts have a strong credit counterparty, often have maturities of up to twenty years and can benefit from a support price floor mechanism. The combination of all of these aspects will maximise the gearing opportunity of the project; and while this will not achieve the same level of gearing as a top-tier fixed-price corporate PPA, it will ensure the project is both bankable and investable.

Technology and innovation will improve returns

Whilst previous solar sites in the UK have been static and simply orientated to the south, developers are now embracing ways to improve a site’s productivity. Innovation is therefore fundamental in improving returns with bifacial modules, trackers and east-west alignment all generating notable enhancements.

Designs and construction now include the use of bifacial panels while Cleve Hill’s design adopts an east-west design layout in order to achieve an optimum return on investment for a finite land parcel. As tracker prices continue to fall the UK may also see these adopted in the future although to date they have been far more common in southern Europe with materially higher solar irradiance.

There has also been much talk of dual solar battery sites and while a small number have been built out in the UK much work has been undertaken into the financial merits of battery supported solar projects to enhance investment returns. As battery pieces continue to fall (now 20% of the price of just 5 years ago) and the storage capacity (up to four hours) of batteries becomes more economic, solar sites coupled with a battery will be able to time shift when it deploys its power to grid (export in the evening, peak price periods) or bid for flexible imbalance grid revenue contracts. There has been significant growth in flexible Fast Frequency Response (FFR) and dynamic services being rolled out by the National Grid and this will only continue to grow to satisfy a power mix with ever increasing intermittent generation. Arbitraging power prices and sourcing flexible and dynamic revenue contracts will enhance the financial attractiveness and investment returns of debt and equity investors.

Technological and financial innovation is required

There is no doubt solar will continue to prosper, after its hiatus, simply because it will form part of an integrated UK power solution to complement growth in offshore wind and nuclear. Solar is extremely flexible, its cost to deploy on a per MW basis continues to tumble, it can be deployed on a localised basis at lower grid levels to support the local area with low carbon power. The use of attractive corporate or utility PPAs, flexible and dynamic revenue streams and time shifting price arbitrage will ensure the technology is here to stay especially given the planning process is condensed compared to nuclear or offshore wind. The challenge for the entire solar value chain will be to rise to the opportunity in hand and aspire to deploy 3GW per annum.

Elgar Middleton’s role in this deployment

Elgar Middleton has extensive debt and equity experience in arranging finance for solar projects in addition to comprehensive knowledge of structuring bankable PPAs and modelling battery solutions for both time shifting and flexible solutions. This experience is ensuring our clients not only design their sites optimally from the outset, but also achieve the lowest cost of capital from the debt markets, thereby maximising their investment returns.

Elgar Middleton sells 8.8MW rooftop solar portfolio

Elgar Middleton is delighted to have sold an 8.8MW rooftop solar portfolio in the UK

Northleaf Capital Partners (“Northleaf”) has sold its 100% stake in two companies that collectively own 8.8MW of rooftop solar installations. The portfolio is located across the United Kingdom and consist of approximately 3,000 rooftops installations installed on both private and local authority owned homes. All installations qualify for the UK Feed-in-Tariff.

Elgar Middleton Infrastructure and Energy Finance LLP (“Elgar Middleton”) was Northleaf’s exclusive financial advisor on the transaction. This successful completion is further evidence of Elgar Middleton’s in-depth knowledge of the rooftop solar sector coming just a matter of weeks after the firm sold a 12.2MW rooftop portfolio on behalf of London & Scottish investments.

Elgar Middleton sells 12.2MW rooftop solar portfolio

Elgar Middleton is delighted to have sold a 12.2MW rooftop solar portfolio in the UK

London & Scottish Investments has sold the entire share capital in a 12.2MW portfolio of rooftop solar installations to Fiera Infrastructure. The portfolio is spread across the South of Wales, England and Scotland and comprises 3,000 rooftop solar assets, all of which qualify for the UK Feed-in-Tariff .

Elgar Middleton Infrastructure and Energy Finance LLP (“Elgar Middleton”) was financial adviser to the transaction.

A (good) chart is worth a thousand words

PowerPoint is a bit like marmite. While there is a subset of people who enjoy it first thing in the morning, most people would agree that in spite of the colourful features it is, at most, an acquired taste. A recurrent criticism made is that PowerPoint trivialises information and puts medium ahead of content. It is thus not surprising to find a plethora of articles describing how “evil” PowerPoint is and concluding that it has inevitably “consumed the best years of too many young lives”.

The reality in our business is that PowerPoint is a rather unavoidable medium to convey information. PowerPoint has become the standard for information memorandums, credit papers, board presentations, market soundings, pitches, etc. And this is not a bad thing. As a matter of fact, in spite of its bad reputation, academic research shows that PowerPoint is particularly powerful when one considers its capacity to use visual cues as a way to convey complex ideas. In other words, where Power Point excels in its graphs.

Using images and charts as an efficient way to conveying complex ideas is nothing new. However, in a time that is governed by data, misusing this concept is easy and can result in the opposite effect, creating confusion and misleading the reader. Project Finance, a discipline where the robustness and demonstrative value of data is key, is therefore particularly exposed, whether one is talking about pricing for a transaction, energy yields, market forecasts or competition analysis. Fortunately, big advances in the area of cognitive data visualisation research based on neurosciences and psychology are helping understand what makes a good chart. An excellent read on this subject is provided in by Scott Berrinato “Good Charts”, a data visualisation guide published in the Harvard Business Review Press. Some key takeaways from this guide, alongside the personal experience as a PowerPoint user, are summarised below.

    1. Thinking ahead. This piece of advice seems almost trivial, but a common mistake people make when producing graphs is jumping to the PowerPoint board right away. The reality is that different ideas will require different types of graphs. Demonstrating a concept with few data point will not necessarily fit data-driven graphs that seek to delineate trends. For this reason, understanding exactly what the graph is meant to demonstrate, and who the audience of that graph is are key. The best way to do this is often to grab a piece of paper, do some sketching and testing the efficacy of the graph with colleagues before even opening PowerPoint.
    2. Keeping it simple. Because a graph is used to convey information, a useful graph will have structure, will express the information clearly and will thrive for simplicity. The reason why complex graphs fail, is because they muddy the message and distract the reader making it harder for them to jump to the graph’s conclusions. After all graphs are made to tell a story and persuade. Keeping the message clear and avoiding the multiplication of messages will therefore result in efficient graphs. Clarity and simplicity do not justify lack of aesthetics. Using colours wisely and trying to understand how our eyes see the information and how they move across it, will help create elegant graphs that are memorable and hence will enhance a graph’s impact and efficiency.
    3. Persuading, not misleading. Good graphs are persuasive and tell a story. For this very same reason, they need to be used responsibly. Choosing a specific axis, limiting outputs to specific periods or undercutting pieces of information through design features can result in providing misleading information. It is therefore important to make sure that whenever a message is given the message remains consistent with the data.

The Harvard Business Review’s guide is a great resource to making better graphs but is not the only one. The democratisation of data visualisation has also come with many useful resources backed by solid research and the realisation that humans are visual animals who constantly seek meaning and make connections. A good graph is ultimately a graph that responds to those instincts.

To finish this article, we cannot keep but recommending spending some time in the FT’s Alphaville “Axis of Evil” data-viz catalogue. This blog has some great data-viz examples of terrible graphs, some of which make us wish the authors had chosen a thousand words instead. The graph above caught our attention (link to article), but for all the wrong reasons.

For other great examples visit https://ftalphaville.ft.com/series/Axes%20of%20Evil

Why Pareto’s 80:20 principle does not apply when it comes to project finance models

It is well-known that accurate modelling is particularly important in project finance transactions. But why is this? One can think of this in terms of the likelihood and benefits/costs of getting these calculations right or wrong. Models are at their most useful when the chance of being wrong is relatively low, but the cost of being wrong is relatively high.

In most project finance transactions cash flows are relatively predictable and the likelihood of the model resembling reality is therefore pretty high; likewise where these assets are highly leveraged, the cost of a mistake can be very substantial (and could indeed wipe out much of the value of the remaining equity in the project). Where cash flows are more volatile, as in many other areas of corporate finance, it is often not practical to use a similarly detailed model to try to give the same degree of confidence in the outputs; whether due to natural variation or human error, reality simply will not match the initial projections. A detailed and accurate model is therefore a fundamental requirement to support the high levels of gearing that we are accustomed to seeing in project finance.

In terms of the ‘at-risk’ areas of your model, these depend on the nature of the assets and the details of the transaction. For instance, an LLCR calculation might be riddled with errors, but if this is not a ratio that is covered in your financing documents (as is increasingly common in renewables transactions) then the cost of getting this wrong is virtually nil. But there are some standard hot-spots for errors across sectors that modellers should always be aware of:

  • Inflation – errors here are both pretty common and often fairly expensive, as any mistake will compound over time. Small changes to base dates or the application of inflation rates will make a big difference to your cash flows at the back end of the debt profile. A further alarm bell should be set off if the model’s cost/price for the current year or period fails to match what is actually paid/received (it sounds obvious but is routinely wrong)
  • Documents – these are written by lawyers who are not necessarily renowned for their modelling ability, whilst the task of carefully reading the documents is routinely given to a different team member to the one doing the modelling. That this gives rise to errors should surprise no-one. There are often subtle points around the timing of cash flows or the calculation of cover ratios (to give two examples) that can get missed. Crucially if such a problem is unearthed at a later stage, the legal document will always take precedence over whatever was modelled, thereby making the subsequent rectification of the problem much harder.
  • Financial close funds flow – in general, models are built around approximations over time periods that are measured in months or years. This is perfectly reasonable and sensible – except at (or soon after) financial close. Large amounts of money move between parties and both the amounts and the process (something on which a model is normally silent) need to be carefully considered. A funds flow statement needs to capture all relevant cash flows and the practicalities of any transfers as it is not possible to take a hand-wavy approach of saying ‘cash flow x nets off against cash flow y’. Understandably any problems here tend to come out of the woodwork pretty quickly when an advisor or exiting lender does not get paid everything they expected to get paid.

What are the lessons here? That depends a bit on whether you are a modeller or looking for someone to do your modelling. But a few things hold either way:

  1. The 80/20 rule does not really apply – the famous rule of thumb of ‘putting in 20% of the effort to get 80% of the way there’ is inappropriate in project finance. You might be able to get much of the way to the right answer but the details of a project finance transaction really do matter and a high-level sense check of the outputs will not always get this right. Modellers should go through the credit agreements and key project documents in forensic detail – division of labour is not a helpful principle here. Take your transaction modelling seriously and it will repay whatever investment is required to make that happen whether that is time, effort, or your finest British pounds (other currencies are available).
  2. You need multiple sense checks – the best models contain multiple audit checks that between them cover off every key output. Whilst including these is best practice, it does not fully immunise the model from either logical errors (something can always slip through the net no matter how tight the mesh of audit checks) or commercial errors. It helps to have a fresh pair of eyes looking at things (at least) before an initial model goes out and each time there are substantial changes. More generally, it is a good sign if more time is spent checking a model than building it.
  3. A modeller should understand the broader transaction – a model is not just an illustration of a transaction that can be bolted on to the main body of activity. If the model (and indeed its author) is kept at arms’ length then it is very easy to lose track of the real drivers of value in a transaction. Financial decisions depend on quantitative analysis and the quality of those decisions will be very strongly correlated with the quality of information that is provided to decision makers; the transaction model informs these decisions more than any other single document or tool. You should negotiate the model rather than model the negotiations – and this means that everyone should understand the key outputs of the model.

As an advisor, Elgar Middleton has always considered the financial model to be central to our advisory services. The modeller is fully integrated into the team advising the client from day 1 and their role includes reviewing all the term-sheets, iterations of the finance documents and providing constructive feedback to the legal advisors to ensure documents and models align. Unsurprisingly this means that the modeller is not a junior member of the team and in some cases the work is undertaken by one of the partners. Even so, every model is subject to repeated peer reviews at various stages throughout each transaction, because even the smallest of slips can have the largest of consequences.

Impact of COVID-19 on borrowers in the renewable energy sector

The spread of COVID-19 continues to have far-reaching consequences with falls in oil and power prices, business shutdowns, financial market downturns, and a shift to the “new normal” of social distancing. Despite this current flux in the financial, commodity, and labour markets, renewable energy assets – particularly those with long-term, stable, contracted cash flows – remain relatively more resilient in the face of such situations.

It is nevertheless vital that sponsors and developers in this sector identify and seek to resolve potential issues that may impact their renewable energy project financing schemes. Elgar Middleton considers the following to be such issues:

Liquidity and solvency

A combination of financial market distress, lower power prices, and supply chain disruption associated with COVID-19 may impact the near-term cash flows of some renewable energy assets – particularly those with pre-existing distress or a large proportion of uncontracted revenues. In certain instances, this may impact the sponsor’s ability to meet its loan obligations.

It is imperative that borrowers review their obligations and, if they have any concerns, engage proactively with lenders to discuss measures such as: extensions to short-term credit facilities, reduction in the repayment amounts, deferred scheduled payments – and in more extreme scenarios – seek to refinance their entire project finance loans.

Ratio covenant tests and other documentary conditions

Even if current cash flows do not result in immediate concerns, COVID-19 may have an impact on financial covenant tests typically required by project finance schemes. Borrowers should consider early engagement with lenders to discuss amendments or waivers to these clauses, as necessary

Other contractual positions in existing loan agreements which are becoming particularly relevant during these times include drawdown conditions on revolving facilities and reserve accounts, material adverse effects, representations and warranties, and events of default.

Market for project finance debt

In response to the current situation, borrowers who are looking at their capital structures and ways to optimise them or most effectively inject new funds – be it through bridge financing, revolving facilities, or replacing long-term debt, need to be aware of additional considerations.

We are currently seeing lenders reviewing key areas including downside sensitivities, the risk allocation between borrowers and key counterparties, and reporting requirements relating to future outbreaks.

It remains crucial for sponsors to structure resilient financial packages that consider these factors without jeopardising returns. It is also worth highlighting that the project finance lending market has not stalled, with deals continuing to progress during these turbulent times.

COVID-19’s impact on renewable energy projects and their financing remains uncertain and will vary significantly between projects. As this situation develops, Elgar Middleton remains keen to share real-time insights with our clients. If you want to discuss these topics further, please do not hesitate to contact us.

Positive news from Australia: MLFs stabilise for FY20-21

In early April, AEMO published the final Marginal Loss Factors (MLFs) applicable for FY20-21.  Broadly speaking the MLF changes are relatively modest compared to the large decreases experienced by many renewable projects in the last two years. Several projects, particularly solar farms in central and north Queensland received modest upgrades. Others were still downgraded, though not by as much as foreshadowed in AEMO’s draft report released in March (for example the problematic West Murray region in NW Victoria / SW NSW).

These outcomes are a reflection of the challenging Australian renewables market, with AEMO citing additional network constraints and a slowdown in new developments as key reasons for the smaller changes.

What does this mean for equity and debt?

The MLF stabilisation is likely to narrow the observable valuation / expectation gap between buyers and sellers. Nevertheless investors should conduct careful due diligence, have an informed view on the MLF trajectory of their potential acquisition targets, and avoid over-extrapolation of the current outcomes.

Although we expect senior debt providers to relax the most severe downside restrictions, there is little doubt that this topic will continue to be a key focus for most credit teams. It remains crucial for sponsors to structure resilient financial packages so that future MLF changes do not cause a critical covenant breach (coverage ratios) and potentially jeopardise returns.

We are conducting additional root-cause analysis on major MLF changes in light of the recent AEMO announcements and will share more insights in due course.

Link to AEMO press release.

How carbon-neutral are EVs and hydrogen fuel cell vehicles?

This is a subject full of myths, claims and counterclaims and was the challenge we put to Elgar Middleton’s latest recruit – Malek Benlarbi-Delai – to investigate. The results are extraordinary.

To determine the carbon footprints of various types of vehicles, Malek analysed an internal combustion engine (ICE) vehicle , an electric vehicle (EV) and a hydrogen fuel cell vehicle (HFCV). Each had its construction-related carbon output calculated and then the carbon released from its ongoing use.

It was no surprise that the analysis confirmed that ICE vehicles are not the way forward for our society. What was a surprise was that an EV can result in just as much carbon emissions overall as an ICE vehicle, depending on where it was manufactured and subsequently driven. In fact, an EV which has its battery manufactured in China and is then driven in Australia will generate more carbon over its lifespan than a standard ICE vehicle.

This all comes down the energy generation mix in those countries with both China and Australia remaining highly dependent on coal for its power. And as the main source of energy of an EV is the electricity coming from the grid, an EV driven in Sydney is indirectly, almost entirely coal-powered.

The report’s conclusions however are not all bleak. The results are far more encouraging in countries where governments have taken proactive measures to switch to renewables.

These regional variations form a key conclusion and reinforce why it is fundamental that we continue to press for each and every community globally to go carbon neutral – because the electrification of transport will not help us reduce our global carbon footprint if our electricity is not produced from renewable sources.

And what about HFCVs? When the hydrogen that powers the HFCV is derived from renewable sources, the process produces no waste products but water. This solution then becomes, without a doubt, the greenest form of transport available.

If you want to know about Elgar Middleton, or indeed wish to see Malek’s full report, then please get in touch.

COVID-19 Update

The wellbeing of our staff, their families and our clients is our top priority. In light of the current situation, our teams in London and Sydney have been adopting full remote working arrangements and our ability to do so is well tested. Despite these worrying times, we are very much open for business and we stand ready to support our clients in any way that we can.