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Projects need cash to build: so what are the options?

Sponsored by Shawbrook Bank

The complications of financing AD

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Projects need cash to build: so what are the options?

Overall, there is a good supply of finance available for properly put-together AD projects, says Michael Stoneham, banking and finance partner at solicitors Brodies.

 

Financing AD is more risky than other renewable technologies, because AD plants are complex and rely on biological factors, so finance often comes with a premium and many lenders will only fund a project once it is successfully running.

 

Mr Stoneham says: “Farmers will need to satisfy a lender that they have access to a supply of quality and reliable feedstock to feed the plant in sufficient quantities for it to operate continuously.

 

“They will also need to show solid plans for operating and maintaining the plant, including putting aside regular resources to pay for anything that needs fixing.”

 

To get an AD plant built in the first place, there are two main financing options, says James Wood, business development manager at finance broker Charles and Dean.

 

Bank loans

 

Mr Wood says: “The first port of call should be your current bank or broker for a business loan.”

 

A high-street bank could be the cheapest source of funds.

 

Often they will look to secure this against land you own, but farmers should consider what they want to offer as security.

 

Bridging loans, project finance and hire purchase

 

If banks will not offer a loan for building the plant, bridging loans, project finance or hire purchase may be options, says Mr Wood.

 

He says: “A bridging loan is normally easier to access than a project finance loan, but is generally more expensive.

 

“With both bridging loans and project finance loans, you only pay the interest until a certain date.

 

“Once the plant is fully functioning, the farmer would normally settle the outstanding balance by transferring the debt to a business loan or higher purchase, at which point they would start paying

back the capital, normally at a lower rate.”

 

To use hire purchase, you would buy the equipment or assets and pay for it in monthly instalments.

 

Common pitfalls when taking out finance include: over-stretching yourself on repayments; offering too much security; not ensuring you can run the plant properly once it is built, resulting in lower energy generation and making it harder to pay repayments.

 

With a bridging loan, farmers should be extra confident the feedstock or plant will work, says Mr Stoneham.

 

He says: “The bottom line is that however you get it paid for, it is essential to ensure the plant is resourced to operate properly. It needs good feedstock and to be properly looked after.”

Financing AD is more risky than other renewable technologies.
Financing AD is more risky than other renewable technologies.

Working with a developer

 

MATTHEW Flint, director of GR Project Consulting, says: “Under a non-recourse project finance model, investors do not require cash or security from the farmer and will invest in a special purpose vehicle [SPV] that is formed to build, own and operate the plant.

 

“If any issues occur, the investor’s recourse is limited to the value of the SPV.

 

“This type of project is suitable for larger projects; the market is currently focusedon projects with an electrical equivalent of about 2.3MW.

 

“Typically, it suits large mixed farmers, but farmers with a good location might partner with a larger farming contractor, who can help procure feedstocks.

 

Rental income

 

“In most cases, the farmer receives an index-linked rental income for the project site, plus contracts to supply feedstocks and to manage digestate.

 

They might also take equity in the project.

 

“Before committing funds, investors typically require contracts for design and construction of the plant, operation, maintenance and management agreements, as well as other corporate and commercial documents, in addition to planning consents.”

Finance - top tips

JAMES Wood advises:

  • Get projections of your costs and income done by an experienced AD expert to ensure you can afford finance
  • Ensure assets used as security do not already have finance against them
  • Show you have reliable feedstock and a solid plan for operational maintenance
  • Get a fixed rate so you know what your monthly repayments are
  • Have a contingency plan for if you cannot make the payments; do not be overly ambitious on construction schedules and run a doomsday scenario. Could you draw down funds quickly?
  • Your lender should be regulated by the Financial Conduct Authority and be a recognised and trusted name; ask other farmers with AD plants for advice and talk to a broker or consultant
  • Ensure you understand agreement details; get a solicitor and consultants to help

How Shawbrook Bank finances AD

How Shawbrook Bank finances AD

CHARLOTTE Davies, head of renewable energy and agriculture at Shawbrook Bank, says: “When farmers approach us for help with an AD project, there is no one-size-fits-all.

 

“Depending on the project, we may offer a bank loan, hire purchase facility or project finance. Key questions and documents will be:

  • What stage is the project at?
  • Full project documents with details of: plant size; type of plant; what feedstock will be used and where it will be sourced from; number of acres to be used if growing feedstock; all project costs; what you plan to do with the energy and digestate produced
  • A letter of intent from the feed stock supplier, if buying-in
  • Three years of accounts, plus bank statements
  • A feasibility study done by a specialist, independent third party
  • Planning permission documents.”

Key considerations

  • Will planning consent be available?
  • Is there suitable gas grid capacity nearby?
  • What is the lifecycle for the subsidy regime underpinning the viability of gas to grid project? The Renewable Heat Incentive (RHI) expires in March 2021. The value of RHI is more than 50% of project revenues, so it is extremely unlikely a plant starting from scratch would attract funding or a developer. It is possible a replacement/ rental of RHI will be announced, but in the short-term this remains a significant risk

For more information:

Visit the Shawbrook Bank Hub

Sponsored by Shawbrook Bank
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