Rob Cormie: Sir Humphrey lurking in the wings to talk up risks

THE renewables market relies on a stable regulatory framework and investors who are willing to accept the return available for taking on a certain risk profile.

The problem investors are facing today is how can they make such major capital investment decisions where there is such uncertainty.

Over the summer, Quayle Munro advised on the sale of a majority stake in the Baillie wind farm in Caithness to Statkraft and the acquisition of the Wadlow wind farm project by Barclays Infrastructure Funds. The issues faced by the buyers and sellers were consistent and were only solved by creative structuring or simply equity having to take the risk of material change.

Two major issues being faced by everyone are renewables obligation certificates (ROCs) and power purchase agreements (PPAs).

Investors – both equity and debt – hate uncertainty and the current reform process is creating a hiatus. As usual, the problems occur at the margin and, in this case, it is for projects that should complete on or around 1 April 2013 when the new banding comes into force. Under the current system, you can only get ROC accreditation once you have an operating wind farm and, as it stands, you may not get one ROC, you may get 0.9 or 0.8 of a ROC. You will only know for certain in April 2012 and, as yet, no-one knows what the full transitional rules will be. In short, investors are being made to make a decision today when they do not have certainty on the regulated revenue stream. Bank funders are looking for default provisions and in some instances will simply not progress.

Historically most wind deals have been funded using long-term debt, which is predicated on a long-term PPA. Two years ago, this was easily achieved; today it is very difficult. Either the participants – primarily the big-six utility firms plus some new entrants from Europe – will not provide a PPA or will not provide the necessary floor price or tenor, or the credit support is insufficient to make the contract bankable. The impact of this is simple; less debt, less value, less competition and less growth. Without a solid structure, the number and type of funders will diminish and the market will slow down, which cannot be right.

What is the answer? We have to find a way to reduce regulatory risk to provide comfort to the key participants in the renewable market. These are long-term projects and they require long-term stability otherwise the market will not progress as fast as it could. It is strange to think that the UK power market is actually seen as relatively high-risk by many investors, not because the market is bad, but simply that the regulations keep changing. In the first dash for gas in the 1990s, numerous power companies arrived from the US, but how many are now left? When was the last time you saw a power plant owned by Enron, AES, Entergy, Aquila or PSEG. The list goes on but, after 20 years of deregulation, we still have six major utilities, a few European new entrants and the odd independent. Why? It is basically very difficult to make money in a volatile market that requires huge capital expenditure and the ability to ride out regulatory change. We should not let this happen to the renewable market where innovation is key. Of course, the utilities have a major role to play, especially in offshore wind, but so do the independents and overseas investors.

Energy policy is a devolved power so perhaps this is a chance for Scotland to cement its position as a key renewable energy market where investors can operate in the knowledge that their long-term strategy will not be affected by the short-term horizon of the politicians in Westminster. I have my doubts that this opportunity will be taken and I fear that Sir Humphery Appleby is in the wings saying that this would be “a brave decision minister”.

If we are bold now we can reap the rewards for generations to come.

• Rob Cormie is managing director of corporate finance firm Quayle Munro. The Scottish Low-Carbon Investment Conference concludes today at the Edinburgh International Conference Centre.