Securing project finance for AD

Securing finance for AD projects in the current climate can be a challenge for any farmer or landowner looking to diversify their business. Phil Gerrard, CEO of Privilege Finance, explains why sourcing funding can be difficult and what can be done to streamline the process.

“Most clients who approach us have found that ‘traditional lenders’ are very risk averse and nervous of the potential unknowns involved with lending for AD and biomass as renewable energy projects are not ‘standard’ to the usual finance providers.

“For example, the construction of a plant can take up to a year, and during that time there is no income generated and the asset has limited value until it’s operational. In some cases, lenders will be providing millions of pounds worth of funding with no sight of return – to them this means their money is at risk,” he explains.

“As a result, traditional lenders typically offer a mortgage style limited ‘loan to value’ amount, and request security over the whole farm, with the farmer also having to contribute a significant amount towards the project themselves.

“For farmers in particular, this can result in a project not getting off the ground, as they may already have the farm secured against other loans, and may not have the cash available. It’s not easy for farmers who are looking to diversify into renewable energy.”

Specialist AD funders

“This is where specialist funders, such as Privilege, offer a different perspective, and widen the options through needing a much lower cash investment, and taking security over the AD plant itself,” Mr Gerrard explains.

“Farmers will often find that a specialist lender is able to provide the funding they need because they understand the renewables sector, the project lifecycle and technology.

“At Privilege, full technical due diligence, testing the ‘what if’, and challenging the technology provider are all common practice, to ensure the plant is built properly. As is close project management to ensure it’s delivered on time and to budget – therefore managing the risk and making supply of funding possible.”

Funding pre-requisites

There are usually pre-requisites for funding, due to the high demand for project finance. Specialist providers will often require that planning permission has been granted, and a suitable grid connection is in place or in progress.

“If a farmer has explored a technology provider, and has planning and grid connection, then Privilege can normally undertake due diligence and issue heads of terms within two to four weeks, with full credit approval shortly afterwards.

“As a business, we offer a high ‘loan to value’ ratio, and set security over the AD plant and its income, not over the farm itself. It’s a flexible and pragmatic approach based on financial forecasting cashflow, tailored to the specifics of an AD construction and commissioning plan.

“We help with the planning and build as well as the commissioning to get the plant running at optimal levels, and then work with the farmer afterwards to help them to refinance in to a longer-term plan with a traditional lender as there is then less risk.”

The future of finance for AD

The industry still awaits the proposed legislation changes to the Renewable Heat Incentive (RHI) that were due to be put to parliament before the election was called.
“Without these regulations being formally passed, a void of uncertainty has been created in the marketplace for developers and funders, and the overarching concern is that this will now linger on in to the autumn.

“However, Privilege is committed to the UK’s AD sector and are always exploring projects that are viable regardless of the subsidy level at the time. We’re experienced and confident enough to make certain assumptions based on in depth sensitivity analysis, that allow us to help prepare developers for pre-accreditation when the RHI situation is finally clarified.

“We have always focused on the bigger picture, and can be relied upon to continue to do so,” he concludes.

What makes a successful AD project?

  • Use of a reputable technology provider for the plant build
  • A hands-on operator who is committed to making the AD plant work, and keep it running efficiently
  • Quality feedstock which comes with security of supply and cost
  • Professional ongoing maintenance of the plant to ensure it continues to run at maximum output
  • An experienced funding partner that understands the sector and can add value throughout the project