Renewable Energy Summary

Renewable energy has recently attracted significant press coverage. In a time of economic uncertainty and ballooning government debt, questions have been asked as to whether the UK’s government support of renewable energy generation is too onerous to the UK tax payer. What is FIM Services Limited’s (‘FIM’) position on renewable energy and how does it perceive renewable energy generation in the wider context of the UK’s energy generation requirements?

What is the UK’s Energy Generating Capacity?

In 2010, the UK’s energy generating capacity was 80GW, of which gas comprises 45% (36GW), coal 32% (26GW), nuclear 13% (10GW) and renewables 6% (5GW). Renewable energy generation is primarily from onshore and offshore wind (4GW and 1GW respectively).

What is the UK Government’s Energy Strategy?

By 2020, the UK’s estimated generating capacity is expected to have increased to 110GW with the mix in favour of renewables. Gas will have decreased to 29% (32GW), coal to 22% (24GW), nuclear 8% (9GW) and renewables increased to 31% (34GW).

Source: “Planning our electric future” Government White Paper 2011

Why is the capacity of the more traditional energy generating technologies, such as gas, coal and nuclear declining?

Between 2010 and 2020, 7GW of energy generation from gas (4GW), coal (2GW) and nuclear (1GW) is forecast to have to come off stream. The amount is actually higher. Some 20GW, or a quarter of our generating capacity, will come off stream due to plant closure (old and ready for decommissioning). However, there is additional capacity being built, offsetting the 20GW expected to be decommissioned. New nuclear and coal is unlikely to be operational by 2020, as a result there is a very clear energy gap.

Can renewable energy really fill this significant energy gap?

FIM believes that renewable energy generation is part of the answer but by no means the only solution. It is clear that investment into costly nuclear (more expensive since the Fukishima disaster in Japan) is required to provide base load power generation, however the timetable and investment appetite for nuclear generation remains uncertain.

Renewable energy and predominantly onshore and offshore wind are clearly the sectors where the shortfall can be met, subject to favourable government support. The various counterparties in the development and construction of wind farms are well known and project finance is available to help build out these capital intensive projects.

If the UK government continues to support the UK wind industry, the opportunity to fill the energy gap through equity investment is very real.

Why can’t the old generating capacity (gas, coal and nuclear) decommissioning be put off for a further 10 years?

The honest answer is that it probably can. However, as a nuclear power station continues to operate past its useful life, the greater the risk for an operational malfunction. Hinkley Point B and Hunterston B have been operating since 1976, but since 2006 have been restricted to about 70% of normal output because of boiler-related problems requiring that they operate at reduced boiler temperatures. These two sites will be closed in 2016 and circa 2.4 GW will come off line. In 2010, EDF Energy announced a 5 year life extension for both Heysham 1 and Hartlepool to enable further generation until 2019, which means that these sites will be operating for 30 years.

The UK government’s support of renewable energy generation appears very costly. How much does it cost and will it cost the UK tax payer?

The primary subsidy for large scale renewable energy projects is the Renewable Obligation Certificate (ROC). Energy companies do pass this cost onto consumers, however to blame rising electricity prices on renewable energy is misleading. The total ROC cost to suppliers in England and Wales in 2010/11 was £1.3 billion, Ofgem estimate that this equates to £19 per household in the UK. As more renewable energy projects are developed, the cost to consumers will increase but possibly at a slower rate than continuing to rely on fossil fuels.

What is FIM doing in its support of renewable energy generation and more specifically onshore wind?

FIM supports UK onshore wind farms by investing directly into construction ready projects. FIM sets up investment vehicles whereby private investors can make direct investments into renewable energy projects.

How does the income from renewable energy investments impact on investors’ returns and their tax position, specifically Inheritance Tax (“IHT”) relief?

Renewable energy income from a generating asset, such as a wind farm, is considered trading income and is taxable. FIM are of the opinion that as the generating asset operates within a trading vehicle it would qualify for 100% Business Property Relief, and thus sheltered from IHT.

How many on-shore wind farms has FIM acquired, built and operate?

FIM has acquired, constructed and now operates four on-shore wind farms in the UK, with a capacity of 32.5MW. Further capacity of 19.6MW in two wind farms recently acquired will bring this total to over 52MW. The acquisition of a seventh site is currently in negotiation, with a capacity of 13.8MW.

How will the current changes proposed by the UK Government affect the wind farms that FIM have currently in construction?

The short answer is that they won’t. The reduction in the ROC subsidy proposed by the UK Government will not come into effect until April 2013, by which time the two wind farms will be built and operational. This means that they are grandfathered into the current ROC regime for a fixed term of 20 years from the date of accreditation by Ofgem. This element of the renewable energy price is fixed by legislation and is index linked.

Will FIM consider investment into renewable energy projects post April 2013?

Yes, if the potential investments achieve an IRR that is satisfactory to investors. Investments into renewable energy projects that are accredited after April 2013 will be subject to a new, and as yet unclear incentive regime.

What is FIM’s view of other potential future renewable energy investments?

FIM seeks to enhance the value of its current forestry portfolio and sees potential value in biomass where FIM’s forestry portfolio could be leveraged to provide low grade timber to biomass energy generators.

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