The last number of years have been busy. As well as funding projects, we have been busy acting for clients seeking to buy and sell either development projects or operational projects. Typically, it has been Irish independent developers selling and foreign funds buying. Through the worst recession of modern times, it has been encouraging to see foreign investors show sustained confidence in the Irish regulatory and political framework and to invest in renewable energy assets when other asset classes were being shown less interest. (This, of course, is changing with my property and banking colleagues in Eversheds seemingly buying and selling huge swatches of commercial property in the last 18 months).
Foreign investors clearly state that they invest here as they consider Ireland as having a “benign” regulatory environment. Previously burnt by retrospective regulatory changes in other jurisdictions, they see Ireland’s pro-business political parties together with a stable regulatory regime as resulting in an attractive investment proposition. Yes, there were always regulatory challenges, like the Wind in the SEM consultation but all got sensibly resolved. What is still a very young industry in Ireland has matured impressively. The politicians, regulators and industry participants can be justifiably proud of what they have achieved.
However, history is certain and, therefore, we tend to look back at it more benignly than we look forward to the future. Our buying clients are still actively hunting for unicorns. That is, the ready to build project that has all its property issues, planning issues and grid issued nicely sorted out! It seems never to be the case, hence the expression. Due diligence periods seem to be getting longer. Sellers of development projects seem to underestimate what the meaning of “shovel ready” is. Repeatedly the standard of due diligence we are asked by clients to undertake is such that if we were to complete the purchase of a development project on a Monday, on the Tuesday we have to be able to start the process of getting project finance.
So often, access issues have not been adequately sorted out. When we ask for Declarations of Identity more property issues are identified. Inevitably planning or forestry issues remain to be resolved with the relevant public body. Why were these issues not resolved before going to market? Hence, the unicorn moniker.
Some sellers bemoan this due diligence. However, most modern buyers will not buy unless they are certain that a project can attract project finance. Sure, sellers can sell without bringing their projects up to this level of completeness but to me it is simply a function of price. If they don’t, buyers will offer less or not make an offer at all.
As mentioned, the future is uncertain. We all crave the holy grail of regulatory certainty. However, this can never be absolutely the case, though I believe we can avoid some “own goals”. By this, I mean inevitably the 20/20/20 framework has to run its course and, rightly, there is a debate under way as to what should follow. Personally, for security of supply and climate change reasons, I believe the support for renewable energy should continue whilst encouraging technological advancement to decrease cost. Some have called for the abolition of financial support for renewable energy. I do not agree. Priced correctly, I believe these supports still remain a cost effective way to delivering the twin policy goals of security of supply and diminishing the effects of climate change. Equally, an appropriate support regime is required to kick start the investment in bioenergy and solar industries. In sporting parlance, we are lucky enough to wear the country jersey for a while and then we need to hand it on to the next generation in better shape than when we received it.
Similarly to the debate on what comes after the 20/20/20 framework, I-SEM and what comes after the current REFIT programme are all causing concern. Likewise, I would like to see the export debate restarted as again it is important for security and competiveness reasons. However, none of these are “own goals”. As mentioned, regulatory evolution and further integration of energy markets in Europe is inevitable. It is a question of when and not if.
The “own goal” I speak of is the increase in local authority rates on wind farms proposed for the entire country and first put into effect on 1 January 2015 by Limerick County Council. Simply put the trebling of local authority rates has rendered some of the development projects purchased in 2014 as un-financeable due to the additional operating cost. Whilst prudent buyers had factored some increase in rates when pricing development projects, none factored in this amount of an increase. Therefore, these buyers, who were supporting the wind industry, are now uncertain as to whether to continue to buy projects or not. Similarly banks are, taking a conservative approach to debt sizing and loan conditions. Hence, when one limb of Government is actively putting in place structures to facilitate the reaching of the binding 20/20/20 targets, another limb of Government is undermining these efforts. An “own goal” by any standards.
I am conscious, I am writing this article in mid-February for publication in March. As mentioned above, the policy makers in Ireland have historically demonstrated their ability to resolve these types of issues. By the time this article is published, it may be the rates issue is resolved. In any event, I have faith in the Irish policy makers and am ever hopeful that the effects of this “own goal” can be reversed. Whilst not being complacent, history tells me it will.