UK private infrastructure funds want to put money into wind farms, despite ongoing struggles with planning laws

Last March, HSBC’s environmental infrastructure fund announced its investment in a joint project with the Carbon Trust, the UK government-funded body that helps companies reduce their greenhouse gas emissions.

Called Partnerships for Renewables, the project aims to build wind turbines on public sector property across the UK. It is the first major investment for the HSBC fund – and is one of the few associations of a major UK bank with renewable energy.

But as the 2020 deadline approaches, the question for many is whether the government and the private sector are doing enough to meet the UK’s target of 20 per cent of electricity to be sourced from renewables.

Partnerships for Renewables, which is 49 per cent owned by HSBC’s fund, aims to develop a 500 megawatt portfolio of renewables projects on public sector land. “There’s a strong business case behind smaller wind turbine sites within the UK,” says James Hall-Smith of HSBC specialist investments management.

It is the first investment for the HSBC environmental infrastructure fund, which Hall-Smith says is looking at other investments in the wind, water and waste sectors. In addition, the Carbon Trust investment is not the first the bank’s managed investment funds have made into the wind sector. “We already have started work with another fund with a joint venture developing larger wind farms, of about 40MW each.”

But apart from HSBC’s foray into green energy, renewables remains a quiet area for UK banks, according to Matthew Clayton of ethical bank Triodos. The firm operates the Triodos renewables fund, which is owned by 3,300 investors and has a portfolio of 22.7MW in the renewable energy market.

Clayton says that while European banks, with experience of a more mature renewable sector on the continent, have shown major interest in UK renewable investments, among UK-based banks it is only smaller institutions such as the Co-operative Bank and Alliance & Leicester that have made gradual inroads into renewables funding.

Green loans

Tom Murley, head of the renewable energy team at HG Capital, a private equity firm, says UK banks are not major equity investors within the renewables market, but many have come to the aid of wind projects in their primary role as lenders. The largest interests in green energy projects are often owned by the same firms that run the country’s power stations.

“Some projects will use bank debt for up to 75 to 80 per cent of the funding,” Murley says. Major debt partners include Royal Bank of Scotland, HBOS and Barclays. But many banks’ roles as lenders often stops them from becoming equity investors, where being both a lender and an equity investor could create a conflict of interest. Instead, the bulk of equity investments in Britain come from electricity firms, such as Eon and RWE, while infrastructure funds and private equity also play a major role in both getting projects off the ground and funding their operation.

“Private equity is mostly involved in the development phase,” Clayton says. “They will provide the equity to get a project off the ground before institutions become involved in the project as a going concern.” HSBC’s Hall-Smith agrees, saying it is difficult for banks to be involved in an infrastructure project early on in its development.

However, many infrastructure funds are involved for the long term in operating wind farms. Murley says infrastructure funds do not merely have developmental interests. He points to private equity firm Babcock & Brown, one of the largest wind farm owners in the world, as example of the trend, although it has put its European wind farm portfolio up for sale. Other major private equity players include HG Capital and Macquarie. Meanwhile, 3i Infrastructure, a fund of the private equity firm 3i, has offered £112 million for Novera, a wind energy operator with the goal of supplying 250MW by 2011.

Some argue it is not a lack of investment that is getting in the way of the UK meeting its 2020 target. Murley says: “There is plenty of capital seeking to invest in the UK, but problems in the planning system hold up that investment.”

Currently there are 217 projects in the planning phase, but only 36 being built. The British Wind Energy Association has campaigned for years on the issue. It has reported that the average time from planning applications to decisions is now two years, and with all the pre-application work projects are often stuck in the planning system for three or more years before a decision is made.

While UK banks are not major players in the British energy market, private equity and energy companies are ready and waiting with investment. However, the question for many wind farm projects may not be whether they can secure the investment, but whether the British planning system will ever allow their turbines to see the light of day.