CFD Investor Analysis

Low Carbon Contracts Company – CFD Investor Analysis

6 February 2020 Public

Disclaimer

This presentation has been prepared based on a report for the Low Carbon Contracts Company (LCCC) in connection with analysing the profile of Contract for Difference (CfD) investors. To the fullest extent permitted by law, Grant Thornton UK LLP does not accept a duty of care whether in contract or in tort (including in negligence) or under statute or otherwise nor assume responsibility to anyone other than LCCC for our work or this report or for any opinions or conclusions that we have formed. We do not accept any responsibility for any loss or damages or costs incurred by you arising out of the use of this report by any third party.

We do not warrant or represent that the report is appropriate for your purposes. The report was not created for, and should not be treated as suitable for, any purpose other than that set out in our terms of engagement with LCCC . If you do rely upon the report for any purpose, you will do so entirely at your own risk and you will not bring or threaten to bring any actions, proceedings or claims against Grant Thornton UK LLP where the action, proceeding or claim in any way relates to or concerns or is connected with the use of or reliance on the report. All data has been provided by third parties. We have not verified the accuracy or completeness of any such data. There may therefore be errors in such data which could impact on the content of this report. No warranty or representation as to the accuracy or completeness of any such data or of the content of the report relating to such data is given nor can any responsibility be accepted for any loss arising therefrom.

Agenda

Data source & limitations - Limitations of the study Key Findings - Timing of investment - Sources of capital: Equity vs Debt - CfD compared to the rest of the energy market Technology specific considerations - Offshore wind - Onshore wind, large thermal and solar

Data source

Breakdown of projects by AR Allocation Number Number of Number of • Desktop research covered 73 contracts of CfDs Analysed Allocation Round dates across FIDER and CfD AR1-3. round (AR) Projects (Contracts) Projects • Analysed as 45 financed projects (phased FIDER 8 14 7 April 2014 projects, or jointly financed projects Allocation Round 1 20 24 15 October 2014 – March 2015 treated as 1 project) March 2017 – September Allocation Round 2 7 13 4 2017 • Three projects in which Banks Renewable May 2019 – September Allocation Round 3 10 22 2 were the investor (Middle Muir, Moor House, 2019 Kype Muir) have been treated as a single Total projects 45 73 28 project Projects that have achieved Financial Close • All the information contained within has been taken from sources in the public FIDER AR1 AR2 AR3 domain Financial Close Achieved 8 17 3 - Financial Close Pending or - 3 4 10 • Data was cross referenced across unknown multiple sources to confirm accuracy Total number of projects 8 20 7 10 • No primary research was carried out to AR3 projects only signed their CfDs in September 2019, therefore we validate findings would not expect much investment data at this stage. In addition remote island wind projects have been delayed due to grid connections.

Limitations of the study: availability of data Known and unknown investment levels, Installed Capacity (MW) by Allocation Round

• It has not always been AR3 possible to determine investor types and/or the amount invested into a project AR2 • Chart opposite provides an illustration of the capacity (in MW) of projects where the investment figures are known, AR1 partially known or unknown. • This may be because Financial

Close has not been reached or FIDER public data is not available and details have been kept confidential 0 1000 2000 3000 4000 5000 6000 7000 Capacity (MW)

Capacity associated with Projects for which all investment data is known Capacity associated with Projects for which part of the investment data is known Capacity associated with unknown investments

Breakdown of investors: type

Investor type Definition Example

A bank with the primary purpose of providing financial products and services to Lloyds Banking Group, 1 Commercial bank corporations, institutions and governments e.g. through commercial loans. Santander

Commonwealth Bank of A bank owned by a state with the purpose of operating as a state bank 2 State owned bank Australia A fund managed by specialist fund managers to invest pools of money in infrastructure Green Investment Group 3 Infrastructure fund assets and projects.

Institutional An entity which pools money to invest in investment assets (not specifically infrastructure 4 Aviva, Foresight investor assets) such as a pension fund or insurance company. Banks Renewables, A company responsible for the design, project development or construction of a CfD project. 5 Developer Lightsource A company that supplies basic amenities (electricity, gas or water) to the end user/public, 6a Utility (European) where the company’s head office is based in Europe. The utility may also have generation Ørsted or network assets. A company that supplies basic amenities (electricity, gas or water) to the end user/public, Utility (non- 6b where the company’s head office is based outside Europe. The utility may also have Kansai European) generation or network assets.

Traditional oil & A company that’s primary activity was providing upstream oil and gas prior to the 7 Equinor, Repsol gas company introduction of EMR.

A sovereign wealth fund (SWF) is a state-owned investment fund or entity which comprises China Investment Sovereign Wealth 8 of pools of money derived from a country's reserves. Reserves are funds set aside for Corporation Fund investment to benefit the country's economy and its citizens

Any investor that does not fall into the categories above has been classed as ‘other’. For EKF 9 Other example, grant funding, technology developers, equipment providers or credit agencies.

Breakdown of investors: volumes

• Across the 45 CfD projects we have identified Number of Amount invested – 145 separate investors, that have invested Investor type investors where known (£m, over £18.7bn. real terms) • The largest known investments to date have Commercial bank 47 4,301 come from infrastructure funds, institutional State owned bank 4 65 investors, utilities and commercial banks. Infrastructure fund 10 3,611 • There is less known investment from developers, this is likely to be due to the fact Institutional investor 25 2,755 that they often invest from their balance sheet Developer 35 1,196 therefore there is very little transaction Utility (European) 8 5,002 information available. Utility (non-European) 4 328

Traditional oil & gas 2 64 company

Sovereign Wealth Fund 1 - Other 9 1,414 Total 145 18,735

Number of Investors and Known Investment 90 4500

80 4000

70 3500

60 3000

50 2500

40 2000 Number Investors Number of

30 1500 (£,m) Investment Known

20 1000

10 500

0 0 Commercial State owned Infrastructure Institutional Developer Utility Utility (non Traditional oil & Sovereign Other bank bank funds investors (European) European) gas company Wealth Fund

Number of Investors FIDER Number of Investors AR1 Number of Investors AR2 Number of Investors AR3 Known Investment (£,m) FIDER Known Investment (£,m) AR1 Known Investment (£,m) AR2 Known Investment (£,m) AR3

Key investors – By number of Projects

• Commercial banks represent seven of Most active investors by number of projects the top ten most active investors (Mitsubishi, Santander, SMBC, ING SSE Developers Group, Lloyds, Natixis and Societe Innogy Generale) by number of projects Orsted invested in. Societe Generale • Commercial banks predominantly Natixis invest in established projects, explaining the high proportion of Lloyds ING Group Commercial investments made in FIDER and Banks Allocation Round 1 projects. Further to SMBC

this point no commercial banks have Mitsubishi invested in Allocation Round 3 projects. Santander

0 2 4 6 8 10 12 Number of Investments

FIDER AR1 AR2 AR3

Key investors – By level of investments

Most active investors by value of investment made

• Unlike numbers of investments made, the SSE value investment is far higher for developers (Ørsted) than for the commercial banks. Innogy Developers • The large investments made in the Hornsea Orsted and Walney project by Ørsted has meant that Societe they have invested more than any other Generale investor. Natixis • The graph also interestingly suggests that, Lloyds

generally, known investment levels in ING Group Commercial Allocation Round 1 is lower than both the Banks Investment Contracts and the Allocation SMBC

Round 2. Mitsubishi

Santander

0 1000 2000 3000 4000 5000 Known Investment (£,m) FIDER AR1 AR2 AR3

Investor Timelines

Timing of Investment: Financial Close

• Majority of Offshore Wind has FC date which was Dedicated Biomass with CHP either after the Milestone Delivery Date (MDD) or is Energy from Waste with CHP still Pending • Some projects achieved FC Biomass Conversion before the signing of the CfD contract (solar, biomass Solar PV conversion, onshore wind) • ACT are almost all still ACT waiting for FC • Only a limited number of Onshore Wind projects (7 of the 41) obtained FC between the Offshore Wind

signing of the CfD contract 0 2 4 6 8 10 12 14 16 and before the MDD Number of Projects*

Pre CfD After CfD, Pre MDD FC After MDD FC Pending, MDD Occurred FC Pending, MDD Pending

* Four RIW projects have not been included in the graph. They are all FC Pending, MDD Pending.

Timing of Investment: Equity Sales Projects which have sold 100% of the Equity interest in the project, since CfD contract signing

Date of Initial investor CfD project Technology Allocation round Seller Buyer(s) Current investor types Investment / post type MDD Dorenell Wind Farm Onshore Wind AR1 Infinergy Developer EDF Energy Renewables Developer 01/11/2015

Utility GIG, Scottish Power Renewable Infrastructure fund, East Anglia One Offshore Wind AR1 Iberdrola 30/08/2019 (European) Energy Utility (European)

The Bioenergy Infrastructure Institutional Investors, Advanced Conversion Energy Works (Hull) AR1 Spencer Group Developer Group, Hancock Natural Resource Other, 24/11/2015 Technology Group, Noy Fund Infrastructure fund

Energy from Waste Wheelabrator Developer, K3 CHP Facility AR1 Developer Macquarie* 01/02/2019 with CHP Technologies Commercial bank

Cawdor Estate, Cawdor Estate, Greencoat UK Nanclach Wind Farm Onshore Wind AR1 Developer Developer 01/02/2017 Infinergy Wind Mainstream Developer, Neart na Gaoithe Offshore Wind AR1 Developer EDF Renewables, ESB 01/05/2018 Renewable Power Utility (European)

Brookfield Tralorg Onshore Wind AR1 Renewable Energy Developer Railpen Institutional Investors 01/11/2018 Partners LP

Northacre Renewable Advanced Conversion AR2 Hills UK Ltd Other Bioenergy Infrastructure Group Infrastructure fund 22/10/2018 Energy Centre Technology Lynemouth Power Utility Biomass Conversion FIDER RWE npower EPH Developer 07/01/2016 Station (European) Dedicated Biomass Teesside FIDER MGT Power Limited Developer Macquarie Group, PKA Institutional Investors 11/08/2016 with CHP

*Macquarie bought Wheelabrator Technologies, as opposed to just K3 CHP Facility

Sources of capital: Equity Vs Debt

Debt v Equity split of FIDER projects

• High level of debt in the Walney Phase 1 FIDER projects, with 6 of the eight projects having a ratio of Beatrice equity : debt of between 30:70 and 20:80. Dudgeon

• This is apart from the Walney Teesside phase 1 project, which has a

debt level of just under 70% Drax 3rd Unit • For a couple of projects (Lynemouth and Burbo) there Hornsea 1 was no visible debt in the publicly available information. Burbo Bank

• For projects where the debt is Lynemouth known the average debt gearing is 75% 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 Gearing : Equity Gearing : Debt Gearing: Unknown

*Gearing information taken from public records at Financial Close.

Sources of capital: Equity Vs Debt

Debt v Equity Split of AR1 Projects • Of the 20 projects, 6 projects are Triangle shown to have an investment of debt. Nanclach • East Anglia shows a figure of Neart Na Gaoithe around 40% East Anglia • The remaining projects show debt Middle Muir etc investment of between 70 and 95%. K3 CHP Coire Na Cloiche • Two projects (Triangle and Nan clach) Achlachan indicate that they have 100% equity Solwaybank investments Mynydd Y Gwair • Neart Na Gaoithe site had a gearing of Energy Works (Hull) 70%, which is expected for this site, as Wren it is a sizeable offshore wind farm and Tralog the funding approach taken for these Sneddon types of projects are more complex and Clocaenon more likely to involve high levels of Charity Farm debt. Brenig • For 9 projects, gearing figures could not Bad a Cheo be found Common Dorenell

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Gearing : Equity Gearing : Debt Gearing: Unknown *Gearing information taken from public records at Financial Close.

Debt levels in the Renewables sector

% Debt seen in FIDER % Debt in comparison investments % Debt seen in AR1 and AR2 FIDER offshore wind – 70 to 85% FIDER thermal (CHP and biomass) – 70 to 80% AR1 Offshore wind – 40 to 75% AR1 thermal (CHP and biomass) – 60% to 70% Dependent AR1 Onshore wind/solar – either 0% or 80% on project AR1 ACT – 0% and owner AR2 Offshore wind – above 80%

Flexibility Assets OFTOs Renewables Obligation Renewables Obligation

0% 50% 100% debt debt debt

Offshore Wind

• Majority of investors are from Number of different investors in Offshore Wind, by Commercial Banks (62%),with Investor Type institutional investors (17%) the Traditional Oil & Gas second highest proportion. Sovereign Wealth Company, 3 Fund, 1 Utility (European), 8 o Number of commercial banks have made a relatively small investment in a relatively large number of projects Other, 6 Utility (Non • Three investor types each account European), 2 for about 5% of investors;

o European Utilities (primarily Orsted, SSE, along Institutional Investor, 26 with Engie, Scottish Power and ESB) Commercial Bank, 96 o Developers (including Innogy and EDF Renewables) and Infrastructure Fund, 7 o Infrastructure Funds (PKA, Global Infrastructure Partners) • The ‘Other’ category was also quite Developer, 7 high (4%), due the involvement of Commercial Bank Developer Infrastructure Fund Danish Export Credit Agency (EFK) and Pension Insurance Corporation Institutional Investor Other Sovereign Wealth Fund (PIC). Traditional Oil & Gas Company Utility (European) Utility (Non European)

Offshore Wind Investor mix per AR

Type of investor by number, by Allocation Round – offshore wind

Similar patterns in investor type seen when broken down by Allocation Round. Larger number of institutional investors investing in FIDER offshore wind projects. Developers and European Utilities share the majority of the involvement in AR3.

Offshore Wind investment levels

• The known investment levels & the relevant level of investment varies significantly depending on the investor type. • The highest total known investment was from European Utilities

o Primarily because of Orsted’s £4 Billion investment in Hornsea Project 2 o European Utilities however, had a lower average investment in £/MW than Infrastructure Funds. • Commercial banks had the second highest total known investment, but have a much smaller £/MW investment cost that most other investor types.

o This is because they have invested a small amount in a large number of large projects Offshore wind investment per £/MW and investment value in £,m, by investor type

£3.00 6,000

£2.50 5,000

£2.00 4,000

£1.50 3,000

£1.00 2,000 Investment (£,m) Investment Investment (£/MW) Investment £0.50 1,000

£- - Commercial Developer Infrastructure Institutional Other Sovereign State Owned Traditional Oil Utility Utility (Non Bank Fund Investor Wealth Fund Bank & Gas (European) European) Company

Investment Average (£/MW) Max (£/MW) MIn (£/MW)

Technology specific considerations

Onshore wind, solar and large thermal average investments - £/MW and £,m Onshore Wind £1.80 18,000 • Onshore wind projects had the highest total £1.60 16,000 investment figure.

£1.40 14,000 • Commercial banks provided the highest level, with institutional investors and infrastructure funds £1.20 12,000 providing additional elements. £1.00 10,000

£0.80 8,000 Large Thermal

Investment (£,m) Investment • For large thermal assets, the known investment

Investment (£/MW) Investment £0.60 6,000 figure is lower than for the other two technology £0.40 4,000 types. £0.20 2,000 • More funding has come from developer, and

£- - limited amounts have come from commercial Commercial Developer Infrastructure Institutional State Owned Utility (Non banks. Bank Fund Investor Bank European)

Onshore Wind Average (£/MW) Solar PV Average (£/MW) Large Thermal Average (£/MW) Onshore Wind Investment (£,m) Solar Solar PV Investment (£,m) Large Thermal Investment (£,m) • Solar projects have seen just investment from commercial banks and developers.

Seagreen Phase One

• Seagreen Phase One being developed by SSE • Financing details

Renewables o Danish Export Credit Agency (EKF) has provided a GBP 304 million guarantee o Project is 1,075MW of which 454MW (42%) was successful in AR3 o Norwegian Export Credit Guarantee Agency (GIEK) has provided USD 172.2m/EUR 152.2m o Leaving 621MW effectively subsidy free o 12 commercials banks o Estimated project financing of 42% • On the 3rd June 2020 reached final investment decision and financial close

o 51% of the project was acquired by new joint venture partner Total – initial £70m with further £60m from earnings

o Opportunity to be involved in 360MW extension o Second project in UK – 80% in floating project off wales (Simply Blue Energy)

o SSE Renewables will continue to lead on development and construction – supported by Total – expected 2022/23

o Around ~30% will be contracted with SSE group as route to market (private CfD)

o Remaining ~28% likely to be Corporate PPA or merchant exposure

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