BNP Paribas Clean Energy Partners, the London-based renewables fund, closed the project financing for the 38MW Sleaford biomass project on 9 December 2011. The sponsor acquired the plant from Eco2, a specialist developer, a process which took place alongside close on the debt financing. The combined cost of the construction financing and the fee paid to the seller is around £155 million ($246 million).

Sleaford is the first conventional biomass financing in England in nearly five years. The deal brings to an end a prolonged hiatus in the UK biomass market, pending the release of government proposals on renewable obligation certificates (ROC) re- banding, which took place in October 2011.

Close for Sleaford provides a useful benchmark financing for the sector, and together with the confirmation of grandfathered ROC rates in the new banding, should increase sponsor confidence for further biomass projects in the UK. The deal is an important milestone for BNP Paribas Clean Energy Partners since it is the fund’s first biomass project and could well serve as a template for other financial sponsors looking to invest in biomass.

Biomass has run a poor second to wind in the UK in terms of popularity for some time. Historic challenges in closing biomass deals persist, including obtaining fuel supply contracts, which tend to be spread across a large number of small suppliers. Even for small or medium-sized projects it has been difficult traditionally to match debt tenors with the length of fuel supply contracts, and the creditworthiness of the suppliers is often low.

The outcome of the UK Department of Energy’s contemplated changes to the renewables obligation banding levels provides developers with some security. Before the proposals were announced on 20 October, the biomass industry was unsure what level of support it would get when the current levels for ROCs expired in March 2013. This lack of certainty made investments in biomass difficult.

The delay in the release of the results of this consultation held up the Sleaford financing. In the end, the UK’s Department for Energy and Climate Change did not make any changes for dedicated biomass, with support levels remaining at 1.05 ROCs per MWh until March 2016. Crucially, ROC accreditation is guaranteed for 20 years, which means that once connected to the grid, a project will not be affected by any future changes in the banding.

The project was first granted planning consent in 2008. BNP Paribas Clean Energy Partners had been looking at the project informally since about this time, before entering exclusive negotiations with Eco2 in 2010. Eco2 always planned to sell the project at financial close since its business model involves a pure focus on development.

The process of roping in lender commitments and documenting the financing took another 12 months, before the deal closed in December 2011. The debt received oversubscribed support from UniCredit, NIBC, Bank of Ireland and RBS, which the developer and sponsor mandated in March 2011. Bank of Ireland, which decided to sell of its overseas project finance business in April, was then replaced with Siemens Financial Services in June.

Agra CEAS, an agricultural consultancy firm, carried out due diligence into the amount of straw available locally to meet the plant’s 240,000 tonnes per year requirement. The sponsor has signed fuel supply contracts worth around £10 million per year. All of the contracts are long-term, of a comparable length to the tenor of the debt, and cover straw sourced from within a 30km radius of the plant. The sponsors will establish a reserve of straw to cover any shortfall that might arise.

The deal was structured to pass the risk of an adverse re-banding onto the sponsor, which provided a contingent commitment to provide additional equity in the event of a re-banding. This would sufficiently decrease the amount of senior debt to maintain the base case coverage ratios, but in the end the sponsor did not need to act on this commitment.

The deal closed with £106 million in long-term debt, provided on a roughly equal basis by the four mandated lead arrangers. The loan is fully amortising and has a tenor of 12 years, slightly inside the project’s 12.5-year power purchase agreement with Statkraft, which was signed in September. The pricing on the debt starts at 320bp over Libor and finally peaks at 385bp after a series of step-ups. The banks are also understood to be providing a 5-year credit facility of around £8 million.

The remaining financing costs are being met with a mixture of cash equity and a shareholder loan. Part of the equity will be used to fund the construction costs of the plant, while the rest will be paid to Eco2 as a fee for acquiring the project.

The project is expected to be fully operational within 30 months with the first deliveries of straw to the plant occurring towards the end of 2013. Once operational, the plant will provide electricity for 65,000 homes, as well as heat through a district heating system for several public buildings in surrounding parts of Lincolnshire. The ash from the plant will be recycled as fertiliser. Eco2 will retain responsibility for operations and maintenance at the plant.

Eco2 Lincs Ltd
STATUS: Financial close 9 December 2012
SIZE: £155 million
DESCRIPTION: Project financing for the 38MW Sleaford biomass plant in North Lincolnshire and sale at close to BNP Paribas Clean Energy Partners
SPONSOR/BUYER: BNP Paribas Clean Energy Partners
SPONSOR/SELLER: Eco2
MLAS: NIBC, RBS, Siemens Financial Services, Unicredit
SPONSOR’S FINANCIAL ADVISER: Ernst & Young
SPONSOR’S LEGAL ADVISER: Eversheds
SPONSOR’S TECHNICAL ADVISER: Mott MacDonald
LENDERS’ LEGAL ADVISER: Linklaters
LENDERS’ TECHNICAL ADVISER: Fichtner
MARKET ADVISERS: Agra CEAS, Poyry Consulting
INSURANCE ADVISER: JLT
MODEL AUDITOR: PKF
EPC CONTRACTORS: BWSC, BWE