With energy-generating wind projects closing in rapidly on landfill gas as the UK’s premier green energy source, wind farm private equity investor HgCapital will feel rightly justified that it is doing its best to close the gap between the government target and the 2010 reality, writes Max Thompson.

HgCapital – a sector-focused European – acquired the Tir Mostyn wind farm in north Wales from local wind farm generator Windjen Power in a £21.6m (US$41m) deal which included the acquisition and construction costs of the 21.25MW facility.

It is the first of a series of investments planned by HgCapital – led by London-based director Tom Murley – in Western European renewable energy projects.

The project

Located 8km south of the north Welsh town of Denbigh, the facility’s 25 wind turbines – manufactured by Spanish firm Gamesa Eólica – will produce enough power to light up 15,500 homes for a year and, when compared with the equivalent fossil fuel generation, will save around 47,000 tonnes a year in greenhouse gas emissions.

Murley said: ‘Power generation is a capital-intensive business with attractive investment characteristics. Investors are looking to broaden their alternative investment strategies to include new assets classes that can provide current income and appealing risk-adjusted returns over the long-term. ‘

The facility is on target to become operational in September this year.

Financing

The £14.75 (US$28m) debt facility – which has a 14 year tenor – was arranged and fully underwritten solely by Bank of Scotland.

Vivek Mittal – director of project finance at Bank of Scotland – told IJ  that while the debt facility was not large, its arrangement was significant. He said:

‘It really is hats off to HgCapital for bringing in the kind of equity they did. Tir Mostyn was the first time that such an institution has invested in the UK wind power market.’

Mittal also added that the project had started life under the Non Fossil Fuel Obligation (NFFO) directive which was terminated and superceded by the Renewable Obligation. Mittal said: ‘The project was sanctioned under the old arranged but the government continued to stand by its commitment to the project even when NFFO was terminated.

Advisors

Bank of Scotland received legal advice from Norton Rose and Garrad Hassan & Partners acted as technical advisor to the bank.

US-based legal firm Vinson & Elkins was legal advisor to HgCapital and Deloitte & Touche provided financial advice. Wind Prospect provided engineering advice for HgCapital.

In addition to the ‘firsts’ identified by Mittal, Vinson & Elkins partner Jeff Eldredge told IJ that the project took on a particular significance because it marked the inauguration of EPC contractor Gamesa into the UK wind power sector.

He said: ‘Tir Mostyn was Gamesa’s entery into the UK market and we had to be consistent with what Gamesa wanted and with what is required in the UK market. The difference between continental statute law and the UK’s case law was another factor that had to be addressed.’

Conclusion

Because of stricter planning processes and growing NIMBYism, the UK renewable sector has not experienced the boom in wind generation projects that has occurred in certain European countries – particularly Germany and Spain.

The financial close of the Tir Mostyn deal – which occurred on 1 December 2004 – overcame changes in national legislation, protracted planning procedures and the participation of an investor without a UK wind power portfolio.

The experience and confidence gained by HgCapital has acted as a catalyst to the London-based investment division and Murley told IJ that it is near to completing another, as yet undisclosed, project. He said: ‘We hope to close the deal early Q2 and lets say that it will be substantially larger than the Tir Mostyn project.'

Tir Mostyn at a glance: