Wilton Power station has an interesting history, rising as it did from the ashes of Enron’s collapse, then operating partly on a fuel source of cattle destroyed during the UK’s darkest agricultural hour, mad cow disease - writes Aaron Woolner.

With this curious pedigree, the north east England power station in Teesside found itself at the vanguard of facilities generating power from renewable sources.

Then in 2003 it was acquired by Singapore-based utility SembCorp and clever management allowed the company to renegotiate the deal that originally financed the purchase.

Management took this opportunity to grab the bull by the horns and drive their burning ambition to lead the field. In other words (excusing previous puns) an expansion programme was on the cards - and that was the origins of the Wilton 10 wood-fired biomass power station.

While at first glance, wood appears to many observers to be an odd choice of fuel for a 'green' project like Wilton 10, sustainable forestry kept it in the green good books.

The drive to increase the amount of energy produced from renewable sources has led the UK government to champion two methods of trading the ‘greenness’ of energy - Renewable Obligation Certificates (ROCs) and Levy Exemption Certificates (LECs).

ROCs and LECs are key to the development of the Wilton 10 facility and also to the wider renewable industry in the UK. The addition of the phrase 'green and brown energy swap' to the nomenclature of the renewable sector may be confusing, but it is less surprising than the other player in this story... the National Lottery.

It is far from surprising to discover the likes of Calyon and Freshfields in the thick of financing and advising on the Wilton 10 facility, but the Big Lottery Fund came as a shock to most observers from the project finance world. However, the proceeds of millions of Briton’s desire to get rich quick played a significant role in what its backers believe is the largest biomass project in the UK to date.

ROCs and LECs

With the Kyoto agreement and growing public concern over pollution levels and climate change, the UK government came up with a system to encourage renewable energy and make the price of energy reflect the true cost – ie one that includes the negative cost of pollution – rather than the nominal cost of putting fuel in one end and generating electricity at the other.

The government set a series targets for producing energy from renewable sources. At the moment it requires 5 per cent of the country’s energy to come from alternative sources. This figure will increase year on year, with the eventual aim of producing 15 per cent of the country’s energy from renewable sources by 2015.

ROCs and LECs are a carrot-and-stick approach that means suppliers who do not produce green energy will have to pay a buy-out charge of £30 a MW/h for relying on ‘brown electricity’. But these charges are only payable on the percentage of energy that comes from renewable sources, so at the moment electricity producers are only liable for five per cent of their output.

According to Andrew Bonser, partner at Freshfields which acted for SembCorp in the refinancing, and when the Asian company originally acquired the site two years ago said that without these the biomass facility was not viable.

‘Running on a biomass fuel is not economically viable without putting all the bells and whistles on the side of it – the bells and whistles in this instance being the ROCs and LECs,' says Bonser.

This view was echoed by John Bone, SembCorp’s assistant vice president of utilities/commercial division, who adds: ‘Anyone will tell you are not going to burn biomass just to generate electricity – you need ROCs and LECs – you need the incentive to make it work in the UK market.’

Bonser continues the point, ‘to make it economic for power developments – if you compare the costs of running a biomass plant with, say, running on oil and gas it would not be viable on a stand-alone basis.

'The elements of this deal that make it work are two-fold – firstly you get the right deal on the off-take side and followed by a £10m grant from the New Opportunity Fund [now the Big Lottery Fund].'

The National Lottery - it could be you

As one source close to the deal remarked: ‘this is the first time I've heard of the National Lottery involved in a project finance deal’, – and it looks like it could well be the last, or if not the last, at least the member of a very exclusive club.

The £10m grant to the Wilton facility forms part of £66m Bioenergy capital grant scheme that the lottery is running in conjunction with the UK’s Department of Trade and Industry (DTI). The scheme is set to run until 2010 and although the DTI provides just over half the funding (£36m) there is still a hefty injection of money from the lottery.

But for all budding biomass pioneers, it seems this curiosity has a limited shelf life. ‘This is a one-off programme,’ says Tony Taylor, programme director for the Big Lottery Fund. ‘It is doubtful that we would enter into a scheme like this again, as the indication from our research is that our priorities lie elsewhere,’ he adds.

‘The capex required for a biomass plant is higher than for a traditional oil and gas fired plants and – you can install the cap cheaper if you want to run on a regular fuel – the Lottery Fund covers  this differential,’ says Bonser.

The other interesting facet of the Lottery’s foray into world of green energy is the need to mitigate against the fund’s reputational risk - an element that required some clever legal footwork.

‘The grant is subject to clawback – this is not performance-related. The performance of the plant is seen as the concern of the commercial banks,’ says Bonser. ‘Instead it relates to the reputational risk of the government.’

What this boils down – and this example is lifted directly from lottery guidelines – if SembCorp were subsequently to sell on the facility to an undesirable, drawing the focus of the ever-vigilant British tabloid press on to the Lottery-funded project, the money will need to be paid back.

The lottery, therefore, has to have security on the asset in order to mitigate against any future financial clawback – the upshot of which was what Freshfields described as an ‘innovative inter-crediting agreement’.

The financing

SembCorp acquired the business in 2003 with a mixture of its own equity, and an acquisition financing from the institutions that were providing the existing senior debt holders.

This confidence has proved to be well-placed as a continuing strong-demand from industrial units on the industrial estate and the successful construction of a 42MW combined cycle gas turbine left the books in good shape, and in a position to refinance and take advantage of improved financial terms.

Jamie Mabilat, director project finance for Calyon, which acted as the mandated lead arranger and bookrunner for the deal, said that a combination of factors made this deal stand out.

‘This project represents a landmark transaction in the UK power sector as it combines for the first time an element of merchant power with ROC revenues and biomass technology,’ says Mabilat.

Despite the unusual elements involved, Mabilat says that a combination of solid performance of the Wilton facility since SembCorp started operations and the success of the company’s overseas renewables project meant there was a strong appetite for the issue.

‘The financing was very well received by the market with the facility being oversubcribed, an achievement in itself given that the transaction was the first successfully syndicated power deal in the UK market since the power crisis of 2001-2002,’ says Mabilat

The £116m deal was structured by Calyon into three separate tranches that will be repaid concurrently over a seven-year tenor:

the first tranche is for £70m and is to refinance the debt that that was used to originally buy the site off Enron the second is £36m slice of debt to be used to pay for the new wood-burning facility the final £10m is to cover SembCorp’s obligations for fuel purchasing and offtaker agreements for the Wilton 10 facility

Conclusion

With renewable targets rising again in 2010 and mutterings among the industry that they are unlikely to hit these targets, the team behind Wilton 10 should be well-placed to expand the facility, but they are keeping their cards close to their chest.

‘The legislation has already outlined the path of the renewable energy and we are confident the market will expand – but we are taking it one step at a time for the development of the Wilton facility in terms of any plans for future expansion,’ says Bone.

With the advent of trading the ‘greenness’ of energy produced there is obviously a definite future for Biomass in the UK – the question is in what form.

‘I think there is some potential,' says Bonser. But he cautions, ‘it will not be a large scale solution for the power industry – there simply is not the fuel supply for this to happen. But what is possible is for smaller plants in the right circumstance - especially captive units in niche markets. This could prove to be a viable sub-section of the market.’

The project at a glance

Project name	Wilton 10 Biomass and Wilton Power Station
Location	UK – Teesside
Description	The financing comprises a refinancing of the debt incurred acquiring the Wilton Power, and to fund construction of the Wilton 10 Biomass plant
Sponsors	SembCorp (UK)
Operator	SembCorp (UK)
EPC Contractor	SembCorp acted as project manager for the variety of companies involved in constructing Wilton 10
Total project value	£116m
Project cost for biomass plant	Wilton 10 £60m – including £10m grant from National Lottery Fund
Debt debt breakdown	Three tranches, to be repaid concurrently Tranche A: £70m, to refinance original acquisition of Wilton Power Station Tranche B: £36m, for construction of Wilton 10 Biomass facility Tranche C: £10m, for use in offtake agreement and hedging costs of Wilton 10
Senior debt pricing	Not given
Total mezzanine	None
Mandated lead arranger	Calyon
Participant banks	Senior lead arrangers: Barclays DBS Bank Overseas Chinese Banking Corporation United Overseas Bank Lead Arrangers: Bayerische Landesbank Credit Industrial et Commercial Arranger: Arab Bank
Legal advisor to sponsor	Freshfields Bruckhaus Deringer
Financial advisor to sponsor
Legal advisor to banks	Allen & Overy
Date of Financial Close	February 2005