Confidence has returned to the UK power market with fierce competition among lenders leading to tight pricing on the first project financed IPP since the American energy giants pulled out of the country at the beginning of the decade

The €563 million (US$730m) 840MW Marchwood CCGT plant will be built on the site of a former power station in the Marchwood Industrial Park in Southampton giving it access to the existing onsite electricity infrastructure.

A subsidiary of Irish Electricity Supply Board (ESB) - ESB International - has been developing the project since 2004 but in August of last year formed a 50:50 joint venture with Scottish & Southern Energy (SSE) for the project.

SSE has a tolling agreement and will supply the natural gas that will be used to fuel the plant and will purchase the entire generation of the power station for 15 years with an option of extending the contract by another five years.

One of the reasons that pricing on this deal was so low is because of the reputation of both SSE and ESB International. Both are credit-worthy counterparties and the banks see little risk of the project going south.

An agreement with EPC contractor Siemens specified that the deal needed to be concluded year-end so all the banks, lawyers and sponsors worked around the clock to reach financial close on 21 December 2006.

Construction will start this month and will the project will take 30 months to complete with commercial operations slated to start summer 2009.

Just a few years ago, though, things were not looking quite as comfortable for the future of UK power projects.

In November 2002, the domestic power sector was looking bleak. TXU Europe was put into temporary administration by the British bankruptcy court which ended up forcing AES into writing off £1.8 billion (US$2.3bn) of debt on its Drax power plant.

However, it now looks as if this will be the first of several greenfield power plants in the UK with the only question being whether they will be project financed IPPs.
 

Project Finance 101

Five banks were selected as MLAs for the €563 million (US$730m) deal:

• Allied Irish
• Barclays 
• Bank of Tokyo-Mitsubishi
• Fortis 
• WestLB

During construction pricing is set at Libor plus 60bp which will then drop to 55bp for the first five years of the power station's operations. The financiers set the debt:equity ratio at 80:20.

Pricing will then increase to 65bp over prime for the next five years and will increase to 75bp for the final five years of the 15-year loan.

This deal was orchestrated without the help of financial advisers as the simplicity of the financing structure could have come straight from a Project Finance 101 textbook.

Future of newbuild in the UK

The Marchwood deal indicates that future new-build power projects in the UK are going to be very tightly priced as it seems that banks have a strong appetite for the low-risk, low-yield deals. 

Investment in the country carries very little risk - at least in the present climate - and competition in the banking sector means that profits on these loans are going to continue to be squeezed.

The UK power sector is going to need heavy investment over the next 10-15 years as demand for power continues to increase and the country's ageing infrastructure needs replacing and updating. 

CCGT technology will play an important role in future newbuild power projects in the UK as it is one of the most efficient uses of energy. However, the focus is on security of supply and substantial reserves of coal as well as natural gas mean that coal-fired generation will play an equally important part in the future of the UK power sector.

It will be interesting to see if banks continue to aggressively bid for UK power deals or if they begin to see if they can find better returns for their investment in higher risk markets overseas.
 

The project at a glance