TEG Biogas reached financial close on Friday 31 August on the first project financed under the government-backed UK Green Investments (UKGI). The preliminary project documents signed in July.

The £21 million (US$34.5m) project is an anaerobic digestion (AD) plant to be constructed in Dagenham near London in the UK. Despite the project’s relatively small price-tag, the project is a landmark for the government’s UKGI programme, a precursor to its Green Investment Bank.  

UKGI is managed through four investment funds, to which it has committed £80 million to two fund managers for smaller waste and energy-from-waste projects and £100 million to two fund managers for smaller non-domestic energy efficiency projects. The fund managers must match fund all government investments on the projects.

The sponsor is a special purpose vehicle backed by Foresight Funds, a private equity firm owned by the Foresight Group, which is one of UKGI’s fund managers, and 24 per cent owned by the TEG Group.

The financing

The Foresight equity investments from its funds and investors came to £11 million, supplemented by a £2 million investment Luxembourg-based institutional fund Quercus Assets Selection, bringing the equity to £13 million.

Investec Bank and the London Waste and Recycling Board provided £7.9 million in senior debt for the project. Investec arranged £3.5 million and L-WARB arranged a £4.4 million loan.

According to James Donaldson, who led the deal for Investec, the project finance team does not usually consider loans of such a small size, but the deal is important to the bank as UKGI’s first investment and its relationship with the Foresight Group and the other parties involved in the dea.

Investec has a £350 million project finance budget this year and focuses on power generation, waste, telecoms, transportation and PFI.

The Dagenham debt is believed to have a maturity of around eight to 10 years and is priced commercially, and to reflect the project’s risk.

One risk, reflected in the pricing and the gearing, is that the project is not yet fully contracted. The developer expects a power purchase agreement and feedstock supplier agreement to be signed “in due course” and is said to be considering a number of options to both of these ends.

One of the supply issues with the project is on account of its ability to use a diverse range of feedstock. As the plant requires fuel from a wide variety of waste sources, a potential challenge of the project will be managing the supply to the facility.

Both lenders were said to have been “flexible in order to reach financial close,” according to a source close to the equity. Despite the UKGI being a governmental organisation, there is no sovereign backing to the project.

The project

The project includes construction and operation of a new 49,000 tonnes per annum food and green waste processing plant.  The project is the first joint anaerobic digestion (AD) plant in the London area, and will operate alongside an in-vessel composting (IVC) plant, due to be fully operational by the second half of 2013.

The TEG Group will build and operate the facility which will have the capacity to process 30,000 tonnes of source segregated food waste and 19,000 tonnes of mixed food and green waste per year. Its power output will be 1.4MW of electricity, 36,000 tonnes per annum in AD digestate and 14,000 tonne per annum of compost for agricultural use.  According to a statement, “The EPC Contract will generate approximately £16 million in revenues for TEG over the period of construction, which will commence in September 2012 and is scheduled to be completed in Q1 of 2014.”

TEG will also provide the O&M services. “The O&M contract is for a 15-year term with annual revenue of approximately £1.3 million per annum, escalated annually,” according to the release.

UKGI and its pipeline

The Dagenham deal has been signed before the government has approved for the UK Green Investment Bank (GIB), but it is investing the cash under UK Green Investments (UKGI) in small-scale waste infrastructure projects.

Greensphere Capital, Foresight Group, Equitix and Sustainable Development Capital are UKGI’s fund managers.

The London Green Fund (LGF), launched in March 2011 by the Mayor of London to encourage investment into waste and energy-efficient infrastructure, also backed the project as part of the Foresight Funds.

The project is one of a number in the UKGI pipeline. In an email to IJ News, UKGI’s Ian Nolan said, “We are also working on a number of other deals, but will seek publicity for them only as and when they get to signing.”

The tight-lipped policy also applied to the Dagenham project which, despite some risk assessment over the supply and capacity contracts, has generally been heralded a success. According to a source close to Foresight, “There are several more projects in the Foresight pipeline,” too.