Irish wind developer and operator Gaelectric has completed the purchase of the 46MW Cloghboola Wind Farm in County Kerry, Ireland from Germany’s Enercon for €60 million ($66.1 million). The transaction had an innovative hybrid project financing structure more commonly seen in the US market.

Institutional lenders have previously tended to gravitate towards larger-scale renewables projects with higher capital expenditure requirements in Europe than the relatively small Cloghboola. These larger deals, commonly found in the offshore wind market offer the ticket size and long-dated debt institutional investors seek.

The Cloghboola deal demonstrates that institutional investors looking for longer tenors can successfully provide debt to smaller onshore wind projects, in combination with bank debt. The deal may also open the door to buyers of similar onshore wind projects across Europe looking to carry out similar takeover deals.  

Background

Ireland has a target of reaching 40% of its electricity generation from renewables by 2020. Onshore wind is a key part of that goal, and met 24% of Ireland’s electricity demand in 2015, according to the Irish Wind Energy Association. The sector is therefore of interest to both buyers and sellers, with major international players prioritising growth in the Irish market.

RWE said in January 2016, for example, that it is shifting its onshore wind focus from the UK to Ireland because of its “first class” wind conditions and “political consensus” on the technology. Last year, German wind developer EnergieKontor and Dutch bank Triodos said they will co-develop a raft of new onshore wind projects in the UK and Ireland, and are also eyeing the purchase of an existing pipeline of developments. 

The power market in Ireland operates differently to that of the UK. All Irish electricity is traded through a pool system, where licensed generators sell their electricity to a licensed supplier. The supplier then sells the electricity into the nationwide pool, and receives a single market price for the energy.

Every generator is given a daily dispatch schedule of the amount of power to be exported to the grid. Generators are then paid a capacity payment in compensation for their availability to generate above their scheduled dispatch. Thus generators receive a payment from the supplier for the electricity they sell, and a capacity payment for their availability.

Suppliers rather than developers receive the Irish feed-in tariff, the REFIT. In the case of Cloghboola, it will receive €69.72 per MWh for 15 years, plus a 15% bonus on top of this price.

The project

Built by Enercon, the Cloghboola onshore wind farm commenced operations in 2015. The farm comprises 16, 3MW Enercon turbines, which meet electricity demand of almost 30,000 households in the region. IJGlobal understands that Enercon built the project on balance sheet, before seeking to recoup the construction costs through the acquisition.

The project revenues are based on the 'supplier lite' model of power purchase agreement (PPA). Instead of selling to an electricity supplier under a PPA, Gaelectric has formed its own separate supply company SPV to which it will sell power to.

The advantage of this for Gaelectric is that it allows the wind farm owner to act as both generator and supplier to the Irish pool, taking advantage of the market price, capacity payment and the supplier’s feed-in tariff payment.

The acquisition

Gaelectric announced that it was to buy the wind farm from Enercon in April 2015. The deal closed on 17 February 2016.

Germany’s NordLB has been a relationship bank to Gaelectric for the development of previous projects, and acted as structuring bank and mandated lead arranger for this deal. For this deal however, NordLB coordinated with its US-based team when devising the project structure for Cloghboola.

As a medium-sized renewables project, the development is not an obvious investment choice for institutional investors in the European market. But as NordLB European director of energy origination Alan Harling explained, projects of this size "allow these lenders entrance to the market at a lower risk than taking on major renewables deals," a trend which has been seen in the US on energy deals for several years. 

NordLB European head of energy Heiko Ludwig explains that the financing “follows the work and development NordLB started with the team in New York.” The bank then came up with “an adjusted structure, suitable for the European market.”

Gaelectric did not comment on whether any equity investment was required for the transaction. The debt splits into a 19.5 year, fixed rate note, to allow institutional investors to come into the financing, and a shorter 9.5 year term loan more suitable for bank lending.

A Hastings Fund Management-led fund, working in partnership with NordLB, provided €26 million for the 19.5-year fixed rate note. NordLB as sole lender provided a loan of approximately €36 million for the 9.5-year tranche. The total €62 million debt financed both the €60 million acquisition and associated costs.

The future

The Cloghboola purchase brings Gaelectric’s onshore portfolio of operating wind farms in Ireland towards the halfway point of its 2017 goal of 400MW of generating wind assets by 2017.

Gaelectric chief operating officer Barry Gavin said he expects to see the structure replicated. “The nature and stable returns characteristic of wind investments make them an ideal asset class for institutional and pension investment. We expect to see this source of funding develop further in the future.” 

Harling said NordLB is looking at replicating the structure on its upcoming pipeline of Irish and UK onshore wind financings. 

Advisers

McCann Fitzgerald was legal adviser and KPMG tax adviser to Gaelectric for the transaction. DLA Piper advised NordLB.