Followers of this website will have seen a previous analysis of finance related to the proposed Helensburgh wind farm. Since then, the developers have amended aspects of their proposal and Professor Bain has adapted his paper. On this page is his revised summary and at the end there is a link to his main paper dated 28th August 2014.
HCWF Revised Financial Projection
I have revised the central scenario financial projection to take account of the reduction from £7.8 million to £6.7 million in the projected level of capital expenditure. As a result the interest charges for the bank and other loan are lower, and the capital repayments are also reduced. The reduced CAPEX is also reflected in a lower annual depreciation charge.
I have made two other changes. It is now intended to seek the 16% subordinated 12-year loan from an insurance company or pension fund, rather than from GCR. Since the loan will be forthcoming only if the lender is confident that it can be serviced properly I have reduced the assumed rate of interest to 8.5% (a 2% premium over the bank loan, reflecting both the subordinated nature of any security and the illiquidity of the loan.)
It is also clear that the contributions to HCDT as stated in the ES do not reflect the developers’ intentions. I have assumed that what they intend is a (not quite fully guaranteed) minimum £40,000 annual payment to HCDT, which would be supplemented to bring the payments to HCDT up to 1/3 of net profits if/when the profits were high enough. So if they made a payment of £40,000 in a year when that was more than 1/3 of profits they would expect to recover the excess from future profits before giving HCDT more than £40,000 in any subsequent year. [That would be consistent with splitting the total profits equally between the three joint venture parties, but ensuring that HCDT got a minimum of £40,000 each year.] The contributions to HCDT have been calculated on that basis.
I have not changed the technical or revenue assumptions used in the central scenario. I regard the 30% initial CF, and very slow (but perceptible) degradation, as cautious.
I have continued to assume that the price achieved for the energy will reflect the price regime now set for large wind farms (£95/MWh ) and that this price will be guaranteed for 15 years. Beyond 15 years the price assumption can only be speculative – the current wholesale market price is only around half the subsidised price. [At £95/MWh the price is actually a little higher than the average price that the renewable energy company Infinis reported they had achieved from their wind farms in the second quarter of 2014.] If HCWF was subject to the current regime for small wind farms, the guarantee regime would last for 20 years, but the current level of the “guarantee” is only around £87/MWh and that includes over £5/MWh for climate change levy which may very well be discontinued long before the end of the 20 years. I also recognise that wind farms can enter into power purchase agreements for 3 years at somewhat higher prices at present, but I think that the guarantee regimes provide a better basis for projections looking 15-20 years ahead.
On this scenario the contribution to HCDT would be stuck at £40,000 for about the first 10 years but would total around £1.1 million over the 15 years for which renewable energy prices are reasonably predictable. Up to this point there would be only about £0.8 million of cash available for LE and GCR together. If the developers’ intention is to split available cash (rather than accounting profit) equally between the three parties, it would be almost 15 years before HCDT received anything more than £40,000. What happens after 15 years will be heavily dependent on how far wear and tear reduces the efficiency of the turbines and, above all, on the level of wholesale energy prices.
On this scenario the project would probably be financeable, though lenders would be likely to insist on debt servicing having priority over any payments to LE as land rental and any contributions to HCDT. Whether it would be sufficiently attractive for the developers to proceed with the project is doubtful. For a commercial project to be viable I think that the developers will be looking for a predicted CF significantly greater than 30% and energy prices not far below £95/MWh.
In conclusion, if planning permission is granted and the project proceeds I think that HCC can be reasonably confident that £40,000 a year would be paid to HCDT for a 15 year period. What happens after that is speculative, and anything more than £40,000 a year in the first 15 years should be regarded as a bonus.
Andrew Bain 21/08/2014
(click on the table above to see an expanded view)
Click on the following link to see a fuller analysis by Professor Bain: