finance take-up of green financing will grow quickly. However, with
few short-term deals and vendor-finance ventures in place, was this
prediction inaccurate? Peter Hunt investigates in
this exclusive survey
In March 2007, financed by The Carbon Trust and endorsed as
“ground-breaking” by the Finance and Leasing Association (FLA), the
UK Social Investment Forum (UKSIF) published a report entitled
“Green Opportunity: Accelerating the Financing of Low-Carbon
Assets”. It included far-reaching recommendations to stimulate the
growth of low-carbon assets in the UK. In so doing, it recognised
the existence of “minimal financing of low-carbon assets to date”
and “low levels of demand”, but predicted considerable future
growth.The report even highlighted one leasing industry commentator
who claimed: “There will be an explosion of demand.”
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Also, generally, adoption of low-carbon technology has been
materially higher year-on-year across a number of continental
European markets, albeit it has been operating under different
regulatory and incentive regimes.
So, where are we today, one year on? Has the explosion occurred
or is the fuse still waiting to be lit? A new survey by Leasing
Life and consulting firm Invigors offers an up-to-date picture
of dynamics within the clean-energy finance market, and the
barriers funders and regulatory bodies must consider to move
forward.
The survey response rate of 19 European asset finance companies
– most of which came from banks or bank subsidiaries – was
materially lower than other recent surveys. While this weakens the
statistical integrity of the findings, in itself it tells the story
of a market still proving to be a difficult niche for many. Only
two funders considered themselves “very active” in the market and
no company expected to write more than £30m (€37.5m) of new
business this year. In the words of one respondent, the
“clean-energy sector is still considered an experimental investment
model from a financier’s point of view”.
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By GlobalDataThe largest concentration of new business volume appears to be
in the £100k – £1m (€125k–€1.25m category), with wind turbines
reported to be the most attractive asset category. Other attractive
asset categories were low-carbon pumps and boilers, and small-scale
energy – biomass, bioenergy and CHP.
A small, but meaningful, minority provided cross-border funding
of clean-energy assets, again indicating a skew toward larger
applications.
Small green deals
Small ticket financing applications appeared less
well-developed. In part, this may be a result of focus by
respondents on business customers, with very little crossover into
the household sector. In general, this appeared to be a policy
decision based on the commercial scope of the funder, with
clean-energy likely to represent only a small part of its
portfolio. Additionally, concerns over the Consumer Credit Act post
April 2008 were raised.
Low focus on the household sector may, in part, explain the
relatively low attractiveness among finance providers of solar
energy equipment (photovoltaic and thermal hot water), which enjoys
relatively high levels of consumer use.
Assuming continued demand growth for clean-energy assets in the
household sector, an inability or unwillingness to provide consumer
finance will be a structural barrier that prevents business finance
providers fully maximising some vendor-driven business
volumes.
Building on other research undertaken by Invigors, it becomes
clear the asset market and related financing in this sector both
remain small, too small for the serious interest of many major
direct or vendor finance providers.
Moreover, more than half of the survey respondents did not
distinguish between different types of clean-energy assets, despite
material differences in terms of technology, likely customers and
commercial application. Not only does this highlight a level of
market immaturity, but also the requirement for greater expertise
within finance companies seeking to attack this market in an
effective and profitable manner.
Most respondents provided finance direct to the end user and/or
through brokers. Less than half operated through vendors.
Respondents
Not surprisingly, nearly all respondents provided finance lease and
HP (see chart one). Other product structures were less common.
Despite energy production having distinct seasonal variations, only
a minority of funders offered any form of seasonal payment
structures – removing the opportunity to match repayment profiles
with historic spikes in energy costs for customers.
On a related note, a small number of funders are able to
provide managed service or per-energy-unit financing.
Finance companies appear to prefer to
focus on a single facility solution, though one provider reported
the combination of asset finance and core banking facilities.
Another indicated that, while traditional asset-finance products
were used, they tended to be packaged in a non-conventional format.
A small number had the facility to provide project finance or
mortgages, although the extent of their application in this sector
is not clear from the survey responses.
Almost half of respondents indicated a
financing period of up to five years. For customers seeking to
match current energy costs or spread repayments over an extended
payback period, this term may not be sufficient. Of those finance
providers offering funding over a longer period, the term ranged
from seven to 15 years.
Residual values currently play a secondary role in clean-energy
financing, with all potential providers (finance companies,
manufacturers and third-party RV providers) providing RVs only
“sometimes” or “rarely”. While overall demand for Government
guaranteed RVs appears low (see below), there may still be a case
for this type of facility for specific asset categories or
commercial situations, in particular where the importance of
matching lessee cashflow at pre-purchase levels is high.
Conservative RVs
When taken, residual-value levels were reported to be
“conservative”.According to one respondent, an asset manager with
interest in this field, this is to “counter the effects of new
technology”. No doubt opportunities will exist for funders to be
more aggressive as knowledge grows of both the asset and commercial
behaviour.There is also an increased likelihood of secondary rental
periods, which appears high with a number of the asset
types.
Interestingly, most finance providers considered funding
margins in the clean-energy sector to be “about the same” as other
markets in which they operated, with only a few highlighting higher
margin availability. From the research, it is not clear whether the
market’s immaturity, and the apparent need for frequent transaction
structuring, will allow higher margins or whether such efforts
could be justified in terms of scale of opportunity.
When asked which finance provider they most admired in the
sector, no respondent gave a positive identification, though one
recognised some high-quality broker relationships.At this stage, it
is only possible to speculate whether this indicates a lack of
quality of finance providers within the sector, a desire to retain
competitive parity, self-opinion or a lack of knowledge on other
businesses operating in this market.
On balance, finance providers highlighted difficulty in finding
both end-customers and vendor partners for financing of
clean-energy assets. In particular, development of suitable vendor
relationships was highlighted as challenging.
Barriers remain substantial and self-perpetuating. Main barriers
highlighted by finance providers were creditworthiness of customers
and suppliers, uncertainty over asset values and performance risks,
all indicative of an immature, fragmented sector with uncertain
demand dynamics.
To some extent, it will only be through greater knowledge of the
market and greater understanding of the different assets and their
applications, combined with a more segmented approach, that these
main barriers will be removed. Current market -and supplier-scale
restrictions, complexity and higher priorities elsewhere all limit
the likelihood of this occurring.The sheer range of “significant”
barriers suggests this is not an easy market to enter (see chart
two).
The most significant drivers for finance companies in the
clean-energy sector appear to be first-mover advantage and the
opportunity of untapped market potential. The potential for higher
margins was also a significant factor (see chart three).
In line with findings from the UKSIF Report, nearly 90 per cent
of respondents agreed there was a lack of dedicated financing for
clean-energy assets, while all respondents agreed “asset finance
could be structured to help companies to more effectively acquire
clean-energy assets”.
Technology
Once it can be proven sufficient realisable potential does, or
will, exist, the potential for first-mover advantage and untapped
market potential seems significant. That said, structural issues in
terms of technological and regulatory change, combined with the
potential for shake-out of the sector’s fragmented supply base,
suggest it is not yet the place for a cautious funder.
The demand outlook appears generally positive, but the
“explosion in demand” quoted in the UKSIF report looks unlikely to
materialise in the next three years without structural development
of the market. It appears more likely that niche funders will
expand slowly and increase expertise, with the potential to become
recognised leaders in a defined market.
The bulk of future demand (see chart four) looks set to come
from larger companies and the public sector, in which case concerns
expressed by many respondents regarding sector credit risks should
be reduced. More than 50 per cent of respondents also believed
there would be significant future demand from SMEs. Lower demand
was expected from energy companies and intermediaries such as
consulting engineers.
Not surprisingly, respondents tended to see a fairly good fit
with their customer base, suggesting continuation of their
involvement in the sector. A number of firms indicated they had an
action plan for the clean-energy market, in some cases including
recycling and other waste-management areas.
Views in terms of the helpfulness, or otherwise, of current
Government interventions (including 100 per cent first-year
allowances (FYA) for SMEs, specific micro-generation grants and
interest-free loans for SMEs) were largely neutral, suggesting
either a lack of knowledge, or impact, on finance
providers.
Results were inconclusive in terms of the need for “Government
to change its policies before financing of clean-energy assets will
take off ”.While current Government actions may or may not
encourage asset acquisitions for specific assets or customer types,
in its attempts to stimulate demand it may need to do more to
increase attractiveness for those providing the finance to support
those asset acquisitions.
In terms of potential Government interventions (see chart six),
not surprisingly, 100 per cent FYA for leasing companies on
qualifying assets received universal support.
A range of other potential interventions were viewed as
attractive, most notably the implementation of rules requiring
public sector bodies to use clean-energy assets. There was also
support to move away from current grants structures that tend to
favour single-asset solutions, at odds with the common practice of
combining multiple renewable energy sources.
Almost all respondents considered a “source of clear information
on performance, useful life and payback of different asset types”
would be attractive, closely followed by “higher feed-in tariffs
(to feed electricity back into the grid), backed by legislation”.
There are already recent market developments to provide
accreditation for equipment and suppliers, backed by the
Government.
Wrap scheme
Support for a Government-backed residual value scheme (similar
to the “Wrap” waste management scheme) was surprisingly muted,
though potentially still of value in the context of appropriate
assets and commercial situations.
Clearly, sponsorship of such ideas and quantification of the
true business opportunity through lobbying trade associations like
the FLA will be necessary to stimulate Governmental
change.
While the research shows a small number of finance providers are
active in the clean-energy market, policymakers will note little
appears to have changed since the UKSIF report last year. Based on
the feedback of finance providers, it is, and will remain, a niche
activity requiring considerable market knowledge, insight and
determination until such time as there is a material shift in terms
of market structure and dynamics. Not on its own, however. A number
of actions by Government can help to stimulate that change. In the
meantime, finance providers must seek greater awareness of the
sector and its asset variations, some of which will offer
attractive business potential.
The author is a partner at the consulting and services firm
Invigors LLP peter.hunt@invigors.com
