Restructuring in the renewable energy sector: what does the future hold?
Restructuring in the renewable energy sector
What will this mean for the future restructuring landscape?
What are the risks the sector could face?
It may be possible to exit an administration if a project can be returned to solvency. This could be through shareholders loans, or alternatively, if a lender were to provide a working capital facility. However, a solvent exit is unfortunately rarely feasible. An alternative option to exit from administration may be a Company Voluntary Arrangement (CVA). A CVA is a binding formal agreement with a company’s creditors that provides an opportunity to address any operational issues within the business at the same time. Although a CVA is implemented under the supervision of an insolvency practitioner, it allows the new owners or funder to maintain management, if offers clean balance sheet and enables the project to remain Ofgem accredited and still able to claim subsidy income. Through these procedures, solvency can be restored and new working capital injected; new shareholders can replace or become joint owners, and new management could be appointed, giving control of the company to the new owner(s) or funder of the project. Taking action and seeking early advice at the first signs of trouble will maximise the options available, giving a project’s stakeholders the opportunity to work together to find a sustainable way forward. Where possible, investors may be more inclined to work to identify a solution, rather than risk their stake. Funders will also often continue to invest if they can see a credible and robust recovery plan.
Several risks are contributing to a repeating cycle of growth, collapse and consolidation across many industry sectors. We are likely to continue to see a number of projects become distressed, with a higher risk of collapse in developments that rely on complex technologies with many variable factors. Financiers tend to be informed relatively quickly when there is good news, but more slowly if there are any issues on a project, and in some instances, only after a project is in severe difficulty. This is a result of project developers being wary of disclosing bad news, and fearing that they will affect a funder’s faith in them and the project. Some project developers will play down issues or their significance in order to buy time. When such issues are eventually brought to the attention of funders or come to light unexpectedly, trust between the parties is invariably affected and finding solutions can be harder to achieve. The right path forward for a distressed project will depend on the specific circumstances. In some cases, this could involve identifying opportunities for a management buyout (MBO) or a sale to an aggregator in order to allow a new funder to complete a project or fix a technological problem. In others, it might be necessary to refinance existing loans or right-sizing debt by converting some of it into equity or where required, the restructuring of the project to preserve and extract as much value as possible. Unfortunately, when projects run into intractable financial difficulty, a solvent solution may be difficult to find, leaving financial restructuring or administration the only realistic solutions. This is because projects that fail are often incomplete or performing substantially below forecasts, and usually require further capital investment to reach the point at which regulatory approval is obtainable, and gas or electricity can begin or continue to be generated. However, there is an important gating item – specific to the sector – to contend with. Some renewable benefits, depending on how the original application was made, may not survive an insolvency process. The financial impact of these accreditations is significant for such projects as they underpin a plant’s viability. Accreditations typically account for over 70 per cent of a biogas project’s revenue stream over a 15 to 20 year lifecycle, making losing them a significant roadblock to its ongoing viability.
New technologies are always high risk. Identifying and managing them is critical in any market, whether a renewable, or any other energy project.
Risks consistently seen include:
Errors in financial models arising from a lack of experience or knowledge, or misplaced optimism in financial forecasts; Poor management and failure to alert the funder to early issues and engage collaboratively to find solutions; Oversupply or undersupply;
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Billion pounds to be invested by the government to create ‘green jobs’ 104 TWh of electricity generated by wind,
Competitive pressure favouring larger operators; and
Lack of reactivity to changing markets.
New and emerging risks include:
Future pandemics and crises; Resource security for example the availability of rare earth metals; Climate change and the resulting environmental challenges; Aging infrastructure and lack of long-term investment until critical points of failure; and Availability of insurance.
Esther Kiddle, Partner at Thomlinson Kiddle Law, said:
“The renewable energy market is very much characterised by this pattern of growth and consolidation. Targets are set, often at a governmental level, for the production of a certain type of energy or for the use of a particular technology. This is often followed by a market rush towards the new direction of travel, but this involves risk as these can be complicated technologies, and many participants won’t have extensive experience in the sectors. Some projects will ultimately fail and as the sector matures, it will consolidate. Crucially, there are opportunities at every stage for businesses and lenders to seek support to ensure their projects start, and remain, on a stable footing.”
solar, hydro and biomass in 2020
Per cent of electricity consumed in 2020 was renewable 39
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