The biomass deal that refused to burn away

With the 300MW Tees REP struggling to get off the ground, Macquarie Capital stepped in to clinch an innovative financial close. We zoom in on how they did it.

In February 2008, the formation of a new UK-based biomass developer was announced. A few months later, the aforementioned MGT Power unveiled plans for a 300MW project on Teesside, north-east England. The project, MGT hoped, would be operational by 2012 and would require an investment of approximately £400 million ($518.6 million; €464 million).

Fast forward eight years and the Tees Renewable Energy Plant reached a £900 million financial close in August 2016, with commercial operations slated for 2020. Over the course of this period, the world has entered and exited a global financial crisis and the UK is in its fourth government since the conception of the project.

While much has changed since MGT Power first proposed Tees REP, arguably the greatest change to affect the biomass project was the entry of Macquarie Capital, which signed an agreement with MGT last year to help finance the plant after a Korean consortium pulled out of the deal.

“[MGT Power] needed to complete the development funding, spend money on geo-technical surveys and some of the bigger cost items in the final stage of development,” Chris Archer, managing director of Macquarie Capital, explains. “There were a lot of legal and advisory costs associated with getting to a fully documented project financing so we were able to help with that. We were able to advise them on raising all the debt and were willing to underwrite up to 100% of the equity.”

The concluded deal saw Macquarie Capital contribute 50 percent of the equity while it brought in Danish pension fund PKA at close to co-sponsor the project. Archer says that it was a “reasonably short process” to bring in the Danish fund which, although it has invested in five offshore wind farms, is making its debut in biomass through Tees REP.

“We focused on investors that we knew were interested and experienced in renewables, were able to take construction risk and who we felt would be able to work with us to get the project to close in a reasonably short period of time,” he says.


Joining the duo to provide 75 percent of the project’s cost were 11 lenders, including Finnish export credit agency Finnvera, which provided £100 million of the £650 million senior debt, one tranche of which was inflation-linked.

According to Archer, the institutional lenders involved in the project were to a certain extent more comfortable taking ECA Finnish government risk than they were taking project risk. Also backing the project was a £125MW/hour Contract for Difference awarded in 2012, a deal which gave the lenders plenty of assurances to fund the project.

The ECA aspect of the deal increases its liquidity, Archer explains, and “with more liquidity, you’ll have more competitive pricing because you’ll be able to stick to the group of lenders that have the better pricing and not have to go to lenders that need higher margins”.

He adds that the deal for Tees REP is representative of a recurring theme in the renewables space with the introduction of infrastructure debt funds and institutional direct lenders keen on renewables as an asset class. ECA financing, Archer says, is likely to back institutional lending rather than banks in future deals.

“The tenor of the debt makes a lot of sense to [institutional lenders] as they want to lend long-term,” he says. “Today, the yields on direct renewables lending look better than comparable yields in the listed bond market, so there’s a move towards institutional direct lending and I think we'll see more of that.”

Another aspect of the financing that worked to the benefit of Macquarie and Tees REP is the fuel contract for the plant, which is 80 percent denominated in pounds – despite most of the pellets arriving from North America and usually being priced in dollars. Archer says the sterling denomination was “critical” for the project and also made it an attractive proposition to the lenders.

“The structure was quite attractive to lenders generally,” he adds. While there's a smaller group of commercial bank lenders [than you would see in offshore wind] we’ve also introduced some institutional lenders. I think that’s because some lenders have had bad experiences in the past with biomass or waste-to-energy and they were less interested in lending to the project. The lenders that did lend were offering smaller tickets so we did need to bring in institutional lenders.”


The deal, though, was not without its complexities. With Tees REP slated as the world’s largest new-build dedicated biomass plant and much larger than anything preceding it, there was a lack of lenders with the experience of financing such a project. Those that did lend were offering smaller tickets than they would do for offshore wind farms, although an investment-grade structure for the project did help alleviate some concerns.

However, the financing structure was not the only obstacle Tees REP had to overcome on its way to financial close. Almost exactly a year before the financing was confirmed, Spanish infrastructure giant Abengoa and Japanese conglomerate Toshiba were selected as the project’s EPC contractors. Yet in November 2015, three months later, Abengoa began insolvency proceedings amid spiralling debts, while Toshiba was unwilling to take on the project alone. Macquarie and MGT Power’s hopes of a December 2015 close were all but impossible.

“We initially expected [the financing process] to take around 12 months and we were well on track with that, but we had Abengoa as the contractor which ran into financial difficulties,” Archer says, with a hint of a euphemism. “We put the process on hold and sourced a new contractor.”

The situation did not affect the view of the lenders, he adds, who were all “very pleased” the contractors were changed, eventually settling on Samsung C&T and Tecnicas Reunidas in May.

The following month, though, saw the shock Brexit result. Archer explains the biggest effect of the referendum was the change in foreign exchange rates, impacting some of the wood pellet supply and the EPC pricing and increasing parts of the project’s cost. However, he says this was offset somewhat by some hedging towards inflation and interest rates.

Amid such challenges, was there ever a time Macquarie worried about the project?

“With any project financing that lasts 18 months, there’s always opportunities for a deal to fail or for people to lose faith,” Archer says. “There were lots of times when we were worried something might not work out or things looked tough. The reason that the deal was ultimately successful was it was an attractive opportunity for all the various counterparties and there were therefore a lot of people around the deal that wanted to make it work.”

Archer reserved special praise for the Low Carbon Contracts Company, a private firm set up by the UK government to provide support and confidence to CfD-accredited projects.

With Tees REP an ultimately challenging but successful process, Macquarie Capital retains an appetite for biomass projects, although Archer says the projects it has in the pipeline are not of Tees REP’s size. He also says future projects depend on the support provided by the UK government, which has stiffened support for renewable energy subsidies over the past 15 months.

“Biomass does offer a large-scale alternative to coal for stable base load power but further growth will really depend on how governments choose to incentivise the various alternative renewable technologies through support mechanisms,” he concludes.