Viking Energy project viewed with excitement by potential investor

The Viking Energy windfarm is seen by Lloyds Bank as an “exciting” project with the potential to be one of the most attractive onshore wind deals in Europe.

The enthusiasm emanates from the bank’s renewable energy project finance team which has been involved in talks about the proposed £685 million development for nearly two years.

The involvement in Viking of a huge and experienced energy company like Scottish and Southern Energy obviously provides comfort and confidence to prospective lenders but Lloyds also sees Shetland Charitable Trust and its trustees as “a big strength” because they are “part of the fabric of the community”.

Today the bankers gave a presentation to trustees in the Town Hall, who own 45 per cent of the project partnership and will have to decide whether to commit community funds.

Lloyds’ conclusion about Viking was that “prima facie, the economics of the deal are robust either on a single asset or phased basis”.

Afterwards the team’s director Richard Simon-Lewis told The Shetland Times: “When we see a project like this with the sort of sponsors involved then you’ve got to be excited by it because it’s a world-scale project.

“It has the potential to be one of the biggest onshore wind deals in Europe and certainly one of the more attractive onshore wind deals in Europe.”

The application to build the 127-turbine windfarm is awaiting its fate with the Scottish government’s energy consents unit in Glasgow and the Scottish energy minister. As expected, there will be no decision until after a new government is elected on 5th May.

If the development gets the green light, the trust does not expect to have to make its big investment decision until next year, about a year after gaining consent.

One of the concerns raised in Shetland is the potential risk to the trust’s £200 million value if the venture goes wrong and fails to earn profits, projected to be £23 million a year to the trust alone from what it believes will be one of the world’s most productive windfarms.

Around £548 million (80 per cent of the £685 million) would be raised by the Viking partnership from banks which would have no security or guarantee against the charitable trust’s funds.

According to trust financial controller Jeff Goddard, it expects to have to raise £62 million itself over the course of five years, half from loans and only up to £22 million of its own money from cashing in some of its investments in the stock market, local businesses and property. The remaining gap would be bridged by income from the turbines, which should start flowing in after three years and would eventually yield more every year than the £22 million it had to invest.

The rest of the trust’s community funds would be untouchable by the bank if the windfarm went wrong because its security would be only the windfarm itself. Mr Simon-Lewis said problems would be the banks’ responsibility. “We can’t go after the sponsors for more money.”

Today’s presentation to trustees by Lloyds was the second from the same bank in just over a year. Although that might suggest Lloyds is favoured as the prospective lender if the windfarm goes ahead, trust chairman Bill Manson said the bank did not have any “inside track” but had shown an interest in the project.

Last year when Lloyds visited the banks were still reeling from financial meltdown and were not lending to renewable projects. That has changed dramatically and Lloyds claims it has led the way in backing onshore wind, which it sees as a mainstream activity now due to the proven technology.

The trust has been talking to other banks and SSE is dealing with the EU’s European Investment Bank, which provides funds in partnership with Lloyds to lend for onshore windfarms.

The EIB also funds in partnership with the Royal Bank of Scotland and BNP Paribas Fortis, which, along with Barclays, has had talks with the trust too.

One of the particular risks to potential Viking investors like Lloyds appears to be the costs and vulnerability of the windfarm’s link to its customers, which is a single interconnector cable running along the seabed from Weisdale to north-east Scotland. If that was to be breached or develop a fault the power would have no outlet. In the past Viking has spoken about covering that eventuality by insurance.

Mr Simon-Lewis and his colleague David Craig said Lloyds was used to funding offshore windfarms, which also rely on seabed cables, and indeed there are interconnectors all over the world.

As to how productive the turbines would be, the Lloyds team had no doubts. Mr Simon-Lewis said the 50 per cent efficiency demonstrated by the Burradale windfarm was “superb” for onshore windpower generation and was “almost like having an offshore windfarm onshore”.

He admitted it had been a poor year for wind strength in the UK, which had affected windfarm profits. However, with Shetland’s “phenomenal” wind, Mr Simon-Lewis said the energy yield for a windfarm would be so high that the economics should be very good even with the higher connection costs from the islands.

Lloyds claims it has been involved in deals worth £3 billion to assist renewable generation, consisting of 45 projects which will generate about seven gigaWatts of power. Onshore wind is its “bread and butter”, Mr Simon-Lewis said, and it financed all the major UK onshore wind projects last year. It is one of three banks selected by the EU-owned European Investment Bank to provide up to £1 billion of EIB financing to the UK onshore wind sector over the next three years.

The visiting Lloyds team included Hunter Inkster from Scalloway who works for Lloyds Bank Corporate Markets in Aberdeen.

At the start of the meeting, independent trustee John Scott hit out at Mr Goddard and Mr Manson for putting out a press release last week which contained the assumption that the trust “will raise” funds to build the windfarm. That had not been decided yet, Mr Scott reminded the meeting, and it amounted to “a deception” on the public. He said he was strongly against staff members putting out press releases and demanded a correction be issued immediately.