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European Investment Bank's retreat pulls key source of finance from UK energy

Brexit has triggered a retreat from the U.K. by the European Investment Bank, withdrawing a key source of financing for energy infrastructure that played a vital part in getting the country's offshore wind sector off the ground.

The bank, or EIB, has poured more than €30 billion into U.K. energy projects since it started lending in the country in 1973, with investments increasingly shifting from fossil fuel extraction and thermal generation to renewables and related grid investments in recent years.

At just over €10 billion, energy lending has made up a third of the bank's newly signed loans in the U.K. since 2013, with almost €6.5 billion going to power and gas networks and around €2.5 billion for offshore wind parks and related grid links.

But the bank quickly vanished from the country after the 2016 Brexit referendum started Britain's still unresolved exit. Lending for energy projects dropped sharply from €2.04 billion that year to only €0.9 billion in 2017. Last year, the bank signed only a single energy loan in the U.K. — its last to date — distributing €392 million to National Grid PLC for replacing and expanding old gas mains.

"The EIB is clearly nowhere to be seen," said Antony Skinner, a partner at law firm Ashurst who has worked on offshore transmission projects in the U.K. with EIB involvement and has also advised the bank on offshore wind projects, for example in Germany.

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For its part, the bank says the retreat was not one-sided, arguing that developers now have little incentive to seek them out for financing.

"Promoters know well that the EIB may not be around for much longer," Andrew McDowell, the bank's vice president in charge of energy financing, said in an interview. "It's not that the bank is withdrawing from the U.K., it's more that promoters are looking for financing elsewhere because they want investors where they can have a longer-term relationship."

While industry players say there is generally enough liquidity from commercial banks to pick up the slack, the withdrawal could slow the uptake of emerging technologies like energy storage. The bank could have also played a crucial part in facilitating a post-subsidy market for mature renewables like onshore wind and solar.

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Future role

The EIB could still be involved in U.K. transactions in the future and is already active in some countries outside of the EU, funding geothermal projects in Iceland and a transmission link between Germany and Norway, for example. But to do so, it would need a special mandate from its board of governors, made up of member states' finance ministers, and any lending would be at a fraction of historic levels.

Prime Minister Boris Johnson is still trying to negotiate a withdrawal agreement before the scheduled departure date of Oct. 31. If successful, that would lead to negotiations over the future relationship between the U.K. and the EU, including the EIB. But a no-deal Brexit would throw a spanner in the works.

"The U.K. has indicated that it would like the EIB ... to be involved in the future. That's something we as a bank have been promoting as well," McDowell said. "If there is no deal, there is no discussion on the future relationship. Eventually everyone will have to start talking again, [but] I would imagine that would delay the whole thing quite considerably."

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An inquiry by the House of Lords found in January that the U.K. should consider setting up a domestic infrastructure bank to replicate the EIB and criticized the government for failing to address the issue. The U.K. once had its own state-backed infrastructure bank to provide financing to green projects, but sold off the business, now called Green Investment Group Ltd., to Australia's Macquarie Group Ltd.

Most of the EIB's energy investments have gone to capital-intensive transmission upgrades, where McDowell said the bank has added value by offering tenors of up to 30 years that go "way beyond what commercial banks can offer." But the EIB's most high-profile involvement has been in the offshore wind industry.

The bank has lent just over €3 billion to offshore wind projects, starting with a €95 million loan to the 90-MW Barrow wind farm in 2005. The project was one of the first to be built in the U.K. and is now fully owned by Danish utility Ørsted A/S.

Since then, the EIB has been involved in some of the largest developments in British waters, including the 588-MW Beatrice project in Scotland, co-owned by SSE PLC, Copenhagen Infrastructure Partners K/S and Red Rock Power Ltd. The £525 million, 19-year construction loan from the EIB supported more than £2.7 billion of overall investment in the project, according to the bank.

Won't be missed

But while the EIB's support was key in getting the sector off the ground, and in some cases reportedly saved struggling projects after the financial crisis, many believe that the industry has matured enough to stand on its own feet.

"There's massive liquidity in both the commercial bank market and the institutional market" to finance offshore wind parks, said Ashurst's Skinner.

One project finance banker said a recent financing round for a greenfield offshore wind project they participated in was three times oversubscribed, with a core group of up to 20 banks now competing in the sector. Meanwhile, refinancing deals and the secondary market for selling down loans also attract a record number of players, they said, leading to a drop in commercial debt pricing.

"I think offshore wind is very well known and understood now, and OFTOs [offshore transmission links] are the same," said Stephen Jennings, head of energy and natural resources for the EMEA region at Japanese bank MUFG Bank Ltd., one of the biggest lenders to the sector. "I couldn't point to any deals that have been stuck in the market as a result of [missing] EIB funding," he said.

SNL ImageØrsted's Walney Extension, inaugurated in 2018 as the largest offshore wind park in the world.
Source: MHI Vestas Offshore Wind

Jennings also noted that other international multilateral lenders have entered the sector recently.

Last year, Japan Bank for International Cooperation, the Japanese export credit agency, signed a £743 million loan to the 950-MW Moray East wind farm being developed by utilities EDP - Energias de Portugal SA and Engie SA, for example.

And in 2017, Denmark's Eksport Kredit Fonden A/S participated in the first green bond financing of a U.K. offshore wind farm by guaranteeing £300 million of a £1.3 billion debt package for Ørsted's 659-MW Walney Extension offshore wind farm.

"If the EIB doesn't have appetite for the U.K., there's plenty of other similar international entities that do," Jennings said.

New frontiers

But while offshore wind may have the wind in its sails, newer and less established technologies could still benefit from EIB funding. Those include energy storage technologies like hydrogen, but also carbon capture and storage technology to reduce emissions from heavy industry.

"The EIB has been playing a key role in giving independent expertise and due diligence to projects, especially in less established technologies," said Daniel Atzori, a research partner at energy consultancy Cornwall Insight. "That has played a key role in convincing other investment to come aboard."

Another area that is in need of the kind of market-leading financing the bank provides is unsubsidized renewables, according to Jennings. The market for so-called merchant projects has had a slow start in the U.K., but McDowell said the EIB is already starting to take on similar market exposure in renewables deals elsewhere in Europe.

"The next stage is going to be, can you finance subsidy-free wind and solar on its own without that sort of cross-collateralization with subsidized assets," Ashurst's Skinner said. "That would be where, potentially, the likes of the EIB could have helped, to kick that off. That might be an area where they will be missed."