New Fund set to plunge into UK ethanol
By Stephan Nielsen
Bioethanol Partners will seek to raise approximately GBP 135m (USD 266m) over the next four months from investors and GBP 195m (USD 384m) of project debt to fund the construction of two wheat-to-ethanol plants in Grimsby and Teeside.The Grimsby and Teeside plants will each be able to generate 190m litres of ethanol per year and will export their biomass residues for co-firing to Drax's coal-fired power plant. They are expected to start production in the spring and autumn of 2010, respectively, and will be developed by UK firm Vireol. The promoter and operator of this project, Future Capital Partners, is currently in talks with ten banks and plans to finalise the debt portion of the projects once it secures the necessary feedstock supply and offtake agreements. "We expect to have the banks on board by mid-June and are currently in discussions with BP and Shell regarding a purchase agreement for our output," CEO Tim Levy of FCP said in an interview with New Energy Finance. Levy explained that there was upside potential for ethanol investment in the UK at the moment. “Currently there is only 66,000 tonnes of ethanol production available in the country. Total biofuels production will have to reach 1.3m tonnes to meet the UK’s 5% blend mandate by 2010. A proportion of this will be met by biodiesel but not much more than half, considering half of UK cars run on gasoline and car warranties presently do not cover biodiesel blends higher than 5%."
There has been a considerable increase in wheat prices over the last couple of years, but Levy puts this down to a spate of poor harvests and speculative traders. “There will not have to be any need to divert arable land in the UK to wheat to meet demand for wheat-based ethanol. Over the last 30 years, this country has been generating surpluses of the stuff and this is set to continue. The EU’s year-long temporary ban of set-aside land in Europe will also help free up more land for feedstock production.”
“We expect to provide investors with a 40% annual IRR over five years.”
The IRR assume wheat prices starting at GBP 105 per tonne in 2010, escalating to GBP 149 per tonne in 2013, and oil prices averaging GBP 92 per barrel over the term. “The most sensitive part of our model is sales price. A 35% reduction in the value of our output would mean the fund would not generate a return above and beyond the initial investment. This could happen if the price of oil falls below USD 40 per barrel."
The UK's Renewable Transport Fuel Obligations, set to come into force in April this year, will mandate that all fuel constitute 2.5% biofuels, rising to a minimum of 5% in 2010. The penalty for not blending is set by the RTFO at GBP 0.15 a litre. Bioethanol also incurs lower duty by GBP 0.20 per litre, thus delivering an immediate GBP 0.35 per litre advantage over unblended fossil fuels.
The RTFO will help prop up demand for biofuels, although some investors are wary that future cheaper biofuels imports from Brazil might dilute prices.
Levy exclaimed that, over the long-term, the tariff on Brazilian ethanol imports, which currently stands at GBP 0.19 per litre, could be reduced and his Grimsby and Teeside projects would have to contend with this. “Brazilian ethanol will be aggressively priced but oil distributors in the UK have already made it clear that they will be more comfortable using home-grown
supplies." Investor confidence in the fund will be reinforced by the unique way it benefits from tax engineering. “A provision in the UK tax code allows us to treat depreciated capital expenditures as income losses. Therefore, if the fund were not to make money, individual investors in the fund could use these losses to offset their income tax. This would provide some down-side protection.”