Blessed with favourable geography, changes in technology and the vision of a few over the last decade, Ireland has succeeded in creating a strong onshore wind industry. At the same time, Ireland has a vibrant financial services industry with particular strengths in aircraft leasing, funds and insurance. Is it possible to draw these two rapidly changing industries together to create a new opportunity?
By way of background it is clear that traditional, long term bank financing is more difficult to obtain for larger energy projects. As such, investors are taking on more financing risk and consequently are looking at a wide variety of new funding models and alternative sources of funds. The new funding models have typically sought to draw on the strength of the equity markets, while at the same time seeking to replace and/or supplement traditional bank finance. These new sources include pension funds, private equity funds, capital markets (i.e. private placements and bonds), other non-bank debt providers, vendor financing and for smaller projects the Employment Investment Incentive Scheme.
At the same time we have seen huge consolidation in this maturing sector as organisations have sought to supplement their skills, know-how, expertise and project experience. PwC in its annual review of the renewable energy sector expects this trend to continue. Utilities, land owners and manufacturers continue to seek to build scale, diversify their asset base and exploit the strength of their balance sheets.
Importantly, a number of organisations have been established in Ireland who have built a significant development and financing skill set, through investing in projects in Ireland and internationally. They include private equity/venture capital funds, large international funds, and a range of domestic and international developers and investors.
At a more developmental level Ireland is a hub of innovation across the renewable energy spectrum, from marine, to storage and grid applications, with many leaders in their sectors. The main impediment to these companies growing is often access to financing. For Ireland to fully exploit the renewable energy opportunity, it will require a deeper and more innovative funding market, from start-up funding through to large infrastructure funding.
The financial services industry also continues to evolve. Operations which began as back office functions for a global organisation are now engaged in a full range of financial services activities while at the same time a large number of bespoke organisations engaged in leasing, securitisations, treasury activities or fund management have emerged.
Given the strengths of the two industries and the continuing developments it would seem that there is a clear opportunity to create a vibrant new hub. However, it is essential that a number of items come together:
1) Build on first mover advantage – industries are very slow to move from their initial cradles into new locations even where there are perceived benefits to moving. People, services, skills and resources are often not as mobile as they initially appear. It is therefore crucial that if a vibrant industry is to be created in the long term, Ireland needs to build quickly on the existing strong foundations highlighted above.
2) Exploit the various technical, project management, professional and financing skills already available. There is considerable expertise built up in a wide variety of areas which have application to this industry. This ranges from large infrastructure project management skills in the construction sector and big ticket leasing skills in the aircraft leasing sector to a deep pool of tax advisers and lawyers well versed in large complex projects in Ireland and around the globe. It will be crucial to continue to develop a pool of people who can meet the needs of the emerging global economy. Initiatives such as the green finance courses in DCU are vital to this.
3) Ensure that the tax regime remains favourable – Ireland has a highly developed domestic tax regime which has been responsive to the needs of developing industries. As new structures and new players emerge, the Irish regime will need to continue to respond. Irish Revenue recently responded, by way of a tax briefing, to the requests from advisers for certainty within the taxation of carbon credits. They also achieved a rapid expansion of our tax treaty network which should help mitigate the overall tax leakage in international projects. PwC remains in active dialogue with the Department of Finance and the Irish Revenue on a range of related areas for our clients.
4) Government to respond to the industries’ needs as they evolve – beyond tax, there are a wide variety of other tools required to create a strong and vibrant hub.
• a strong domestic energy infrastructure to support those seeking to expand their Irish renewable operations helps create credibility on a global stage;
• the participation of Irish banks in funding domestic projects, perhaps as part of an international consortia, should help send out a supportive signal;
• a review of legislation such as our partnership legislation to facilitate certain types of investors and projects would broaden the range of activities which could be carried on from Ireland.
Of course there is an onus on the industry to bring the practical issues or deficiencies in the current regime to the attention of Government to allow it to respond.
5) Government and the private sector working together to develop innovative financing solutions – this could involve for example setting up a green capital markets solution for projects in Ireland initially (such a “green bonds”), and then leverage off this experience to develop Ireland as a financial hub for green capital markets solutions. Ireland is well positioned to develop such initiatives, as we already have the core skills, the necessary international presence, the access to capital markets and the State is heavily involved in the relevant sectors. What is required is a concerted effort to kick-start such an initiative.
6) Marketing is key – Government and the private sector need to work together to promote the attributes of the Irish regime. Government has a wide variety of channels including embassies, consultants, various departments and a variety of state funded bodies all who should be providing a single clear message to those who may be interested in the sector. Similarly the private sector has a huge global network which should be exploited. Through organisations such as the Green IFSC, a public/private sector body set up under the IFSC Clearing House Group, there is the opportunity to ensure that the public and private sectors are delivering a consistent message.
In summary, while many challenges lie ahead, if the public and private sector can work together quickly to build on the existing platform a wealth of opportunities exist to greatly expand Ireland’s role in developing a financial hub for renewable projects and companies locally and globally. After all, Ireland has the required highly skilled workforce (both at graduate and experienced level), excellent infrastructure, a wide and expanding number of financing facilities available and a Government who are taking an active interest in the renewable energy sector.
Ronan MacNioclais is the partner responsible for the Energy, Renewables and Utilities group for the tax practice in PwC Ireland.
For more information, contact him by email email@example.com or telephone 01 792 6000