Interview: Richard Nourse and Stephen Lilley

“I think what we have seen is that people who thought they had lots of money turned out to have less money – such as utilities.” Richard Nourse, Managing partner, Greencoat

In 2008, Tony Blair had a dream. The then prime minister, together with his cabinet, advisers, European colleagues and indeed many in the energy industry itself, believed that by 2020, the UK’s energy could be clean. The targets were agreed to much fanfare and little thought was given to the estimated £110 billion of investment the sector would require to meet them. It was assumed the cash would flow in from the big utility companies.
“I think people were nervous about where the world was going but they didn’t worry – in the slightest – about the capital,” recalls Richard Nourse, managing partner of Greencoat Capital. Then the world changed – and that is where organisations and fund managers like Greencot Capital come into play.
Five years on from the crash, and Greencoat is one of the few businesses that could be said to have benefited from it. Established in 2009, Greencoat Capital is the sole adviser to the €200 million cleantech fund ESB Novusmodus LP, which steps in where traditional funders now fear to tread. It invests between €3 million and €20 million in green energy projects – after the proof of concept – with an aim of seeing a return within six years.
There is a second side to the business, Greencoat UK Wind, which floated on the London Stock Exchange in March this year for £260 million. It has already invested in six onshore windfarms, and the Rhyl Flats offshore windfarm, and Utility Week is here today to learn more about its plans. Sat at the table is Nourse and a surprise guest to the interview, business partner Stephen Lilley. As the conversation goes on, it is clear that the two are something of a double act, bouncing off each other and even finishing the odd sentence.
This free thinking and creativity is key to Greencoat, giving the fund an edge on traditional utilities. Nourse says: “Following the financial crisis, what looked like great big, growing, strong, ‘they’ll get us there’ utilities, which would be interested in the new technologies, are now shadows of their former selves.”
Lilley explains that when the fund was set up, it created a new business model for the sector. “[Utilities] can either have their own really big balance sheets – which they can’t really do – or they need to sell assets and recycle the capital. If you can meet that need, you can provide a product that’s a great yielding product for investors, but also serves a purpose.”
Nourse jumps in to highlight the distinction between the two Greencoat funds. He explains that the business model of the ESB Novusmodus fund looks at technology. “So, for instance, we think solar is going to be huge for generation across Europe in the next ten years,” he says.
“I think it is all to do with cost. It seems one thing we have learned since 2008 is that government doesn’t have infinite patience for subsidising large amounts of rather unproductive generation. So £400/MWh for a 4kW roof in the UK, and £1,000 per tonne of carbon abated – it is not just bad economics, it’s verging on immoral. Just think what else you could do with £1,000.”
Nourse continues: “We think wind will be a huge deliverer as well”, receiving a knowing nod from Lilley. “It is an obvious and sensible thing to do and there will be plenty more of it.”
Both Nourse and Lilley are what appear to be a rare breed in the energy sector – investors who are happy with government policy and do not believe blame ministers for the investment slowdown. They praise the relative stability of energy policy in the UK, although they do raise some concerns about the transition between the Renewables Obligation system and the contracts for difference (CfD) regime.
Lilley says the “evolution” of energy policy is “a good thing because the costs come down as the risks come down, and the risk has gone down”.
They both add that if they were a developer now, they would press ahead with ensuring their project was Renewables Obligation eligible, although they do believe the CfD system will settle down.
As for the so-called investment hiatus, they say that was more a matter of global circumstance following the financial collapse than something created and exacerbated by government policy.
“I think what we have seen is that people who thought they had lots of money turned out to have less money – such as utilities,” says Nourse.
“Utilities were the mainstay of the development world for onshore and offshore wind. Therefore they don’t have as much money as expected to do the bigger pipeline projects. This keeps coming back to the need for more money to come into the sector. You have to be a very, very beefy investor to invest in an offshore windfarm by yourself.”
“And it would be your only windfarm,” adds Lilley.
“And if it breaks…” says Nourse. The two of them think out loud for a moment about the financial implications of owning a non-functional windfarm, before he continues: “…so we think we will be the guys they come back to.”
Greencoat is involved in six onshore windfarm projects and one offshore project with a combined capacity of 153.1MW, so both men keep a watchful eye on government policy and what part of the energy trilemma – security of supply, affordability, and decarbonisation – is the government’s main priority.
“It’s about security of supply” says Nourse, although Lilley jumps in, adding: “And it’s about affordability. I think you need a mix of energy. You need to properly remove coal. You need nuclear. You need gas, because you need to be able to bring capacity on quickly when you need it.”
However, Nourse does say the government has done its part in becoming the “greenest government ever”.
“The government seems completely committed to delivering substantial amounts of public money, energy customers’ money, to ensuring that we generate a significant amount of our electricity from renewable sources by 2020,” he adds.
“If we go right back to the husky photos in 2006 [as part of David Cameron’s show of commitment to tackling climate change, he was photographed hugging a husky before promising to take a lead on green policy] – it is a completely different world.
“There is an affordability issue – people thought we had a limitless amount of money to spend on fixing the problem.”
The key for renewable technologies is bringing their costs down – without doing that they will become obscure and irrelevant. If some technologies – and Nourse gives offshore wind as a prime example – are unable to bring their costs down quickly enough to a price “seen as affordable by the electorate,” he says the funding and subsidies should be moved elsewhere to support other low carbon generation technologies that can bring their costs down.
Onshore wind is one of the areas where costs are coming down and it is a proven technology – that is why Greencoat took the plunge earlier this year to buy up a stake in six onshore windfarms, while their offshore windfarm stake was chosen “very carefully”.
“It needed to be of the right sort of age, it needed to be not too far away. It needed the right operating characteristics – no problems that were still there after construction. There weren’t many windfarms that fell happily into that category,” say Nourse.
Lilley carries on: “Yes, five miles off the shore and very easily accessible and of a size that we can invest alongside and have a meaningful stake. They are very big projects – those offshore – and what we’re looking to do is put our toe in the water, literally.
Looking forward, Nourse says there will be more offshore windfarms that Greencoat will take a stake in when the fund increases to £1 billion – provided the investments they have already made have been successful.
The criteria that Greencoat UK Wind would be looking for is the same as applied to the Rhyl Flats windfarm – which means that the bigger round three offshore windfarms – in deeper water and further off the coast of the UK – are out of the question for now.
Lilley says: “They are going to go a long way offshore into areas that are more difficult. I think we need to watch and we need to see how those sorts of farms operate and we need to get to the scale where we can buy a meaningful stake in them.”
 “We’ve been dragged along in the wake as people move out to bigger projects further out. When they start building Round 3, we’ll start buying Round 2 – once they’ve shown they operate, and operate well.”
As with all investors, it comes down to the bottom line. They do not want to have to invest in the risky area of project development, especially when operation provides a steady return on investment of about 6 per cent.
Lilley says: “The skills of operation are not intense. The skills of construction and development are intense, and project management is intense, so their [utilities’] role is going to be in the development and the short-term ownership of large offshore assets, and then we buy for investors de-risked projects that are managed by us.
“That has to be the obvious way to do it.”