Bank of Ireland has weighed in on the emerging biomethane industry, in a new report that it launched last week, along with the financial services group Davy. The report provides a high-level overview of the industry and outlines the role biomethane will play in meeting our agricultural emission reduction targets, and providing income opportunities for farmers.

Bank of Ireland suggests that decarbonising our agricultural sector will require some €4.3bn of investment, with around €1.7bn coming from public and €2.6bn from private investment. Of this, around €1.6bn will be required to build a network of anaerobic digestion (AD) plants, providing a significant new opportunity for green investment.

Eoin Lowry, head of agriculture at Bank of Ireland, told attendees at the launch of the report last week that the bank wants to see an AD sector established to help de-risk and transition the agricultural sector.

“If we don’t have a biomethane sector, we actually have to do more in the agricultural sector to reach our 25% target,” he said. “As a bank, banking to 82,000 farmers, we need to be seen and need to support the development of the biomethane sector, because that then supports the entire agricultural portfolio of the bank, which represents 20% of our business banking.”

Risk

However, the risk associated with AD development was highlighted at the event. AD isn’t like wind or solar investments, both of which can avail of a long-term State support scheme to help reduce risk for developers and finance providers. AD also has many more moving parts, especially when dealing with hundreds of farmers for feedstock supply and digestate management.

“Banks don’t like risk and they try to mitigate any risk,” he said. However, Eoin mentioned they are now seeing some activity in this space, with people coming to them with project proposals. When assessing any AD proposal, they will scrutinise the security of feedstock supply, the skillset and experience of developers and the offtake agreement price.

He said that the farmer is core and that the economic model needs to stack up for farmers to switch.

“From an economic point of view, the dairy sector is number one and tillage number two. They are going to need very strong pricing models to switch to grow feedstocks,” he said.

In the report, they assume a price of €50/freshweight tonne of grass silage and €5/t for slurry, including the transport costs to deliver to the AD plant. They assume a yield of 52t of freshweight silage per hectare.

Eoin said that despite the risk, there is a willingness from the bank to engage in this sector, but “there are a lot of dots to join up”.

However, the report stopped short of outlining where they believe banks will play a role in this industry, highlighting the challenge for farmers and developers.

The challenge of finance

Securing finance in the emerging AD sector is proving to be one of the most challenging elements in getting the industry off the ground. While there are now multiple developers backed by international pension funds that intend to develop multiple projects here, for the initial handful of smaller developers and farmers trying to build plants, accessing affordable debt finance is proving extremely challenging.

Pillar banks view the AD sector as inherently risky, limiting their appetite to lend. Given the chosen structure of the AD industry in Ireland, none of this risk will be mitigated, meaning many developers are not viewing pillar banks as a credible finance option to initially build their plants.

Furthermore, as the build cost of a 40GWh AD plant is in the region of €15m, few farmers or developers would have the level of security required for that size of a loan. As such, they are looking to other finance houses, likely using a combination of debt and equity finance to get their plants built.

Looking at debt, a developer may approach a private funding house, likely in the UK or Europe, to provide the capital to build the plant. All of the criteria for funding which applies to pillar banks, applies to private funds, but the cost of debt would likely be in the region of 10-12%.

Another option is for equity investment, where a fund would take a stake in the plant, likely 90% or more, and provide all of the funding at a cost. Many of these funds normally look to sell the project in five to 10 years, potentially presenting an opportunity for the developer to finance and buy back the plant. However, these funds will look for a significant return on investment, upwards of 15% when selling. Other funds, however, may not sell at all and will own and operate the plant for its lifetime.

Both options generally come at a substantial cost, which contributes to the challenge of making biomethane production stack up. For example, Bank of Ireland and Davy have used a debt figure of 6% in its report and achieving a 12.5% return on investment at a gas price of 12.5c/kWh.

However, the actual experience of developers attempting to build new plants is closer to debt costs of 10-12%, which drastically changes the economic model and requires prices of upwards of 15-16c/kWh to achieve that return.

Refinancing

Where pillar banks have traditionally played an important role, however, is providing debt for refinancing at more competitive rates, typically three to five years after the plant is up and running. In the absence of a long-term support scheme, or a State-backed ISIF or SBCI loan scheme to reduce the risk for pillar banks, refinancing will likely be the role these banks play in Ireland’s multi-billion euro biomethane industry. This is still a vitally important element of a successful AD industry, however. Dropping from a 12% to a 6% interest rate on debt can transform the economics of a plant, all while providing a significant new opportunity for green lending for the banks.

Eoin acknowledged that while the biomethane strategy and capital funding were a good start, the industry will likely evolve. As a bank, he emphasised the need for engagement with stakeholders across the industry to understand future developments.

“This report starts that conversation” he concluded.

The author Stephen Robb is currently involved in a family/community proposal for an anaerobic digestion facility in Co Donegal.