A UK energy first as Walker Morris team advises on data centre power project

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Late September saw completion of the UK’s first combined cooling, heat and power plant at a data centre in a drive by Citi Bank to reduce energy demand whilst cutting both greenhouse gas emissions and energy costs. The project was led by Walker Morris client Sustainable Development Capital Limited (SDCL), whose cornerstone investor is the Green Investment Bank (GIB), using private equity funds matched by GIB lending.

Energy savings

Energy efficiency should be one of the most compelling investments any organisation can make but surprisingly opportunities to cut energy demand by up to 20-30 per cent are often not taken up owing to the up-front capital costs and know-how required. At the same time energy costs are forecast to rise significantly above the rate of inflation (despite the current low in crude oil prices) so savings will go straight to the bottom line.

SDCL holds a mandate from GIB to operate the UK Energy Efficiency Investments Fund consisting of £104m in capital and is building a pipeline of projects that include building retrofit (LED lighting and improved environmental controls); combined heat/cooling and power (CCHP); renewable heat (of particular interest to off-gas grid industrial users) and outdoor lighting (car parks and street lights). As the deliverability of these projects becomes better understood in the market, additional sources of finance are likely to become available from the traditional banking community as well as from asset finance houses. Major contractors and utility companies already offer a range of energy improvement measures deploying their own capital and recovered through an energy performance contract linking payments to contractual targets for savings. Typically such solutions are designed to be off balance sheet.

The project

The Citi Bank project involved the provision of a combined cooling and power (CCP) plant on a very restricted site adjacent to the bank’s key UK data centre in Lewisham. The data environment is a major user of power and producer of heat and the design solution involved the provision of two power plants fuelled from a new gas grid connection which could offer cooling at a modest impact to overall efficiency. The size of the plant is scaled to the client’s demand and the nature of the gas engine market is that it is highly modular, compact and capable of operating in sound sensitive locations with appropriate attenuation. The solution will deliver over 70 per cent of the centre’s electricity requirement. Compared to a conventional power plant the gas-fuelled power plant reduces generation losses from 65 per cent to 10 per cent and avoids transmission losses associated with grid-delivered power. The CHP’s energy efficiency is therefore 90 per cent compared to 33.5 per cent for grid power. Depending upon the type of technology used and its configuration, savings in CO2 well in excess of 40 per cent can be anticipated whilst reducing the primary cost of power delivered substantially.

In this case, SDCL provided a special purpose company (SPV) to fund and implement the project whilst Citi took the role of Host for the project. A bespoke SPV was created which negotiated an Energy Services Agreement (ESA) with the Host for the financing and delivery of the power, heat and cooling services to guaranteed performance and availability standards for each element in return for a service charge calculated as a fee per MWh of electricity generated. The ESA addressed both the construction and operation phase, apportioning key risks to the SPV whilst others were retained and managed by the Host. To maintain operational flexibility the Host retains the right to terminate on notice on payment of agreed compensation. Provision is included for the right of the Host to retain the asset on expiry or termination and if appropriate for the decommissioning of the equipment. The length of the ESA is tailored to the requirements of the Host but usually the life expectancy of the plant is such that it provides the opportunity for an extended term or management directly by the Host. The site of the CCP solution was leased to the SPV for the duration of the ESA.

The SPV will work closely with its supply chain, typically a specialist energy services contractor (ESCO) which will usually be an experienced manufacturer/supplier of proven power technology with an operations and maintenance capability. The commitments in the ESA for delivery and performance of the energy solution and the liabilities associated with its non-performance are passed down to the ESCO through the terms of the energy performance contract (EPC). The SPV may require additional security in the form of bonds, retentions and parent company guarantees to manage its financial exposure to the ESCO.

The CCHP opportunity

Commercial and industrial companies, utilities, landlords and public sector bodies are increasingly attracted to the CCHP opportunity – delivering early financial savings and non-financial benefits in the form of carbon savings. It also allows clients to retain medium-term flexibility in their power requirements as the term can be typically negotiated between 7 and 15 years. Schemes can be delivered quickly with the minimum of disruption to on-site services. Clients considering this option will need to appreciate their liability under the limited obligations imposed on them in the ESA and the strength of the performance and financial terms imposed on the SPV as well as careful choice of partner and technology to assure the clear benefits that can be achieved.

The Walker Morris team was led by David Kilduff, Partner, and supported by Michael Taylor and Katie Raftery (Finance Commercial).