Helius Energy: filling the energy gap

The UK’s electricity needs have long been achieved by a combination of (largely) coal, gas and nuclear power plants. Renewable power projects currently contribute a small percentage of the overall requirement, but that is set to change thanks to plans to decommission several coal and nuclear power plants during the next decade.

While peak demand currently accounts for around 65 gigawatts of the electricity that the UK’s energy network is capable of generating, this is set to head towards 70GW during the next decade as the country’s electricity-generating capacity falls below 60GW due to the closure of old plants (source: E.ON).

The fact is that all kinds of electricity-generating assets are going to have to be employed by 2015 if the UK is to have any chance of meeting expected demand. Meanwhile, the government is keen to promote renewable power as a way of filling the ‘energy gap’ as a key part of its drive to meet its EU carbon emission targets.
Of course, all of this is good news for renewable power firms like Helius Energy.

The government’ Renewables Obligation provides Renewables Obligation Certificates for Biomass plants for the first 17 years of operation, so this provides a sizeable income stream for projects such as those that Helius develops.

Helius develops, installs and operates biomass-fired renewable electricity generation plants at sizes ranging from five megawatts to 100MW. The company is currently involved in several projects.

Helius’s flotation on London’s Alternative Investment Market in January 2007 helped it to raise funds to develop its Stallingborough site – a 65MW biomass plant on the south side of the Humber estuary in Lincolnshire. Helius received planning permission for the site in early 2008, and then successfully sold the project on to RWE Innogy UK – a wholly-owned subsidiary of German power utility RWE.

As part of the deal, in which Helius made a profit of around £20m the Group will also receive 13% of the annual profits after tax generated by the plant during the first 24 years of its operation (this profit was valued by the company at £14.3m in September 2008).

This ‘build and sell’ business model is helping Helius fund its other projects, such as at Avonmouth (although the company says it does not intend to sell this project). Here, the company has secured an 18-acre site for the development of a 100MW biomass power plant and it received support for the project from Bristol City Council during the summer.

Analysts who follow the company believe that Section 36 approval under the Electricity Act 1989 (required for the project to go ahead) could occur early 2010. If it does, then the go-ahead decision should add more than 30 pence to Helius’s share price, according to independent broker Ambrian.

Of course, one-off projects like Stallingborough and Avonmouth make for a rather lumpy and unpredictable revenue stream for Helius. But the company is mitigating this – not only through the practice of securing a portion of future income from profits produced at the larger-scale plants it builds, but also through the sale of its GreenSwitch-branded small-scale biomass powered plants.

The GreenSwitch plants are rated between 5MW and 8MW and they are designed to be located where sustainable and renewable feedstocks are readily available, so that there is no need to transport wet feedstocks.

Helius has a joint venture with the Combination of Rothes Distillers (CoRD) in Scotland. The JV, called Helius CoRDe, will build and operate a £50m renewable energy scheme designed to reduce the carbon footprint of the whisky industry on Speyside.
The project will use whisky distillery by-products to fuel a 7.2MW biomass combined heat and power plant. Meanwhile, a separate plant – which Helius has branded GreenFields (see below) – will turn pot ale (the liquid co-product of whisky production) into a concentrated organic fertilizer and an animal feed for use by local farmers.

The project has already won an award: it was named ‘Best Environmental Initiative’ at the Scottish Green Energy Awards last December. And Helius’s managing director, John Seed, believes that the project will serve as a model that the company can roll out elsewhere.

At the end of August, Helius revealed that it had formed a strategic alliance with the water division of France’s Veolia Environnement – one of the world’s leading environmental services firms.

The two companies have agreed to jointly develop Helius’s GreenFields membrane technology, which turns distillery by-products into organic fertiliser. Veolia Water will help to fund existing and future GreenFields development costs and projects.

Traditionally, distillery by-products such as wet grain, draff and pot ale have been dried for use as animal feed using an energy-intensive process. GreenFields membrane technology takes these by-products and produces what the company describes as a “highly effective” biomass fuel for renewable energy plants, as well as other products.

Helius’s most recent set of results, covering the six months to 31 March 2009, showed it made an operating loss of £328,000 (H1 2008: £1.1m loss) on revenues of £554,000 (H1 2007: £0).

The company is debt free, but its long-term plans involve the use of debt and equity financing in order to fund projects. So future growth is dependent on the credit and equity markets and potential investors should be aware of this.

As well as the Stallingborough, Avonmouth and Rothes projects, Helius has identified a dozen other projects that have potential to add value to the business and which it is currently evaluating.

Forecasts estimate that Helius is set to be loss making for the next couple of years. But the company appears to be building the projects and alliances it needs to see it through to handsome profits in the long term.