M&G Investments case study

With a pedigree in renewables stretching back to the 1930s, and consistent investment in project finance over the last 20 years, M&G’s infrastructure debt team now provides finance that supports nearly a fifth of the UK’s ground-mounted solar plant capacity.

In the UK, ground-mounted solar plants are starting to attract more long-term institutional investment, not least from M&G’s infrastructure debt team.


Solar plants are large installations of panels, usually in rural locations, that can meet the electricity supply needs of thousands of homes. Initiatives on this large scale play a major role in reducing carbon emissions. They also help the UK Government meet a legally binding goal of renewable energy comprising 20% of national gross final energy consumption by 2020.

In general, the UK’s photovoltaic (PV) industry has benefited greatly from historic government incentives, such as feed-in tariffs that guarantee 20 to 25-year, inflation-linked pricing for electricity generated.

This has provided a supportive framework for developers to create solar plants – as has the decline in the cost of the technology, through innovation of design and manufacturing.

With panels and attendant technology becoming cheaper, so large-scale plants become more cost-effective – leading to lower state subsidies (and a better deal for the taxpayer), reduced regulatory risk and greater opportunity for institutional investors.

Significant growth in UK solar capacity and generation


Source: M&G; DECC, Renewables statistics, DUKES 6.4; 30 July 2015
In October 2015, M&G’s infrastructure debt team completed a major debt refinancing for Lightsource, Europe’s leading solar energy company, in a deal that allocates nearly £250 million of funding for 32 separate photovoltaic plants (PV) and one commercial rooftop asset.

The solar plants in this transaction are based mainly in the south and east of England, are already fully operational and have a total installed capacity of just over 100 MWp – enough generated electricity to power over 30,000 homes (based on an average annual consumption of 3,300 kWh of electricity per house).

M&G’s approach to this investment included the full consideration of material ESG criteria. For example, the borrower is required to comply with UK law and the ‘Equator Principles’ (the risk management framework for determining, assessing and managing environmental and social risk in projects). Such requirements will be monitored and addressed throughout the life of the investment.


Where possible, M&G analysts and fund managers extended this ESG consideration to component supply chains to ensure that sustainable labour practices are adhered to. This included confirmation from M&G’s technical advisers that the PV modules installed across the portfolio hold certifications stating compliance with product quality, environmental management and occupational health and safety management systems standards (ISO9001, 14001and OHSAS 18001). The Technical Advisers also visited some PV module factories to review labour practices and manufacturing processes, among other things.

The borrower, Lightsource, is also keenly aware of the importance of ESG considerations in this sector. For example, its panels are fully recyclable and they are also exploring further methods of adding to the agricultural use of its solar farms, such as livestock grazing, or growing and harvesting wildflower seed (thus establishing pollinators and localised honey production).

This investment will provide M&G’s pension scheme and other institutional clients with a 22-year income stream that rises annually in line with the retail prices index (RPI), the main UK measure of inflation, and which is secured against the solar plants themselves.

ESG and solar plant lending

M&G has long invested in renewable energy – the forerunner to the current team provided debt finance for Carsfad hydroelectric dam in the 1930s and more recent investments by the group include solar, onshore wind and tidal hydroelectric power generation.

Now, one of the most attractive renewable energy investment opportunities is in lending to operators of UK solar parks. These investments can be structured as shorter-dated loans repaid over two to five years or longer-term investments of up to 22 years, providing M&G’s pension fund clients with secure and stable cashflows, often linked to inflation, which can pay pensions over the longer term.

M&G has made a number of investments in this sector, including financing the largest single site in the UK at the time in 2014 and, in 2015, debt refinancing the UK’s two largest solar portfolios. It is also financing such investments outside of the UK.

In total, M&G has provided funding to 119 UK parks with a combined operating capacity of 763 MWp. This is around 20% of UK ground-mounted solar PV plant capacity, is sufficient to power over 230,000 homes (based on an average annual consumption of 3,300 kWh of electricity per house) and equates to annualised CO2 savings of over 328,000 tonnes.

M&G’s infrastructure debt investment team embeds ESG considerations into its investment analysis and across both construction and operation phases of solar plants, where appropriate, and where such risks can have a meaningful impact on the long-term performance of the investments we make on our clients’ behalf.

Investment analysis - environmental considerations

The solar parks funded by M&G’s infrastructure debt team have, in aggregate, a significant net positive impact on the environment.

This is chiefly due to the contribution played by photovoltaic technology in the reduction of overall UK carbon emissions. A typical example can be found in one of the plants funded recently by M&G, based near Launceston in Cornwall, which has an installed capacity of 41 MWp and achieves an estimated monthly CO2 saving of 1,500,000 kg.

The important environmental role played by solar parks in helping the Government achieve its renewable energy goals is factored into M&G’s credit analysis. Such central support for a relatively young industry can give institutional lenders significant levels of comfort.

Aside from the benefits of a reduction in carbon emissions, the environmental impact on each plant site is usually minimal. The technology, a closed electrical circuit, is secured to a metal frame implanted in the ground. There is next to no use of concrete.

Moreover, most of the sites have a dual use. The land, typically a field leased to the solar plant operator for 20 to 25 years by the farmer, tends to be used for either sheep grazing or hay crops.

M&G’s assessment of the environmental risks within each investment opportunity takes into account these and other criteria:

  • Suitability of the plant’s location for sustainable dual use
  • Impact on the local community
  • Impact on biodiversity
  • Decommissioning at the end of the project’s useful life

Investment analysis - social considerations

Photovoltaic plants tend to reside in remote, rural locations. Their relative simplicity means a short construction phase, with low resource requirements for ongoing operation and maintenance.

M&G’s infrastructure debt analysts would typically see two main social benefits of solar plants for local communities. Firstly, each solar plant creates additional jobs, thereby providing a boost to the rural economy.

Secondly, they provide landowning farmers with the security of a long-term rental income stream from the solar plant operators – such security has proven welcome at a time of financial difficulty for many farmers and rural communities.

Moreover, some of the plant operators funded by M&G, and with whom M&G’s analysts engage regularly, make significant contributions to the local community. These have included the employment of local contractors, ecological improvements (such as new bat and bird boxes) and financial support for local schools.

Such a positive social impact for local communities helps to ensure the smooth running of solar plants through their construction and operation phases, reducing risk for our investments.

M&G’s analysis, risk control monitoring and engagement has encountered few negative social risks in the operation of solar plants that require mitigation.

Investment analysis - governance

When M&G appraises solar plant debt investment opportunities, the bulk of ESG analysis tends to focus on governance. This includes requiring compliance with UK laws and in some cases Equator Principles as a condition in the finance documents, assessment of the quality of counterparties’ management, their systems and processes and the technology and materials they use.

M&G’s analysts focus on plants rather than residential rooftop sites because of the difficulty of conducting an appropriate level of due diligence on each of the latter sites – bearing in mind that a solar residential rooftop portfolio will often be comprised of thousands of panels.

M&G considers that the required level of detailed analysis, on financial, ESG and other risks, can be best achieved in large scale sites.

Due diligence and analysis focused on counterparties includes

  • Quality and experience of the borrower’s management team
  • Structure of borrowing entity and its governance procedures
  • Risk culture within the borrower
  • The leases signed between solar plant operator and the landowner
  • Contracts signed between the operator and maintenance contractors – covering legal issues as well as labour practices and other social considerations
  • Planning permissions attached to the land
  • The capabilities of the technical adviser (the commercial entity that verifies the quality of the technology and hardware)
  • The solar panel supply chain, from the point of purchase by the operator to installation in the plant.