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The mood is better but money still tight

EWEC Report:When it comes to financing wind farm projects in Europe, market sentiment has improved from a year ago. The worst of the financial crisis, which resulted in a sharp drop in capital available for European wind farm projects, appears to be over.

More lenders are coming back onto the European market
More lenders are coming back onto the European market

International financial institutions, such as the European Investment Bank and the European Bank for Reconstruction and Development (EBRD), have helped to cushion the blow of a more difficult financing environment by significantly ramping up funding for wind projects. There are encouraging signs on the project financing front, with bigger financing packages being pushed through, more lenders coming back to the market and some developers starting to report improved loan conditions.

But the mood among bankers and project sponsors remains far from euphoric. Liquidity remains tight, leading some conference participants at the recent European Wind Energy Conference (EWEC) in Warsaw, Poland, to suggest new ways of financing wind farms. As was the case in 2009, investors seeking to purchase wind projects can still afford to be choosy, meaning developers without the highest quality projects up for sale may find themselves in a very tough spot. And while floating shares on the stock market had seemed a valid option for several renewable energy players even as the second quarter of 2010 began, that has changed abruptly as European stock markets tumbled in the face of a EUR110 billion bailout for Greece amid fears the debt crisis could spread to other European countries.

Project financing improves

The market for project finance, vital for the growth of the wind industry, is slowly being pried open. "There's definitely an improvement in debt finance in Europe," said Mortimer Menzel, head of the renewable energy practice at London-based investment bank Augusta & Co. "We're seeing some bigger deals and that it's perhaps a little less difficult to push deals through." Yet Menzel noted that the cost of borrowing remains high. Interest rates 300 basis points, or 3%, above the interbank Euribor and Libor rates are still common, although some project sponsors may be able to obtain financing at a rate of 200 basis points above, he said. According to Menzel, debt-to-equity ratios have also changed little over the last year, with about 20-25% equity required for onshore projects and 25-30% for offshore facilities. This compares with 10-20% onshore and 20-30% offshore prior to the crisis. A high debt ratio can result in higher earnings than would have been possible without outside financing, but can also cause unstable earnings due to the added interest expense.

Bankers do not expect that the heady days when 5-10% equity, or in some extreme cases even zero equity, was required for an onshore project are likely to return - at least anytime soon. "I think the whole industry has learned you need some tangible contribution from investors so interests are fully aligned," said Kim Christian Koehler, deputy head of European wind energy origination at German lender HSH Nordbank.

Koehler nonetheless is generally optimistic on the prospects for project finance. One positive sign is that some commercial banks that are not among the traditional financiers of renewable energy projects are starting to return to the market. "I think we're looking good - although there is still a market liquidity and syndication issue," said Koehler. "So we're still looking at single underwriting or club deals with somewhat limited market capacity." This is having the most serious impact on offshore wind financing deals, which require significantly larger loan packages.

Club deals

In the pre-crisis era, standard procedure was that one or two banks would underwrite a project finance loan, in which a loan is secured against project revenues, and subsequently syndicate it with a larger pool of lenders. Now loans involving more than one lender are typically club deals, in which a number of banks are lined up to take their share of loans from the beginning.

On the brighter side, Alain Delsupexhe, general manager at French wind and solar developer Eolfi, told participants at an EWEC project financing session that the syndication market looks poised to take off this year. He said banks are returning to the market, loan maturities are once again being lengthened and interest rate margins are improving. At the same time, he stressed that lenders remain cautious about taking on too much risk as a result of balance sheet restrictions.

The project-finance situation is no different among the EU's newest member states in Eastern Europe, such as EWEC 2010 host country Poland. "We're seeing an improvement in the market," said Grezegorz Zielinski, senior banker with EBRD, which is financing a growing number of wind projects in Eastern Europe (Windpower Monthly, April 2010). "We're seeing commercial banks coming back with longer tenors," he said, referring to the length of time until a loan is due. "But debt-equity ratios haven't changed. We've also seen more local currency financing coming back."

"Probably over the last one or two years you've needed the best conditions (for financing eastern European wind projects), commented HSH Nordbank's Koehler. "So you see good quality investors with experience, financing structures that might be a little more conservative than elsewhere. Then there's still the use of export credit, insurance and the likes to support a project just because it gives you more liquidity." Some investors are still wary of investing in Eastern Europe, but the situation is quickly improving, he said.

Equity buyers

As banks concentrate on financing the best projects throughout Europe, equity buyers have also continued a flight-to-quality set off by the financial crisis in 2008. "It's much more of a buyer's market," said Augusta's Menzel. Because it is harder to get projects sold, investors can be more demanding of onshore projects, he says. According to Menzel, equity investors are currently targeting internal rates of return (IRR) - a project's expected rate of growth - of 10-13% for onshore wind investments compared to about 9-11% prior to the financial crisis.

The story is different offshore, where Menzel noted that targeted IRR have declined to about 14-18% from 18-22% before the crisis. IRR, however, is expected to recover as investment costs for offshore wind decline from the current level of about EUR3.5-4 million/MW and overall raw material costs come down, competition in the offshore sector heats up and the industry simply gets better at constructing wind farms at sea.

Developers with projects that lack construction permission are in a particularly tough position. "Investors are basically giving no value to these projects because they don't know if they can debt finance them," said Menzel. In normal market times, a value is assigned to the work the developer has put into identifying sites and pushing projects through the authorisation pipeline. On the other end of the spectrum, strong, fully-permitted projects may still be sold for top prices. "There's a focus now on the best projects with the best returns but that's only a tiny proportion of the market," said Menzel.

Alternative approaches

Alternative financing solutions are increasingly being considered. Eolfi's Delsupexhe proposed that bonds could be issued to refinance debt for a portfolio of operational onshore wind farms. The fact that assets are already operational provides investors with greater ability to forecast cash flow and reduce investment risks. While Delsupexhe believes private investors would already be keen about wind bonds, he expects public markets could also be receptive in the future.

But Jean-Pascal Orcel, head of structured finance at Eolfi, believes bonds are not a viable option for offshore projects. "We think," said Orcel, "that the offshore market is not mature enough for bonds. Technically, (these projects) are much more complex, so I think it will take some time to see this practicable for offshore projects."

Liquidity represents a particularly vexing problem for offshore wind projects, where required investments are potentially enormous. Marc Schmitz, senior vice president of the renewable energy and infrastructure finance group of the Netherlands' Rabobank points to a likely shortage of capital to fund future offshore projects, given the limited number of commercial banks active in the offshore sector and the large size of the projects. Project values range from roughly EUR500 million to EUR1.5 billion. "We think there is a real issue," said Schmitz. "There is not enough bank debt in the market."

To help get around liquidity problems offshore, Martin Billhardt, chief executive of German wind developer PNE Wind, suggested that offshore private equity funds could be created to help finance permitted offshore projects. Funds could be brought in once a construction permit is received to help bridge the financing needs until an offshore wind farm becomes operational, providing equity before debt financing becomes available. A fund's stake could then be sold two years after a wind farm is commissioned, with a targeted IRR for the private equity investor of 14-18%.

The ideas are likely to keep coming. "(Wind) is a market with double-digit growth, so demand for capital will increase very quickly and the capacity for lending is constrained," said Eolfi's Orcel. Even if the market's mood turns euphoric, the financing challenges will remain.

ENTHUSIASM AND PROBLEMS - LACK OF POLITICAL WILL IN POLAND

Polish delegates and investors seeking opportunities in Poland's wind power sector turned out in respectable numbers at the European Wind Energy Conference (EWEC) in Warsaw, even though air-traffic disruptions kept attendance below expectations. Polish Day, the April 19 conference of the Polish Wind Energy Association (PWEA), provided a kick-off to the Europe-wide event, with around 700 participants in attendance. Polish visitors also helped blow some life into EWEC's official opening day on April 20, as numerous conference delegates from further afield were still struggling to make their way to Warsaw.

Poland's installed wind capacity amounted to 725MW at end-2009, revised figures from the Polish Wind Energy Association showed, and had risen to 794MW at end-March. PWEA President Jaroslaw Mroczek expects about 300MW should be installed during 2010, bringing the total to above 1GW. PWEA estimates Poland could have 13GW of wind capacity installed by 2020, including 1.5GW in offshore capacity and 600MW from small-scale installations. Poland's government has targeted 6.1GW of total wind capacity by 2020.

Key obstacles to growth of Poland's wind business, said Mroczek, are a lack of political will and confusing legislation. "I have no problem seeing political will in Brussels but I do have a problem in my country," said Mroczek. "There are (government) declarations but there is no action."

Mroczek noted that a key 1992 energy law has been amended more than 50 times. "Even the best lawyers have problems today sorting through these changes," he said. New regulations issued early in 2010 on grid connections - a thorny issue for developing Polish wind farms - have not cleared up matters. "Even in this regulation there are so many wrong solutions, which create the situation where nobody knows how to proceed," said Mroczek. On the other hand, Mroczek said that the threat of penalties for countries not achieving targets laid out in national renewable energy action plans can help significantly in ensuring that Polish wind development proceeds.

Mroczek believes the simple fact that the conference was held for the first time in an emerging European market means it has been something of a success. "New countries that have recently become members of the European Union have a contribution to make," he said. Grezegorz Zielinksi, senior banker with the European Bank for Reconstruction and Development, agreed. "Poland seems to be attractive (for wind)," he said. "We're also seeing an increased interest from international investors in Bulgaria and Romania."

CONFERENCE DIGEST - A BREATH OF FRESH AIR AMID VOLCANIC DISRUPTIONS

Attendance holds up

Air traffic disruptions caused by the eruption of Iceland's Eyjafjallajokull volcano dampened attendance at the April 20-23 European Wind Energy Conference (EWEC) in Warsaw, Poland. Still, the European Wind Energy Association reported that over 3,000 participants attended and more than 220 of the 250 planned exhibitors were present. A total 1,400 individuals followed conferences online, while some speakers were forced to deliver presentations via Skype. While 80% of conference sessions went ahead, some key policy sessions and half of the finance conferences were among those cancelled. Although the event did not go entirely as planned, many exhibitors found a silver lining in the lower-than-expected attendance numbers. "We've had the chance to speak to some other exhibitors and do business with them," said Jan Langelund, senior acquisition manager at Danish developer Global Wind Power. Felix Losada, deputy head of corporate communications at German turbine manufacturer Nordex, summed up the event: "It was not so crowded," he said, "but the people who made it were high quality. They had a real purpose in being here."

Fresh air

The European Wind Energy Association (EWEA) has launched a new advertising campaign designed to show how wind energy is a mainstream power source that can help Europe respond to the energy, environmental and economic challenges it faces. Unveiled at the European Wind Energy Conference, the campaign features images of toothpaste, chewing gum and breath mints accompanied by the slogan "Give Europe a breath of fresh air". Visitors to the ewea.org/freshair website are told about the advantages of wind energy and learn how wind turbines function. They are also asked to show their support for wind energy by "adopting" a wind turbine online and keeping friends abreast on such how matters as how much C02 emissions the turbine prevents and how much electricity it produces. The adopter who gathers the most friends will be awarded with a weekend trip to Copenhagen, including a visit to a wind farm. Along with the new campaign, which will run for one year, EWEA also launched a European wind energy blog, blog.ewea.org, to provide updates on public opinion regarding wind and news on wind energy in the EU.

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