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Investment grade

They say money makes the world go round. It's going to take about $110 billion to make the next decade's forecast windmills spin around. Just the margin for error in that calculation is equal to about half of what it has cost to build every single windmill in the last three decades.

Over the summer, exciting news appeared on the horizon. Arguably a whole new source of debt capital for wind projects was suddenly opening up. Industry giants FPL Energy in the US and Britain's ScottishPower separately raised large scale financings totalling more than $1 billion for their wind businesses (page 23). An FPL subsidiary borrowed $380 million to finance a portfolio of their US wind farms in operation and construction. Scottish Power raised $700 million to finance a wide variety of its energy investments, including wind farms on both sides of the Atlantic.

These were not the first mega-deals in the wind business. EHN/Iberdrola in Spain raised more than EUR 800 million in 2001 with their Energías Eolicas Europeas wind farm financing. What made these deals different, and exciting, was that FPL and ScottishPower did not use banks.

Instead they went to the bond markets, where massive amounts of capital are raised on a daily basis. Compared with banks as lenders, the bond market is typically characterised by large institutions such as insurance companies, pension funds and professional fund managers. It's all still debt though and it all still needs to be paid back. The bank market tends to be better at more specialised, relatively smaller loans, whereas the bond market is known for the ability to borrow larger amounts for a longer period of time.

For a developer and owner of stable energy projects, the bond market holds real appeal. Longer, larger loans can boost equity returns and help preserve sparse capital. In the early 1990s, wind's cousin, the Independent Power Producers (IPP), were finally able to make their way to this promised land. Over the summer it appeared that wind had reached there as well.

But appearances can be deceiving. While both the FPL and ScottishPower transactions are important, applauding a grand new era of financeability would be both premature and misjudged. The Scottish Power financing was not a pure bond, but rather a hybrid financing which would convert into Scottish Power shares under certain circumstances. More to the point, it funded a variety of corporate investments, of which wind was but one. Investors were only ever taking Scottish Power corporate risk -- and the only relevance of wind was whether it would blow the postage stamp off their checks.

The FPL financing, on the other hand, was a pure wind portfolio financing. Investors are taking a significant proportion of wind project risk. With this deal, wind power's first large scale portfolio financing has been rated "Investment Grade," a universal acknowledgement of creditworthiness, and successfully sold into the bond market. This alone signals that the wind sector has now reached another important milestone in its development.

There are, however, no new financing techniques or technology at work here. Put in their proper context, the deals are both relatively straightforward and run of the mill. But they are not run of the windmill. What makes these financings important is what they mean to the wind industry, not to Wall Street.

Both the Scottish Power and FPL transactions represent nothing more than large companies efficiently financing their businesses. Yet, that is the story. Some major investments in wind are being financed and moving forward faster than ever -- certainly where they have a utility or strong corporate sponsor. This is in particularly sharp relief to the large scale and/or challenging financings, particularly offshore. In British waters the utilities are clearly leading the way to financial close (page 49), while in offshore Europe, Danish utility Energi E2 has just teamed with an independent German developer on its pilot project (page 28).

Larger and stronger borrowers

In the IPP era, certain developers became strong enough to be able to access the bond market. Thus far for wind, it is only the utilities. What helped make it a fair fight between the independent and utility IPP companies was that each had increasingly equal access to a number of different funding sources. As things stand today, it would take a cool fight promoter indeed to pitch pure wind players into the ring against the utility giants and call it a fair fight.

While the menu of wind financing options may be expanding, the required profile to access them is getting narrower. Scottish Power and FPL were able to complete their financings because they are Scottish Power and FPL. Part of this has to do with their name recognition, but far more has to do with their own corporate size and creditworthiness. Following in their financing footsteps demands the latter, and is greatly aided by the former.

It takes an investment grade sector to fund $110 billion. It also takes larger and stronger borrowers. On that, both bank and bond investors will heartily agree. The investors have now shown that they are ready to listen, learn and lend. Whether the industry can consolidate itself to act and speak with fewer stronger voices remains to be seen.

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