The European Investment Bank (EIB) has just closed its first clean energy fund, a signal of the growing importance of renewable energy financing, wind project financing in particular, for the lending arm of the European Union. The fund, managed by Spanish asset management group Green Alliance, wrapped up a first round of financing on August 1 at EUR 63 million, of which EUR 25 million has been committed by the EIB and the remainder by Spanish institutional investors. After a second closing, the size of the fund is expected to rise to as much as EUR 120 million. Green Alliance, which is also the name of the fund, is likely to invest mainly in wind energy projects, though it is also eyeing biomass, photovoltaic and other renewable energy investments.
Geographically, the fund has found itself focussing on Spain, where, with capital markets not as highly tuned to renewables as further north in Europe, customers are on the doorstep of Green Alliance. In addition, a number of the large and mid-size companies that have tended to be the natural counterpart for the EIB are extremely active in the market created by Spain's 2005-2010 Renewable Energy Plan. For Green Alliance managers as a team, the fund is a first and is evidence of the EIB's commitment to primary funds and young management teams that might have more difficulty securing financing.
It is also an indication of the growing sophistication of the financing tools available to fund renewable projects at the EIB. "The EIB's financing scheme runs the full range of the credit curve from sovereign debt to quasi-equity investments," says the bank's Christopher Knowles. "This is new. Just three or four years ago there was only very senior debt."
Created with the Treaty of Rome in 1958, the Luxembourg-based EIB finances projects designed to enact EU policies. Its shareholders are the 27 member states of the EU, although it is not dependent on the EU budget or national taxpayers. It is guaranteed by member states, however, winning it an AAA credit rating and the ability to offer favourable lending terms to its customers. In general, this means slightly lower interest rates and a somewhat longer lifetime for loans than is the case with the average commercial bank.
Last year, the EIB financed EUR 524 million in renewable energy projects, 70% of them wind, and is aiming for much more in future. Earlier this year the bank raised its annual lending targets for renewables to EUR 800 million after making "sustainable, competitive and secure energy" one of the priority objectives in its 2007-2009 corporate operational plan. The EIB also stresses that the target is a minimum. Knowles notes that some EUR 900 million in renewables projects have already been financed in the first six months of 2007. Even though wind's percentage of the renewable lending pie has declined somewhat, in absolute terms financing for wind projects had already matched the level seen for all of 2006.
Big in Portugal
One major EIB operation this year helping to support the wind financing figure is a EUR 162.5 million 18-year project financing loan to wind developer Alto Minho Parques Eolicos for five related wind plants in Portugal, each with a generating capacity of between 32 MW and 64 MW and all using Enercon 2 MW units. The combined capacity of the entire project is 240 MW and total costs are about EUR 390 million, making it one of the largest developments on land in Europe. Alto Minho is the EIB's first wind financing on a project financing basis and the bank has taken on just over half the total debt with the remainder provided by a banking syndicate (page 46)
Another significant wind financing by the EIB in recent times was a EUR 450 million loan to Spain's Iberdrola, announced late last year and divided into two tranches, helping to support the development of 31 wind farms and two mini-hydro projects in various regions of Spain.
While Spanish companies have received a significant portion of EIB financing for wind projects, there is no intentional focus on Spain on the part of the lender. Rather the funding for Spanish wind projects is largely a reflection of the extent of renewables development activity in Spain. In the past, the EIB has been involved in projects in Denmark, Britain, Germany, Greece and Italy.
Meantime, one of the bank's priorities is to increase its support for smaller sized companies and wind projects that may have a more difficult time accessing capital than wind energy giants like Iberdrola. "The problem is that they are small and we are central. We don't have a branch network and it's necessary to bundle projects," says Knowles. The EIB authorisation process can also be onerous for smaller players.
Small scale too
To make itself more accessible, in May the EIB signed off on an EUR 100 million framework loan to Unifergie, a subsidiary of Crédit Agricole specialised in the financing of sustainable development. Unifergie will use the loan to finance small and mid-sized renewable energy enterprises in France, particularly wind farms. The initiative is among the first the EIB has conducted in France's renewable energy sector.
The framework approach through Unifergie represents an improvement over the EIB's global loan product. This is an EIB loan provided to a lender for financing in a wide variety of sectors and previously the main existing model for financing smaller-scale wind projects. "With our global loan, we're not adding as much value as we could so we had been looking at ways to improve that and a first step is what we did with Unifergie," says Knowles. Since Unifergie is a specialised player, the EIB has agreed to streamline its procedures for that portion of the facility dedicated to wind. This is something new for the lender, which has been generally unwilling to delegate when it came to assessing wind projects. "We have taken a strategic decision that they have the high standards that we would expect," says Knowles. "We're not taking risk on the wind farms but on Unifergie."
The next step would be for the EIB to directly take on some of the risk of smaller wind farms, although Knowles notes that this sort of transaction would still be done with a partner since the EIB isn't staffed to handle such an operation on its own. "It would be helpful for our partner since he doesn't have to lock up so much of his capital and helpful to the financial beneficiary because our terms are favourable."
Too much support
The EIB might be increasing its support for financing of wind and other renewable energy sources, but there is no open cheque book on the table -- the bank takes a hard look at the economics of the projects it finances. "We have a benchmark price at which a wind farm can produce and be economically defensible and not only bankable," explains Knowles. "Some countries have highly supportive incentive mechanisms that may actually be overshooting the mark so that some projects are built that shouldn't be. It's not only a problem for wind but for renewables in general."