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25th Anniversary Special - Finance - When high finance discovered wind

Ten years ago, if you had told an audience at a wind conference that utilities and large corporates would dominate the industry, half would scream in terror and half would cheer but not believe. Yet, in the last five years, the wind sector has completed its move from cottage to skyscraper - industry now replaces craft.

Carl Tishler, a relative newcomer to the industry - ten years - has watched the industry grow in value as financiers realised its worth.

Ten years ago, if you had told an audience at a wind conference that utilities and large corporates would dominate the industry, half would scream in terror and half would cheer but not believe. Yet, in the last five years, the wind sector has completed its move from cottage to skyscraper - industry now replaces craft.

While there is room for a lively debate about whether wind has lost its soul, ultimately it is irrelevant. The current era of economic dislocation and uncertainty, unparalleled in almost a century, has shaken the world's economy. Familiar household names are gone forever, national industries teeter on the edge of bankruptcy and governments are forced to step in as lenders of last resort. Yet the wind industry still shows positive growth: developers still develop, banks still lend and jobs are still there to be created. Wind energy appears to be a survivor.

It has already survived the challenge of growing up over the last 25 years, which required dedication, flexibility, stubbornness, innovation - and a move to big business. All of which is helping it to survive now.

Its transition to can be broken down into four processes, not only for wind manufacturers, developers and owners, but also for providers of capital - the people who added industrial weight, skills and money.

 

Backyard inventors

We start in the 1980s with stage one - the cottage period. The sector was small, artisan-based, highly localised and literally in people's back yards. Loans were made on a personal basis, as if you were extending your home or building a boat. The annual global capacity in the 1980s was in the tens and then hundreds of megawatts as the turbines began to multiply.

The second stage, in the early 1990s, was one of domestic growth. Smaller companies scaled up their operations and professionalized wind development locally. Project finance - where loans were given against the wind farm itself without recourse to guarantees from the owners - started to appear in some countries, in various forms. In Spain, for example, there was no legal recourse to the owners, but "comfort letters" were requested from sponsors. To keep transaction costs low for smaller deals, developers and sponsors standardised loan documentation to be able to replicate them.

With tax-driven structure partnerships, individual investors could participate, seemingly without taking much wind risk. Particularly popular in countries with high taxes, such as Denmark and Germany, they provided developers with an outlet for their projects.

By 1995 the wind industry was installing thousands of megawatts a year, much of it taking place through national wind industries rather than an integrated sector. It was common that 90% of manufacturers' business would be with four or five small domestic developers.

Stage three, in the late 1990s, was the start of cross-border expansion when manufacturers, developers and lenders looked for growth outside their home markets. A number of primarily German developments launched their initial public offerings (IPOs), embarking on a volatile ride: post-Internet blue-sky retail investor dreaming; the unpredictability of the wind development business; and the burdens of being a public company. Wind energy had caught the attention of some early players, and mergers and acquisitions increased, driven by select utilities.

 

Fighting to be heard

Several mainstream companies spotted the opportunities of wind power early on - EDF Energies Nouvelles, US giant FPL and European utilities Nuon and Iberdrola. A defining contribution from these companies was the perseverance of dedicated individuals who fought to put wind on the corporate agenda. The advance of the wind energy industry is beholden to the work of these people in organisations where the green agenda and climate change were not yet a priority.

The evolution of the utility companies' response to wind energy has its roots in the independent power business. Following the oil crises of the 1970s and 1980s, legislation for independent organisations to build power plants came into effect. But these independent power producers - or IPPs - had to fight the utilities tooth and nail. Dan Badger, one of the early independent developers, remembers years of fighting the incumbent utilities: "It was only when they realised the independent power industry wasn't going to disappear that they decided to compete themselves." Then, as now, the utilities held key advantages: access to capital, and to information on grid capacity and generation requirements.

 

Enter international finance

Having fought legislation that required them to buy wind power generation at fixed prices, early-moving utility players began to join the game. In manufacturing, the same thing was happening. GE acquired bankrupt Enron Wind (itself the product of two early players, American Zond and German Tacke) and Siemens' purchased Bonus in Denmark. Vestas and NEG Micon merged, seeking "national champion" status and a larger platform for slugging it out with the new entrants.

The finance market also contributed. Project finance, with international standards and international lenders, spread through the industry. Large project transactions were undertaken in the bank market, such as Terranova's 201 MW financing in Spain and the Zephyr transaction in the UK. Bond market financing was also appeared, with FPL's dollars 380 million financing in the United States.

The combination of focused sponsors, stronger manufacturers and increasing depth in the financing markets was powerful, and by 2005 the wind industry was installing more than 10,000 MW annually - the total amount that it had achieved pre-2000.

 

Indisputably global

By the early 2000s, the industry had reached the fourth and final stage in its move to big business and, while wind will always be - like politics - the most local of businesses, it is now truly global. Installed wind capacity has increased one hundred fold since the cottage days.

In sponsorship and development, the rest of the utility world has finally caught up and is piling in. Companies, such as Portugal's EDP, which had been modestly active for some time, moved towards the front. From a utility or corporate perspective, wind long ago became a must-have on the balance sheet. And for some firms wind has grown to a large business in its own right, with utilities listing their renewables businesses, and Iberdrola, EDP and EDF following suit.

As well as investors and participants in the overall wind business, the role of utilities should not be underestimated. Mergers and unbundling of integrated utilities have reshaped the business, and their strategic objectives and capital requirements will continue to be vital to wind as long as the industry depends on their networks, is paid by them and competes with them.

Manufacturers have for some time enjoyed good prices, terms and customer credit, with project sponsors fighting to buy turbines. Financing has been plentiful and production constrained. But signs now point to the cycle having turned. As customers respond to the credit crunch by delaying projects, turbines are no longer in short supply. Credit remains tight for many but not all customers, so it will take skill to navigate through this recession.

 

Finance and the global economy

In finance the story is the same although short-term prospects appear brighter. The big hangover for lenders, not just in wind, is too much leverage - too little equity and too much debt per project. But, assuming that one hasn't fallen foul of one of wind's cardinal sins, such as misestimating the wind, then most wind projects should be good risks. The average bank loan officer ought to be relatively happy to have these loans on the books.

Renewable energy has long been reliant on market support mechanisms and those in turn are reliant on governments to put them in place. Concern over global warming, fossil fuel dependency and a wish to promote domestic industries have all helped, and the Kyoto conference in 1997 kicked off action on climate change.

In Europe, the EU has set mandatory targets for lowering emissions and, in the United States, global warming and renewables have moved so far up the political agenda that both were leading issues in the 2008 presidential election. Wars in the Middle East have added to concern about oil and Europe's dependency on former Soviet bloc countries cause concern about gas supplies.

Wind offers developing countries a new and clean source of power - and those experiencing much higher growth rates in demand are looking at renewables. China, with one of the fastest growing demands for electricity, is a prime market, with many more yet to emerge.

- Carl Tishler is an investor and M&A advisor in the renewables sector, involved in many of the largest transactions.

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