Conference Report - Wind project finance is not yet clear of the doldrums

EUROPE: For those seeking finance for wind projects in Europe, the prospects are mixed. There are some encouraging signs: compared with the peak of the global financial crisis, the number of banks active in the project-finance market has increased and each appears willing to lend a bit more, helping to improve the market's overall liquidity. Although growth is uneven across member states, the European economy as a whole is recovering.

Investors in offshore wind - a sector that is still in its infancy but growing strongly - are also finding it easier to attract project financing. As workable support schemes have been put in place in some countries and a growing number of offshore wind farms have come on line, the comfort level of banks is clearly increasing.

But concerns still abound. As Dominik Thumfart, head of renewable energy asset finance at Deutsche Bank, put it at the European Wind Energy Association (EWEA) annual conference in Brussels in mid-March: "There are lots of clouds out there".

Regulatory risk, underscored by recent and retroactive changes to support schemes for solar photovoltaic energy in a number of European countries, is a worry for many investors. Impending new capital and liquidity requirements for banks - the so-called Basel III rules - may also make it more difficult for lenders to finance the sector, while some banks are still licking their wounds after the financial crisis.

Utilities, an important class of investor over the past few years, have also signalled that they will be scaling back wind energy investments. The recent announcement by Spanish wind giant Iberdrola that it plans to install just 750MW of new capacity in 2012, down from the 1,450MW foreseen for 2011, is indicative of a wider trend. On the brighter side, other funding sources should increasingly be available to fuel the growth of the sector in the medium term.

"In some ways the crisis is over, but in other ways it is very much alive and with us," summed up Christopher Knowles, associate director for energy at the European Investment Bank (EIB). "There is more liquidity and more banks are in the market, but the situation is not as good as it needs to be."

Pointing to EWEA figures indicating that investments in wind energy in Europe in 2010 were about the same as in 2009, or roughly EUR13 billion, Marie Donnelly, renewable energy director with the European Commission's energy department summed up the subdued feeling shared by many: "Wind is going places, but it needs to be going a bit faster."

Donnelly noted that the commission recently called upon member states to double annual capital investments for renewable energy to EUR70 billion, from EUR35 billion, in order to meet 2020 objectives.

The need for member states to meet 2020 renewable energy targets has helped to provide an attractive regulatory backdrop for investments. However, retroactive cuts made to solar photovoltaic incentives in countries like Spain, the Czech Republic and Italy have shaken investors' faith in some EU member states' commitment to supporting renewable energy.

"I think regulation is the number-one thing on equity investors' minds right now," said Tom Murley, who leads the renewable energy team at HgCapital. "They had been told the eurozone had a stable regulatory framework, that there would be no retroactive changes."

For the most sophisticated investors in Europe, cuts to the continent's solar photovoltaic incentives may be shrugged off without too much difficulty. Indeed, some investors and lenders expect more opportunities for investing in European wind projects to open up now that prospects for solar energy are looking more uncertain. With higher costs and higher incentive prices, the downside risk for solar was always considered to be higher than that for wind. On the other hand, new investors looking to invest in European wind projects may not trouble to make the distinction in the regulatory frameworks between the two renewable energy sources.

Even more seasoned investors are likely to take a harder look at the sustainability of the incentive regime for wind energy in the countries they invest in, particularly since many countries have made budget cuts a priority.

"It is quite likely that there will be a permanent differentiation between well-regulated jurisdictions and those that are not," said David Jones, chief executive of Allianz Capital Partners. "There are also concerns about sovereign risks; even if you have a good track record (with a support system) there might be worries you won't be able to sustain it. In general, there is a renewed retreat to quality." The net effect of this flight to quality, Jones believes, is likely to be a slower year for wind energy investments in Europe.

When it comes to agreeing on the terms of project-financing loans, bankers note that a clear distinction is already being made between European countries. For top projects in countries with strong regulatory regimes, banks may actually be quite aggressive in offering attractive terms to project sponsors.

The general picture, however, is one that sees banks taking an extremely prudent approach to lending, a trend that may be accentuated as banks prepare to meet the stricter capital requirements laid out under the Basel III rules.

"While Basel III regulations are still under discussion and there will be a lengthy transition period, higher capital requirements and new liquidity and leveraging constraints will affect the ability and willingness of banks to lend," noted Thumfart.

"The banking sector will have to find ways to unlock liquidity, and it will get there," said Romain Talagrand, head of power project finance at BNP Paribas. "Clearly there is also money available outside the banking system." While short-term prospects are uncertain, an increasing amount of that money is expected to come from institutional investors, including sovereign wealth and pension funds, which are sought-after investors due to the trillions of euros in assets they manage.

"Pension funds will increasingly look at renewables because they generate a steady stream of cash through the life of assets," said Peter Dickson, technical director at BNP Paribas Clean Energy Partners.

Bonds are seen as one financial instrument for gaining access to pension-fund money. At the Brussels conference, a draft standard was unveiled for climate bonds ahead of the planned issue this spring of a $250 million bond issue by an as yet undisclosed "large, multi-country bank" to finance wind farms globally. The European Union has plans to issue infrastructure projects bonds, which could also be used to finance large wind projects. The first EU-backed infrastructure bond, however, wouldn't come to the market before 2014, when the next EU budget cycle begins. Other debt-financing alternatives also exist. "We are working on a fund that would have the ability to take slices of debt," noted Thumfart.

Offshore momentum

When it comes to offshore wind projects, the commercial banking sector looks increasingly open to considering traditional project-financing loans. And while utilities have cut back planned capital expenditure onshore, they are seen as playing a major role in the development of offshore facilities. Utilities themselves are increasingly seen seeking funding from the project-financing market, although some bankers point to a reluctance on the part of utility investors to open their books to the extensive due diligence required for offshore projects.

Installed offshore wind capacity in Europe jumped 51% to 833MW last year while investments in offshore installations accounted for roughly 20% of investments in European wind farms. The EIB, the EU's lending arm, has been crucial in getting funds to the sector.

"We like to invest where we think we can have a catalytic effect, such as in offshore wind," said Knowles of the EIB. "We see offshore wind as a massively important part of the future renewable energy sector." As other lenders come into the market, however, Knowles said that the financial contribution from the EIB for individual transactions was likely to decrease.

Clementine Tassin, energy project finance manager at Dexia, pointed to serious challenges for offshore wind financing, which remained a "new and scary" proposition for many lenders. Nonetheless, she added that capital constraints hadn't prevented an offshore project from being financed to date. Banks have concluded a total of six offshore transactions, with another three to five due this year, she said. "Offshore transactions can happen and will happen but only with appropriately conservative structures, high-quality due diligence and full transparency."

High-quality projects will always attract funding, according to Filip Martens, general manager of C-Power, the consortium building Belgium's Thornton Bank 325MW offshore wind project: "When you want to attract financing, the most important thing is to discuss matters with the toughest guy at the bank. It's normal that banks are willing to take less risk than the sponsor."

Other investors seeking to take wind projects in an uncertain financing environment would be wise to follow his advice. Last year, C-Power secured roughly EUR900 million for the 295MW Thornton Bank project, the world's largest offshore project financing to date.

SLOW RECOVERY
Typical project finance conditions - onshore (FIT)

Year Leverage Maturity Pricing (basis Maximum
(Debt:equity post- points spread underwriting
ratio) completion over Euribor) (EUR millions)
2007 90:10 18 years 60-90 100-150
2009 75:25 15 years 200-275 30-50
2011* 80:20 15 years 150-225 75
* estimate.
Source: Green Giraffe Energy Bankers.

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