Financing in transition in Europe's emerging markets

EUROPE: As a growing number of wind-energy investors have targeted central and eastern Europe (CEE) for growth, regulatory uncertainty in key markets such as Poland and Romania has complicated the prospects for financing and could slow down expansion in these regions.

Key growth… Poland has been popular with investors, but a changing market framework could stop that (Pic:SCA)
Key growth… Poland has been popular with investors, but a changing market framework could stop that (Pic:SCA)

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Multilateral financial institutions have seen a growing demand for their support as funding from European commercial banks has fallen in the wake of recent or impending changes to policies that affect wind farms and a squeeze on funding in general. And while a potential source of funding lies in EU financing available for wind projects in the region, given the amounts available, these funds are better seen as a supplement rather than as replacement financing.

Reversal of fortunes

"In the past 12 months the availability of financing for renewable-energy projects in this region has been negatively affected by increasing regulatory uncertainty," says Grzegorz Zielinski, a senior banker in the power and energy team at the European Bank for Reconstruction and Development (EBRD). Zielinski notes that the role of the EBRD and other multilateral financial institutions in countries such as Poland and Romania had been expected to decline two or three years ago amid positive signs that their markets were maturing, but that trend has reversed as doubts over continuing political support are once again growing.

Poland is in the midst of changing its market framework and Romania's government has recently indicated it plans to scale back support for wind and other renewable-energy sources. Financing wind projects in Romania had already become more challenging following the approval last July of legislation that makes it more difficult to seal power purchase agreements (PPAs).

Poland, Romania and Turkey have been the EBRD's biggest markets for wind energy financing. "They are fairly large countries with favourable wind conditions, and their governments have demonstrated the required level of support for renewable energy," says Zielinski. "The EBRD expects to continue its involvement in these countries despite current regulatory uncertainty in Poland and Romania."

In Turkey, a low feed-in tariff (FIT) for wind projects has meant that most investors opt to forego the FIT and instead receive the market price for wind production. While this may expose investors to market risk, on the flipside bankers note that it has also meant that regulatory risk has been relatively limited. Wind-energy development in Turkey is supported by an official government target of 20GW of wind capacity by 2023, and an expected increase in power-generation requirements foreseen in the country.

Elsewhere in the CEE region, the EBRD has made wind financing available to Bulgaria, Estonia, Hungary, and Ukraine, as well as the Czech Republic and Croatia via a renewable-energy equity fund in which the EBRD had invested.

The International Finance Corporation (IFC), part of the World Bank, has financed wind farms in Romania, Turkey, Croatia and Bulgaria. Fuphan Chou, an investment officer in the IFC's infrastructure and natural resources department, says it continues to look for opportunities to finance wind energy in the region, both in markets where the IFC already has a presence and in new countries. One new market on its radar is Serbia, where the FIT regime has just been confirmed.

Poland has not historically been a priority country for the IFC's infrastructure business given its relatively advanced state of economic development and low need for IFC financing. However, as the country's renewable-energy market has grown, Chou says the IFC has been taking a new look in recent years. While much of the market's financing needs were covered by commercial banks, demand for financing from multilateral financial institutions may increase as the Polish government completes the revision of its market framework.

"There's been a lot of uncertainty and, as things stand right now, it would be very challenging to close a deal in Poland on a complete non-recourse project finance basis," Chou notes. Romania is another country where the IFC is interested in financing wind and is watching closely to see how the regulatory framework evolves.

While multilateral financial institutions have a key role to play in financing projects in CEE countries, commercial banks have not entirely abandoned the financing of wind projects in the region. "The number of banks interested in financing these assets has decreased, although the banks that have their operations focused on the region are still dedicated to doing business," says Ladislav Tolmaci, a director in the project finance and energy business of Austrian bank Erste.

Although market participants are now looking for clarification on the regulatory front in Romania, Tolmaci notes that there had previously been a surge of financing transactions for wind farms in that country. Regulatory stability has also allowed a few long-awaited financing deals to finally be concluded in Croatia, he adds.

Helping hand

Financing terms offered in CEE countries would differ enormously from those obtainable in Erste Bank's home market of Austria, says Tolmaci, especially when it comes to debt-to-equity ratios and the maturity of loans. "Also, participation of an export credit agency or an international financial institute would be very much welcome to make the deal bankable in CEE countries, apart from some corporate balance sheet support."

Tolmaci says the support of multilateral financial institutes and export credit agencies is essential to start financing transactions. "However, commercial banks help a lot when it comes to structuring the financing," he says. "A substantial part of wind financing in Romania, for example, is under B-loan structures." B-loans are the part of financing from international financial institutions that are not retained on their account but syndicated with commercial banks. They receive more favourable terms since the international financial institute is the key "lender of record".

Untapped EU funding

One untapped source of funding comes from EU funds earmarked to implement the EU's regional, or cohesion, policy. The EU's 2007-2013 budget earmarked a total of EUR 786 million in Cohesion Funds for wind energy, of which EUR 420 million fell to the EU's newer member state. As of 2010, however, only EUR23 million of the total had been spent across the EU and none in newer member states. Vilma Radvilaite, EU budget and research adviser for the European Wind Energy Association (EWEA), says there are a number of reasons for the low absorption rate of EU funding in CEE countries: "There is a lack of knowledge that prevents industry from absorbing funds, the rules and procedures are pretty difficult, and there is also a shortage of additional funds available. EU structural funds only cover a part of the total so you need private and other funding sources as well."

But Radvilaite remains hopeful that spending will rise significantly in the post-2010 period, and EWEA has pushed the national wind associations in CEE countries to put the word out and help ensure that EU financing is used. Of CEE countries, Poland has been allocated around EUR 228 million for wind investments in the 2007-2013 period, while the Czech Republic has EUR 68 million earmarked and Romania about EUR 57 million.

And while the EU's 2014-2020 budget foresees an overall cut in spending, funds available for renewable energy and energy efficiency projects are expected to increase from EUR 10 billion to EUR 18 billion. Even though the exact split is still being negotiated, this should increase the share for wind.

Hot spots… Central Europe shows top financing potential, with Croatia offering the greatest additional benefits

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