A new class of finance

Upcoming wind projects in the size of hundreds of megawatt put the wind business into a new class. Attracting investors of the calibre needed to fund $100 million-plus ventures -- and with a fair element of risk -- calls for a new approach to financing. Commercial finance could be good for wind. Proposals are rigorously scrutinised to eliminate as much risk as possible -- and what risk is left is spread over several entities, diluting it further. And while soft loans are part of the realm of "hidden costs" for the taxpayer, commercial financing allows everybody to see how much a kilowatt hour from wind energy truly costs.

Never before have there been so many mega-scale wind power projects in the offing. In the US, the news is of a 150 MW plant planned for northern California (page 17), a project grown to 100 MW in Minnesota (page 27) and a contract for delivery of a huge 208 MW to Texas (page 20). Not long ago orders that size were the stuff of dreams. Now they are becoming the norm. Even bigger plant are on the way: Europe's offshore wind stations are getting ever closer (pages 24 and 43) and will dwarf their onshore counterparts.

Projects this size put the wind business into a new class, one that calls for consideration of a new approach to financing. In the areas of Europe where most of the world's wind power is sited, money to pay for it has often been raised as personal loans with little risk to the lender. In Germany it has nearly all come from government-backed sources. As such, high returns on investment were neither sought nor required.

Attracting investors of the calibre needed to fund $100 million-plus ventures -- and with a fair element of risk -- is another matter though. Such investors will require that the rewards are well worthwhile. And that requires project financing structures which, by their nature, can increase the rate of return on investments (pages 36-39). The success of the model has already been proved in getting wind plant financed in Britain and North America where soft loans have not been available.

Whether Europe's traditional sources of cheap money will remain in place for the mega-projects coming up is an unanswered question. But the fact that members of the financial world are now sniffing around the fringes of the wind business with barely disguised eagerness gives a clue to the answer. They believe wind will need to turn to the world of commercial finance.

That might be no bad thing, for two reasons. First, a proposal for project financing is rigorously scrutinised to eliminate as much risk as possible -- and what risk is left is spread over several entities, diluting it further. Interestingly, the kWh cost of the end product is apparently unaffected by this costly process (pages 39-42), suggesting that the discipline imposed by "due diligence" cuts out a lot of waste in the long run. Second, while soft loans are part of the realm of "hidden costs" for the taxpayer, commercial financing allows everybody to see how much a kilowatt hour from wind energy truly costs, when all expenses are accounted for.

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