A cure for financial cramp

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The wind energy business might be growing faster than that of any of its competitors, but it remains stuck in a series of uncertain niche markets that are prone to roller coaster behaviour and in constant fear of sudden collapse. There is nothing new in that. The need to protect existing market support -- whether it be wind's tax credit in the US or the command and control power purchase prices that keep Spanish wind rolling -- has for years tended to divert policy focus away from securing long term market certainty. But permanently tying a healthy industry to a series of subsidy support machines is no way to inspire confidence, not with voters and certainly not in the financial sector.

Without finance there can be no wind plant development. And finance is in short supply. Not long ago, banks lending money for wind farm construction would look to the strength of the power purchaser. A project developer clutching a 15-year power purchase agreement (PPA) with a major electricity retailer offered security enough. Those days are long gone. The power industry is in disgrace and the financial world is not inclined to regard much of it as particularly creditworthy. Instead of looking at the strength of the purchaser behind a wind PPA, banks are now looking at the extent of the long term security built into the market.

What they see is a shambolic mish-mash of incentives tacked onto an old and shabby patchwork of power market regulation, now fast coming unravelled. The exception could be Britain, but it leaves a vacuum after 2010 (page 50). The threat of restructuring, renegotiation or market evaporation is large. Not surprisingly, financing wind farms is getting mighty difficult, as we report in the first of our two major features in this issue, Fighting Fear in the Finance Sector.

Wind finance is an innocent victim of the painful evolution of the power sector, but lack of guilt does not absolve the wind industry from action. Long term market structures for a dynamic future beyond life support are essential for bringing in the money. It is not a question of either/or. There can be no dismantling of today's support systems until market pull is strong enough for the industry to thrive. But reaching agreement on which mechanisms are best for increasing that pull has to be an industry priority, for without the promise of dynamic markets, finance will be tight. Utility money is no longer flowing -- the electricity giants are busy reducing debt and cannot afford their earlier aspirations to own all the wind generation. And the sums raised against their mortgages by home owners in Germany and Scandinavia to buy stakes in wind turbines are not large enough for the big time. The wind development industry needs the financial markets.

Fortunately, the money men like wind. They see its huge potential. They want in. Right now they are pondering solutions to the acute financial cramp, including portfolio finance, hedging agreements, and ways of tapping into the bond market (pages 47-52). What is attracting them is not opaque tariff regimes, but the emerging markets for wind energy's spin-off commodities, among them green tags or renewable energy certificates, exemption certificates from eco-taxes, bonus payments for distributed generation, and emissions reduction units. Transparent trade in commodities is something the financial world is comfortable with. It has decades of experience in knitting together long term deals with acceptable levels of risk. Lenders can see far less risk in a PPA supported by trade in green power credits and carbon emissions reduction units than one based on a politically controlled tariff. Minimising risk lowers cost.

Driving the market for these commodities is the Kyoto protocol's environmental imperative. Despite America's refusal to sign it, the protocol created a world consensus on reducing energy pollution, unleashing market forces long since recognised by the finance industry. In 2005, the EU will launch the world's first large-scale "cap and trade" market for CO2 emissions. Wind has a value far beyond its emissions reduction credits, but how the CO2 market has to be shaped to add extra value to wind in addition to that inherent in green tags is the subject of our second major feature, Emissions Trading and the Missing Link.


It is too easy to scoff at nascent green tag markets, pointing to their immaturity, lack of trading depth and limited geographic scope. But a dynamic and widely accepted green tags market will give sponsors, lenders and developers an objective indication of the specific premium for green power and therefore a project's viability. A PPA and a market for green tags is a more friendly structure than fixed tariffs for attracting the calibre of investors and lenders needed. The market pull resulting from Kyoto fall-out is attracting entities into wind as widely divergent as SaskPower in Canada (page 41) and the New Zealand government (page 37-38), among many others.

Introducing new policies in already functioning markets is bound to rock the boat. But if near term uncertainty is coupled with directional certainty, it has to be better than a leaky boat plugged with a rag of old patchwork. The European wind industry, meeting for its annual conference in Madrid this month, must forge a consensus on broad policy to allow its lobbyists to add agenda setting content to the campaign for national targets. The future lies beyond arbitrary pricing and direct political risk. International green tags and emissions trading markets are clearly favoured by market players, particularly the all important financial players. That is a fact worth noting. It is probably worth acting upon too.

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