Green growth finance spells eastern promise

EUROPE: As the year began, the money arrived. In January alone, the European Bank for Reconstruction and Development (EBRD), based in London, announced deals involving equity and debt finance of EUR185 million to wind projects in central and eastern Europe.

Zorlu Energy Group's 135MW wind farm was the first to receive EBRD funding
Zorlu Energy Group's 135MW wind farm was the first to receive EBRD funding

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This is in addition to the roughly EUR160 million Riccardo Puliti, the bank's business group director for energy, says the EBRD invested in renewable energy in 2009. The EBRD is assuming a greater profile in the wind power sector in areas east of the old Iron Curtain, which have grown more enthusiastic about green energy but lack the finance to deliver it.

Financing for wind and other renewable energy projects is part of the EBRD's sustainable energy initiative (SEI). The bank launched SEI in 2006, partly in response to the Group of Eight richest countries' call for international financial institutions to scale up investment in climate-change mitigation. SEI entered a second and more ambitious phase in 2009, with a target of issuing EUR3-5 billion in finance in 2009-2011. Estimates are that this should bring projects online with combined value ranging between EUR9 and EUR15 billion. SEI also finances energy-efficiency measures in industry, municipal infrastructure and the power sectors, as well as development of the carbon market.

"We started to work hard (on renewable energy financing) in 2007 and 2008," says Puliti. "In the beginning, it was difficult to develop a large pipeline. In 2007, there was still liquidity and not many projects being developed. Those that were developed had easy access to financing. Since the second half of 2008, the situation has changed enormously." From October 2008 to February 2010, the EBRD completed ten renewable-energy financing deals, Puliti says, noting that almost all of these involved wind farms. In addition, the EBRD finances small-scale renewable projects through local banks in the 30 countries where the lender does business (see map).

Puliti says the bank used to invest in roughly three to four renewables projects annually - that has now gone up to six or seven a year. The amount of funding for renewables deals, particularly involving wind, is expected to increase sharply this year. Financing for Turkish and Polish wind farms is on the horizon. "There isn't any reason we can't do even ten or 15 deals a year in the future," notes Puliti.

Green frontier

Puliti says the wind potential of many EBRD territory countries is far from fully exploited. "Poland is quite advanced and, due to its proximity with Germany, has had more of a buoyant financial climate and did well in the financial crisis. Other countries are lagging behind," he says. He describes a growing number of wind and other renewables projects in such places as Bulgaria, Romania, Hungary and the Baltic states, though a shortage of credit is holding back development.

"The picture is completely different when we talk about places like Ukraine and Russia," he says. "Ukraine has been plagued by persistent political uncertainty, and in Russia, legislation in renewables is still very much being developed."

Established in 1991, the EBRD is owned by 61 countries as well as by the European Union and the European Investment Bank (EIB). Its mandate includes fostering the transition towards open and democratic market economies.

"The EBRD takes a top-to-bottom approach," explains Puliti. "It was established to make sure macroeconomic reforms were done to facilitate the availability of the private sector to invest. So, first of all, we want to make sure that the regulatory structure is sufficiently organised - that there's an economic and legal framework that makes investments profitable but also sustainable." Once the EBRD is comfortable with the regulatory framework, Puliti says the bank also checks to ensure that such considerations as regulations for environmental protection and licensing are being respected.

Given its mission, it is not surprising that the EBRD also gets involved in policy. "In agreement with governments of countries, we are from time to time asked for grant financing to pay for consultants to draft a set of laws, for example, on renewable energy, tariff-setting, grid connection rights and all these kinds of things," says Puliti. Donor countries provide the funding. "We also very much support the government in the selection and hiring of consultancy firms that help to develop a certain piece of legislation," he says.

Debt and equity

The EBRD is designed for both commercial lending and equity investment. In January, it announced that it would lead a EUR60 million syndicated loan to Eolica Bulgaria, a subsidiary of Spanish renewables group Enhol, to finance the development of the 60MW Suvorovo wind farm in the north-eastern region of Bulgaria. The loan was the second the EBRD had made to a Bulgarian wind project: in 2008, it had provided a EUR137 million loan for the construction of the 156MW Saint Nikola wind farm built by US giant AES.

But the EBRD also routinely buys and sells stakes in companies. It plans to spend up to EUR125 million to acquire a 25% stake in the Hungarian and Polish subsidiaries of Spanish wind giant Iberdrola Renovables. Iberdrola's Hungarian and Polish subsidiaries currently own a combined 211MW spread across five operational wind farms. A further three under construction have a total capacity of 98MW. There are also plans by the two subsidiaries to double this capacity with other projects in the pipeline in both countries. The EBRD is now looking at buying a stake in Iberdrola's Romanian operations.

Iberdrola and the EBRD got to know each other in a 2008 deal that Puliti calls an example of how the bank likes to do business. That year the bank invested EUR900,000 for a minority stake in Iberdrola's Estonian arm. "I think that was an investment we wanted to make to see if we could find a way to cooperate in the future," says Puliti. The EBRD's cooperation with Iberdrola went smoothly and gave the bank confidence to expand its partnership with the developer into Hungary, Poland and Romania. "It's good for everyone to see how we operate without too much money being risked," he says.

Puliti says the EBRD looks for equity investments with an annual net return of 15-20%. "We can be an investor for seven, eight, nine years," he says. "We have many different kinds of agreements. But we always have a very clear exit strategy." Such options include initial public offerings (IPOs) of company shares on a stock exchange, as well as trade sales, in which the bank sells its stake to a company in the renewables sector. In some instances, the held company buys out the EBRD's stake. One EBRD investment in a private equity fund focused on renewable energy and energy-efficiency projects, but that was probably a one-off arrangement. "We have had far greater satisfaction investing directly," says Puliti.

Whether an equity or debt investment, the EBRD conducts what Puliti describes as quite complex due diligence. "Like every good and solid banking institution, we want to make sure that our money is not at risk," he says. International players like Iberdrola and AES are not alone in getting through all the hoops.

Turkish conglomerate Zorlu Holding was awarded the EBRD's first financing in Turkey after the bank started operating there in 2008. The money went into Zorlu's 135MW wind farm in the south of the country. Estonian developer FreEnergy also passed muster, and the EBRD last year took a 35% stake worth EUR18.85 million to support that company's development of 15 wind farms across the Baltic states (see table, page 71) - enabling a total 330MW of new generation capacity to tap the region's wind power potential.

Key wind financing by the European Bank for Reconstruction and

Country Project/ Cap. Developer Investm. Finance Investm.
invested (MW) (EURm) Year

Bulgaria St Nikola 156 AES Geo 137.0 Long-term 2008
wind farm Energy debt

Bulgaria Suvorovo 60 Eolica Bulgaria 60.0 Syndicated 2010
wind farm (Enhol) loan

Estonia Iberdrola 150 Iberdrola 0.9 Equity 2008
Estonia Wind investment
wind farm)

Estonia FreEnergy 331 FreEnergy 18.9 35% equity 2009
portfolio stake
(Estonia, Latvia,

Poland Tychowo 50 RP Global 29.0 Loan 2009
wind farm

Turkey Osmaniye 135 Rotor Elektrik 45.0 Loan 2009
wind farm (Zorlu Hlding)

Hungary IBR Magyar 124* Iberdrola 50.0 25% equity 2010
(Iberdrola sub) stake

Poland IBR Polska 185* Iberdrola 75.0 25% equity 2010
(Iberdrola sub) stake

TOTAL 1,191 415.8

Most loans above are co-financed by other international lenders
* operational and under construction; additional pipeline capacity

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