Of all the renewable energies, wind has witnessed the highest growth - a record 6,868MW of wind power was installed worldwide last year, bringing total capacity to 31,128MW, according to figures from the American and European Wind Energy Associations (AWEA, EWEA).

And of all the European markets Spain has been the most prolific in terms of bankable projects. The Paxareiras deals, Energias Eolicas Europeas (EEE), Eurovento and most recently Sistemas Energeticos Cando (SEC) (for details of past deals search on www.projectfinancemagazine.com) - all pushed the boundaries on structural complexity, size and tenor, even by pan-European standards. Even Germany, Europe's biggest market, does not produce wind deals of a size or bankability as those of Spain.

Consequently, the Spanish wind market now outstrips all but Germany in Europe for capacity: current installed Spanish wind power-generated capacity is 4,830MW (at end of 2002). And with its stated aim of 12,000MW by 2010, Spain continues to attract newcomers. GE Wind energy paid $380 million for the Spanish assets of Enron Wind Corp in May last year, giving it a 12% stake in the domestic market, which it plans to boost to 16%. And most recently (in March) Marubeni and J-Power completed the joint acqusition of Sistemas Energeticos Cando (SEC) from Gamesa through the first non-recourse wind acquisition facility in Europe.

But, and to some extent because of, the success of the Spanish wind programme now faces a healthy challenge on two levels - deal pricing is increasing and the incentivisation programme started under Royal Decree 2818/1998 has been cut.

The royal decree 2818/1998 defined the applicable wind tariff as the sum of the average hourly final price and a premium, where the hourly final price is itself the sum of the hourly market price resulting from the bidding process (the pool price) and the remuneration of auxiliary services and power capacity guarantee.

The premium is fixed annually by the government and is designed to ensure that the price of electricity sold by special regime producers ranges between 80% and 90% of the annual average price of electricity. Given that this average price is well above the market pool price, it provides producers and investors with significant incentives. But more importantly it proffers the stability required for limited and non-recourse financing and has played a significant role in banking Spanish wind.

RD 2818/1998 also gave the government the right to review premiums every four years and its findings under the latest Royal Decree 1436/2002 cut premiums by 8% to 2.66 cents/kwh from 2.89 in 2002 and the tariff by 1%.

The government argues that wind costs have fallen sharply to the point that the average investment cost is around Eu780/KW. Others disagree. The Spanish renewables energy association (APPA) claims that a wind farm in Spain has an average investment cost of Eu955/KW. Taking this figure for an average site (25MW, 2.400 equivalent full-load hours (EFLH) per year and 20 years of life span) the resulting Internal Rate of Return (IRR) is less than 9%.

Pricing has jumped

Given that the premiums are set yearly, the Spanish government may yet have a change of heart. In the mean time the change has not yet started to stifle the influx of wind developers. But the shape of the lending market has changed, and debt pricing, although stable at a range of 125bp to 135bp, has gone up in the past two years.

The jump in pricing is symptomatic of the fact that the Spanish banks, once the mainstays of Spanish wind finance, are playing a smaller role in the market.

The Spanish banks are still in the market. La Caixa, along with Dexia, closed a 15-year Eu18 million project debt package for Endesa Cogeneracion y Renovables (EcyR) last month. The deal finances Exploitaciones Eolicas El Puerto, a 25MW wind project comprising two wind farms in El Puerto and Trinidad in the Aragon region. But most Spanish content is either vanilla or as co-arrangers with foreign banks.

The reality is that having been hit hard by investments in South America, the Spanish banks appear to have handed back the initiative in the wind market to the internationals - a market they had previously pushed them out of with keen pricing and longer tenors against a backdrop of international investor discomfort (no power purchase agreements and a potentially shifting tariff rate). Simply put, Spain's banks had priced wind too keenly and when they needed every margin they could get wind was no longer an option.

Last year's Eurovento deal is a case in point. On 17 December 2002 HypoVereinsbank successfully syndicated a Eu213 million ($209 million) facility for Spanish wind developer Eurovento (a joint venture between Terranova and Tomen Corporation) - the largest true non-recourse financing for a Spanish wind project to date. The loan covers 80% of the cost of a six-plant deal, five in Galicia and one in Asturias.

At time of sell-down there was very little uptake from the domestic Spanish banks and their absence was attributed to an unwillingness to support non-traditional developers, with Eurovento being hailed as a newcomer to the market.

The reality was somewhat different. Eurovento was not a newcomer to the market (it was formed in 1996). Its joint venture sponsors closed a $53 million credit facility for a Galician wind plant - Paxareiras 11c and F - in July 2000 and in the process managed to raise the longest-term Spanish wind debt to date. Furthermore, Terranova is basically ex-Sea West, which was Tomen's co-sponsor, along with Cinergy, on Paxareiras 1 and 1a. So these credits, although not the strongest in the market, are not unknown quantities.

The lack of Spanish banking presence in Eurovento was down to the drop in domestic liquidity and the fact that Eurovento was pushing the envelope on lending terms. The deal incorporated a number of firsts for the Spanish wind sector and it was not the sponsors that were newcomers but the structure.

Not only did each Eurovento plant constitute a separate borrower, one plant in the deal came with a vendor finance package - thus complicating cross-lender negotiations. More importantly, the sponsors and their advisors were adamant about achieving a 15-year tenor without cash sweeps, thus boosting project returns.

Pricing on Eurovento was competitive given current accepted market rates. The Eu213 million package comprises a Eu180 million 15-year term loan, carrying a margin of 125bp from years one to six and 135bp thereafter. But the deal was still, unfairly, cited as expensive by banking commentators given past comparative transaction rates.

SECurity but not as we know it

It is a similar story with Spain's latest headline wind deal - the joint project acquisition facility arranged for J-Power and Marubeni in their buy-out of Sistemas Energeticos Cando (SEC).

Although new to the Spanish wind sector, both Marubeni and J-Power have a strong track record elsewhere. SEC is the seventh wind power plant (5 in operation and 2 in construction) that J-Power has been involved in. Projects include the 4.5MW Shimamaki and 14.8MW Wakkanai facilities in Hokkaido. The company is also building a 13MW plant in Kagoshima Prefecture.

Marubeni has also been involved in a number of Japanese projects and has stressed its commitment to Spain with four other greenfield sites under development. Consequently neither company is an unknown wind entity - a fact that does not appear to register in the pricing.

SEC is a club deal comprising a Eu57.15 million term loan and a Eu4.5 million working capital facility lead arranged and underwriiten by Dexia (45% take) with ING (25%), KBC (25%) and Banco Urquijo (5%).

Pricing on the 13.5 year debt was 130bp initially, ratcheting up to 145bp after three years - a little higher than the norm but much higher than the 85bp offered by Banco Credito Local to Gamesa for funding the wind farms in the first place.

The pricing reflects two things: that newcomers to the Spanish market, irrespective of reputation, generally pay a little more for debt. But more importantly that the Spanish banks are out of the cutting-edge market - Spanish debt content on SEC is 5% from Banco Urquijo which is in fact a subsidiary of international co-lender KBC.

And the SEC deal, like Eurovento, is cutting-edge - the first non-recourse wind acquisition facility in Europe and made more complicated by the fact that under Spanish civil law the assets of the acquired company cannot be used as security against debt raised to finance the takeover.

Consequently the deal has been done through SEC HoldCo, a special purpose joint venture which has purchased all the shares of SEC. Lender security in the short term is therefore corporate-based with no recourse to the assets. Nevertheless, the deal has been structured as non-recourse in the expectation that HoldCo and SEC will formally merge within the next 12 months, thus giving recourse to the assets.

And a merger is a certainty structured into the project. If it does not happen in the next 12 months the margin on the deal climbs 35bp. After 18 months the margin goes even higher at which point a cash sweep kicks in to pre-pay the facility and the deal goes into refinancing.

The structure is normally frowned upon by the Spanish government because a merger post-takeover means the acquirer can reap tax benefits from amortising the goodwill of the acquired company. However pricing incentive mechanisms like those in SEC are normally deemed sufficient reason for merging and are not blocked by the authorities.

The SEC deal can be speculatively seen as a transition point in the way Spanish wind is financed in the future and how the market shapes up. The traditional one-off SPV deals of the past look set to be replaced by corporate deals and refinancings for consolidated renewables companies, as the market matures further, attract more newcomers and ultimately ends in an M&A battle for market share.

Similarily, the Spanish banks are likely to return to the market in a big way as dealflow increases, deals get bigger, margins remain stable and lucrative, and the M&A fray hots up. La Caixa is already working with Dexia and WestLB on the next big Spanish benchmark - the upcoming Eu800 million Dragados Eolico deal.