Hot Air?
Expansion of wind capacity across Europe is inevitable and as the
market becomes established deal sizes will grow and financing
techniques will diversify. But attitudes change slowly. Energy
companies are very eager to highlight their attempts to expand
renewable interests but in reality it only accounts for a tiny
per-centage of their business. Investment in renewables is still
largely driven by political/cash incentives and in many countries
these are still embryonic.
New farms
Germany, with its long-standing socio-economic incentive schemes, has the most installed capacity. Denmark and Sweden have also achieved impressive targets. But the typically small size of the projects in these countries, fuelled by perceived technology risk, has prohibited non-recourse financing.
In southern Europe larger deals are beginning to happen. Induced by new legislation favouring ?green' projects in combination with de-regulating energy markets, many countries in the region are seeing rapid development of wind farms ? and of a size that make the project economics stand up.
This is true of both Italy and Spain, home to the IVPC4 and EEE deals ? cited as benchmark transactions in wind financing. EEE's Eu913 million loan, due to launch into syndication at the beginning of May, is the largest renewable energy project loan in the world to date. Its success in selling at arranger level is an indication of market appetite, although there are a number of peculiarities mitigating perceived risk for investors. These include the sponsor strength, an offtake agreement with a sponsor parent group and that the deal builds on EEE's existing capacity in the region.
Coextensively, some bankers suggest that a number of foreign players avoided the deal on the grounds that pre-completion risk is covered fully by the equity ? a structure typical to Spanish deals attempting to achieve cheap financing.
Despite the peculiarities, EEE is a template for future deals in one respect ? it is a bundled deal. On completion, EEE will have a total capacity of 1173MW from 31 separate wind farms. Other developers are likely to follow suit and strategically bundle small wind projects.
Larger deals mean better cost of project funds. But structuring could become even more diverse. ?There will be many more wind farms in Spain following the example of EEE, and some will be financed the project way. As the market settles other techniques, such as bonds, may be used,? says Borja Buades Fuster, manager, project finance, BBVA.
Italy is also developing wind projects capable of attracting international bank investment. IVPC4, with a debt of L731.527 billion, signed in September 2000, having secured a total of 23 banks. This deal was one of the last in Italy structured with a CIP6 agreement (generous tariffs and offtake agreements). A replacement scheme designed to favour such plants, but notably omitting co-generation plants, is under discussion and is likely to be a form of tradable ?green certificates'.
Gary Griffiths, director and head of global syndications at Fortis Bank, predicts that Italy holds a particularly promising future for large-scale wind farms. ?The majority are to be in rural areas, where the land royalties promised will be warmly welcomed and planning objections minimal.? Local manufacturers will also benefit from contracts from developers.
As more such deals close, financings for wind farms will become an increasingly common scene in the markets. All bank lenders on the look out for wind investments cite Italy and Spain as the hottest markets. Turkey also gets a mention.
Investor confidence is growing but there is still an element of wariness. Technology has improved but is not entirely proven over its whole life span, weather is unpredictable and the geography of farms relative to each other may affect productivity.
David Cain, vice-president, syndications at Fortis Bank adds that, ?A notable problem is that there are too few independent advisors in the market.?
Offshore options
Elsewhere in Europe, differing problems are creating conditions even more problematic for large-scale build out. The Netherlands has rivalled Germany in its attempts to boost renewable generation capacity: The Dutch ?Green Funds' system allows investors to earn tax-free interest on renewable investment funds with the fund manager/bank taking on the project risk.
Despite the ?Green Funds', wind farm development has met with resistance from the public and environmental pressure groups ? ironically the Dutch don't like wind farm aesthetics. And even if development picks up, there is an existing surplus of funds so future projects are unlikely to need to raise cash from elsewhere.
Offshore farms are increasingly being considered as a viable option in countries with space and planning restrictions. Although burdened with their own problems, such as higher technology risks and maintenance costs, they do offer a solution to many of the objections of onshore sites, as well as being best placed to harness wind.
The UK, where public resistance has held up the development of wind energy, despite it being the windiest country in Europe, has recently taken a major step in this direction. On April 5 Crown Estates, the agency in control of the Isles' seabeds announced the granting of 18 leases. The wind farms in this ?first round' of development, to be in operation by 2005, will be allowed up to 30 turbines, giving an approximate maximum capacity of 100MW each. The minimum stipulated output is 30MW. Developers must now apply independently for all the necessary permits to proceed, its only remaining tie with Crown Estates an annual fee of 2% of gross overturn in exchange for use of the land.
A spokesperson for the agency said that the response of viable applications was greater than had been expected, particularly given the stringent criteria and proof of financing ability demanded. More leases have been awarded than was originally anticipated and the British Wind Energy Association (BWEA) sees the announcement as significant progress towards achieving 10% of generation from renewable energy by 2010.
The Crown Estates awards have been restricted to giant energy players, that have either set up wholly owned subsidiaries or are leading consortiums, typically including small energy developers or turbine manufacturers. That this is the case is at least in part down to the detailed financing plans and substantial deposit demanded. However, it is also a product of the backdrop against which the developments are to be made and the likely financing routes to be taken as a result.
Onshore technology used offshore is inevitably going to create an element of project risk. But it is the transitional state of the UK energy market, particularly with reference to renewables, that is likely to make bank lenders most wary. Given this, it is likely that the project sponsors, with their large balance sheets, will pay for build out of the farms the corporate way, with a possible view to re-financing post construction.
The Non-Fossil Fuel Obligation (NFFO) has been discontinued in the UK and is to be replaced by a new system, still undergoing final tweaking ? ?Renewable Obligations'. Under the former, all public electricity suppliers were obliged to secure a specified amount of generating capacity from renewable technology. NFFO contracts were then awarded following a competitive tender process, with the cheapest schemes selected to secure the required capacity within each technology band. The scheme was enabled by the Fossil Fuel Levy raised on domestic electricity bills and therefore amounted to subsidisation of renewable projects.
Existing contracts will still be honoured, including a number of frustrated projects due to be re-located, but no more will be awarded. Alison Hill, communications manager at BWEA highlights one of the reasons for an overhaul. ?NFFO fulfilled its aim of bringing renewables into the market but the way they were awarded was sporadic and intermittent.?
The incoming Renewable Obligations marks an important transition away from the notion of subsidies. It dictates that by 2010 all electricity supply companies must source at least 10% of their supply from renewable energy. Renewable plants will be able to sell the equivalent of their excess capacity in the form of ?green certificates'. Non-renewable generators can opt to purchase these direct from the renewable generators or pay what amounts to a fixed fine of 3 pence a unit. The amount amassed through these fines will then be re-distributed to companies that have attempted to meet the renewable requirement with payment size reflecting the extent to which those companies have met the 10%.
Melville Haggard, executive director at environmental consultants IMPAX, stresses the significance of this shift, saying, ?Renewable resources are to be brought into the mainstream market, with a marketable commodity attached to them that non-renewable energy providers cannot obtain from anywhere else. It will no longer be seen as a subsidised industry.? An ideal would be the introduction of this system across Europe, creating a deep and transparent pool of tradable commodities.
Bankers, although admitting the possible benefits of the certificates in the long term, are generally not quite as enthusiastic ? until their value has been proven they will not provide much comfort. The other factor causing disquiet among investors is the very recent launch of NETA. This introduction of direct trading between generators and suppliers is designed to make the electricity market more competitive and transparent, thus lowering prices.
Because of these fundamental and untested shifts in the UK energy market, it is very difficult to predict what will happen and bankers lending into such an environment are going to be wary, demanding margins accordingly. The players best positioned to evaluate and take risk are the large vertically integrated corporations, whose balance sheets can stand fluctuations in price and revenue streams. Existing wind farms in the UK have been financed through a mixture of equity and debt, but these were guarded by NFFO contracts. Under the new conditions there is merchant in addition to project risk. It seems likely, then, that until the market settles, build out will be financed independently by the large energy giants seen in the Crown Estates leases. Once a history has been created from which outsiders can judge risk, external lending will start playing a part and smaller developers will emerge.
Going green?
The market in renewables is growing. Technology has come a long way since first generation equipment and farms are growing in size and frequency. Differing environmental and political factors in certain regions are influencing the financing techniques most suited to fund build outs. Gary Griffiths believes that we are now reaching a stage where there is a pipeline of decent sized projects, which if successful will instil confidence in the markets.
So is Europe going green? Although the progress outlined here and elsewhere does illustrate steps on the way to reducing fossil emissions, it is only the beginning. The BWEA is fond of stating that the UK has enough wind to power its energy demands three times over. This may be true but there are numerous obstructions. All of the Crown Estate projects together will only provide about 1%, giving an idea of how many turbines would be needed for full supply. Apart from the technical and geographical problems, there is proven public resistance to unrestricted construction of wind farms.
Storing harnessed energy is very expensive, but wind is an unpredictable source, creating problems if too much of the grid is relying on its input. In addition interconnectors in the UK in their current form could probably only cope with about 20% penetration. Established energy companies are very keen to market themselves as ?going green' but in reality it takes time to build up new assets. A close inspection of most of them reveals that only a tiny percentage of their investments or profits are accounted for by renewable investments and a number of them still attract bad press from environmentalists for their activities outside Europe. They are certainly not on the verge of giving up oil and coal. This said, a step has been taken and with both commercial pressure and research into renewables growing, it will hopefully be the first of many.
New farms
Germany, with its long-standing socio-economic incentive schemes, has the most installed capacity. Denmark and Sweden have also achieved impressive targets. But the typically small size of the projects in these countries, fuelled by perceived technology risk, has prohibited non-recourse financing.
In southern Europe larger deals are beginning to happen. Induced by new legislation favouring ?green' projects in combination with de-regulating energy markets, many countries in the region are seeing rapid development of wind farms ? and of a size that make the project economics stand up.
This is true of both Italy and Spain, home to the IVPC4 and EEE deals ? cited as benchmark transactions in wind financing. EEE's Eu913 million loan, due to launch into syndication at the beginning of May, is the largest renewable energy project loan in the world to date. Its success in selling at arranger level is an indication of market appetite, although there are a number of peculiarities mitigating perceived risk for investors. These include the sponsor strength, an offtake agreement with a sponsor parent group and that the deal builds on EEE's existing capacity in the region.
Coextensively, some bankers suggest that a number of foreign players avoided the deal on the grounds that pre-completion risk is covered fully by the equity ? a structure typical to Spanish deals attempting to achieve cheap financing.
Despite the peculiarities, EEE is a template for future deals in one respect ? it is a bundled deal. On completion, EEE will have a total capacity of 1173MW from 31 separate wind farms. Other developers are likely to follow suit and strategically bundle small wind projects.
Larger deals mean better cost of project funds. But structuring could become even more diverse. ?There will be many more wind farms in Spain following the example of EEE, and some will be financed the project way. As the market settles other techniques, such as bonds, may be used,? says Borja Buades Fuster, manager, project finance, BBVA.
Italy is also developing wind projects capable of attracting international bank investment. IVPC4, with a debt of L731.527 billion, signed in September 2000, having secured a total of 23 banks. This deal was one of the last in Italy structured with a CIP6 agreement (generous tariffs and offtake agreements). A replacement scheme designed to favour such plants, but notably omitting co-generation plants, is under discussion and is likely to be a form of tradable ?green certificates'.
Gary Griffiths, director and head of global syndications at Fortis Bank, predicts that Italy holds a particularly promising future for large-scale wind farms. ?The majority are to be in rural areas, where the land royalties promised will be warmly welcomed and planning objections minimal.? Local manufacturers will also benefit from contracts from developers.
As more such deals close, financings for wind farms will become an increasingly common scene in the markets. All bank lenders on the look out for wind investments cite Italy and Spain as the hottest markets. Turkey also gets a mention.
Investor confidence is growing but there is still an element of wariness. Technology has improved but is not entirely proven over its whole life span, weather is unpredictable and the geography of farms relative to each other may affect productivity.
David Cain, vice-president, syndications at Fortis Bank adds that, ?A notable problem is that there are too few independent advisors in the market.?
Offshore options
Elsewhere in Europe, differing problems are creating conditions even more problematic for large-scale build out. The Netherlands has rivalled Germany in its attempts to boost renewable generation capacity: The Dutch ?Green Funds' system allows investors to earn tax-free interest on renewable investment funds with the fund manager/bank taking on the project risk.
Despite the ?Green Funds', wind farm development has met with resistance from the public and environmental pressure groups ? ironically the Dutch don't like wind farm aesthetics. And even if development picks up, there is an existing surplus of funds so future projects are unlikely to need to raise cash from elsewhere.
Offshore farms are increasingly being considered as a viable option in countries with space and planning restrictions. Although burdened with their own problems, such as higher technology risks and maintenance costs, they do offer a solution to many of the objections of onshore sites, as well as being best placed to harness wind.
The UK, where public resistance has held up the development of wind energy, despite it being the windiest country in Europe, has recently taken a major step in this direction. On April 5 Crown Estates, the agency in control of the Isles' seabeds announced the granting of 18 leases. The wind farms in this ?first round' of development, to be in operation by 2005, will be allowed up to 30 turbines, giving an approximate maximum capacity of 100MW each. The minimum stipulated output is 30MW. Developers must now apply independently for all the necessary permits to proceed, its only remaining tie with Crown Estates an annual fee of 2% of gross overturn in exchange for use of the land.
A spokesperson for the agency said that the response of viable applications was greater than had been expected, particularly given the stringent criteria and proof of financing ability demanded. More leases have been awarded than was originally anticipated and the British Wind Energy Association (BWEA) sees the announcement as significant progress towards achieving 10% of generation from renewable energy by 2010.
The Crown Estates awards have been restricted to giant energy players, that have either set up wholly owned subsidiaries or are leading consortiums, typically including small energy developers or turbine manufacturers. That this is the case is at least in part down to the detailed financing plans and substantial deposit demanded. However, it is also a product of the backdrop against which the developments are to be made and the likely financing routes to be taken as a result.
Onshore technology used offshore is inevitably going to create an element of project risk. But it is the transitional state of the UK energy market, particularly with reference to renewables, that is likely to make bank lenders most wary. Given this, it is likely that the project sponsors, with their large balance sheets, will pay for build out of the farms the corporate way, with a possible view to re-financing post construction.
The Non-Fossil Fuel Obligation (NFFO) has been discontinued in the UK and is to be replaced by a new system, still undergoing final tweaking ? ?Renewable Obligations'. Under the former, all public electricity suppliers were obliged to secure a specified amount of generating capacity from renewable technology. NFFO contracts were then awarded following a competitive tender process, with the cheapest schemes selected to secure the required capacity within each technology band. The scheme was enabled by the Fossil Fuel Levy raised on domestic electricity bills and therefore amounted to subsidisation of renewable projects.
Existing contracts will still be honoured, including a number of frustrated projects due to be re-located, but no more will be awarded. Alison Hill, communications manager at BWEA highlights one of the reasons for an overhaul. ?NFFO fulfilled its aim of bringing renewables into the market but the way they were awarded was sporadic and intermittent.?
The incoming Renewable Obligations marks an important transition away from the notion of subsidies. It dictates that by 2010 all electricity supply companies must source at least 10% of their supply from renewable energy. Renewable plants will be able to sell the equivalent of their excess capacity in the form of ?green certificates'. Non-renewable generators can opt to purchase these direct from the renewable generators or pay what amounts to a fixed fine of 3 pence a unit. The amount amassed through these fines will then be re-distributed to companies that have attempted to meet the renewable requirement with payment size reflecting the extent to which those companies have met the 10%.
Melville Haggard, executive director at environmental consultants IMPAX, stresses the significance of this shift, saying, ?Renewable resources are to be brought into the mainstream market, with a marketable commodity attached to them that non-renewable energy providers cannot obtain from anywhere else. It will no longer be seen as a subsidised industry.? An ideal would be the introduction of this system across Europe, creating a deep and transparent pool of tradable commodities.
Bankers, although admitting the possible benefits of the certificates in the long term, are generally not quite as enthusiastic ? until their value has been proven they will not provide much comfort. The other factor causing disquiet among investors is the very recent launch of NETA. This introduction of direct trading between generators and suppliers is designed to make the electricity market more competitive and transparent, thus lowering prices.
Because of these fundamental and untested shifts in the UK energy market, it is very difficult to predict what will happen and bankers lending into such an environment are going to be wary, demanding margins accordingly. The players best positioned to evaluate and take risk are the large vertically integrated corporations, whose balance sheets can stand fluctuations in price and revenue streams. Existing wind farms in the UK have been financed through a mixture of equity and debt, but these were guarded by NFFO contracts. Under the new conditions there is merchant in addition to project risk. It seems likely, then, that until the market settles, build out will be financed independently by the large energy giants seen in the Crown Estates leases. Once a history has been created from which outsiders can judge risk, external lending will start playing a part and smaller developers will emerge.
Going green?
The market in renewables is growing. Technology has come a long way since first generation equipment and farms are growing in size and frequency. Differing environmental and political factors in certain regions are influencing the financing techniques most suited to fund build outs. Gary Griffiths believes that we are now reaching a stage where there is a pipeline of decent sized projects, which if successful will instil confidence in the markets.
So is Europe going green? Although the progress outlined here and elsewhere does illustrate steps on the way to reducing fossil emissions, it is only the beginning. The BWEA is fond of stating that the UK has enough wind to power its energy demands three times over. This may be true but there are numerous obstructions. All of the Crown Estate projects together will only provide about 1%, giving an idea of how many turbines would be needed for full supply. Apart from the technical and geographical problems, there is proven public resistance to unrestricted construction of wind farms.
Storing harnessed energy is very expensive, but wind is an unpredictable source, creating problems if too much of the grid is relying on its input. In addition interconnectors in the UK in their current form could probably only cope with about 20% penetration. Established energy companies are very keen to market themselves as ?going green' but in reality it takes time to build up new assets. A close inspection of most of them reveals that only a tiny percentage of their investments or profits are accounted for by renewable investments and a number of them still attract bad press from environmentalists for their activities outside Europe. They are certainly not on the verge of giving up oil and coal. This said, a step has been taken and with both commercial pressure and research into renewables growing, it will hopefully be the first of many.
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