Greece's energy composition has long been characterised not so much as a mix, but a lump of coal

As a market, the Aegeans have preferred fossil-fuels for electricity generation with lignite the most popular source of power in terms of megawatts.

In an effort to diversify the energy mix and promote renewables inline with EU directives and the Kyoto Protocol, the Greek government has put in place certain incentive structures and legislation to promote wind, solar and geothermal power.

Developers are taking advantage of favourable conditions and embarking on the process of navigating their way through the labyrinth of requirements and guidelines established by the government for renewables.

As a consequence, the market is attracting investors previously uninvolved in Greek projects partaking in what is becoming an extensive pipeline of projects.

As Babcock & Brown's first investment in Greek infrastructure, the financial close of Garbis (18MW) and Zefyros (24MW) wind farms bodes well for the renewables market.

However, those looking for hasty progress towards renewable power will be sorely disappointed.

The Greek energy mix

Gross electricity generation has steadily increased over the past two decades with growth in gas-fired power plants facilitating the rise.

Coal continues to dominate with roughly half of gross electricity generation provided by lignite. Meanwhile, Greek oil consumption in electricity generation has remained remarkably stable accounting for around one-sixth of the energy mix at present.

Renewable energy has steadily increased on aggregate in the last two decades but this improvement is considerably less impressive once the rise is set against the overall incline in electricity generation and consumption as a whole.

The composition of renewables in Greece has traditionally been dominated by large-scale hydropower. However, onshore wind projects like the pair Babcock & Brown is developing have gained significant ground in the past five years. According to European Commission figures, by 2004 onshore wind projects accounted for around 1,000MW capacity. Solar thermal and geothermal have also started to challenge this supremacy more recently.

The role of policy

The European Union has set Greece a target of 20.1 per cent of gross electricity consumption to be covered by renewable energy resources by 2010 and 29 per cent by 2020.

With this aim in mind, the Greek government has implemented some important legislation including the reform of its renewable energy sources policy to harmonise with the European Commission's 2001 Directive and the Kyoto Protocol.

It has attempted to reduce bureaucratic burden faced by developers through the introduction of firm deadlines to issue licences for grid access, installation and operation of renewable energy projects.

Further, the transmissions operator HTSO must purchase all renewable generation by entering into standard power purchasing agreements (PPAs) with renewable plants connected at the grid for a fixed 10-year term. HTSO must buy the power at fixed rates which stand at €73 per MW for the mainland and €84.6 per MW for the non-connected islands.

Under the 2006 reforms, developers of renewable energy will have right-of-way entitlements for grid connection works which aim to mitigate risk for developers as it addresses the problem of offloading the electricity produced.

Finally, extra costs anticipated as a result of forcing companies to purchase power units from certain projects at set prices will be reimbursed by a special fund established by the government for this purpose.

Conversely, the government has tempered enthusiasm for renewable projects by adding certain conditions.

Grants are only available to those projects with a structured plan for implementation, including EPC agreements. However, EPC contracts cannot be finalised as this would suggest the project would go ahead with or without the grant.

This was one of the challenges faced by Babcock & Brown. The financing of its Garbis and Zefyros wind farms may shift debt to equity if the projects secure government funding.

However, the projects did avoid one bureaucratic tripwire. As of December 2006, the Greek government required developers to prove the viability of a project before they commence construction.

Proposed wind farm sites need measured wind data for a set period before they can proceed beyond the planning stage. As the Garbis and Zefyros sites were already in development by the time the legislation was implemented, the projects were grandfathered in.

Garbis and Zefyros reach financial close

Babcock & Brown's two wind projects in Greece's Peloponnese peninsular were concluded in a single financial close with Dexia and Portugal's Millennium bcp in September.

The transaction followed more than four years of negotiations and feasibility studies while passing through the hands of three different sponsors.

The two sites were identified for feasibility studies in early 2003 by the then developer - a German company owned by Enron.

UK-based private equity firm Penta subsequently took over the project and continued its development until Babcock & Brown entered into discussions to take over the ownership of the project in August 2005.

The asset acquisition agreement was eventually finalised in May 2007 after delays as a result of changes in government legislation.

Dexia and Millennium bcp acted as MLAs providing equal amounts in debt for the autumn financial close.

The debt is composed of:

• €38 million (US$53.7m) long-term loan
• €3.5 million (US$4.9m) debt service reserve facility
• €2.2 million (US$3.1m) in VAT
• €16 million (US$22.6m) grant bridge facility

Babcock & Brown has applied for a grant of around €13 million from the Greek government which amounts to 40 per cent of the eligible costs. This is the maximum grant a developer is allowed to apply for in terms of percentage of eligible costs. If the grant is obtained, Babcock & Brown will substitute it for debt.

Norton Rose acted as legal adviser to the sponsors while Allen & Overy assisted the banks.

Lahmeyer International was appointed as technical adviser to the banks, which were also assisted by Marsh Limited on insurance.

Deloitte and PKF were both involved on the accounting side of the deal.

The development programme was managed by R.E. Services E.P.E. which will also provide construction and operations management services.

Conclusion

Babcock & Brown's inaugural foray into the Greek renewables market provides a positive outlook for similar projects currently in the pipeline.

Nevertheless, when commenting on closing the Garbis and Zefyros deal, Babcock & Brown implied that it took over six months to fully respond to the new government legislation and its implications.

Devising a strategy for understanding the myriad rules and conditions for receiving grants seems to be delaying other developers - but only temporarily. Blockages due to uncertainty regarding government policies will most likely clear in the next few months and a steady stream of new-build renewable energy projects should ensue.

However, if Greece is to shake off its reputation for having a highly asymmetrical energy mix, it will need to work hard. The country is still perceived to be excessively bureaucratic, which could potentially hold back its progression into renewables.

The project at a glance