Havsnäs Wind: Renewable PF blows into Scandinavia


Project financing for the Havsnäs wind farm in Sweden closed on 27 March, demonstrating that infrastructure funds are able to assess and assume variable pricing for wind energy in market-based regimes that do not offer long-term contracts.

Havsnäs is a landmark deal [Transactions Database]; the first large-scale project financing in the Nordic electricity market, which until now has been dominated by the utilities and energy-intensive industry and characterized by balance sheet financings.

Jens Thomassen, Jean Perarnaud and Tom Murley of HgCapital who led Hg's investment alongside developer Renewable Energy Systems (RES), discuss the project that will be Sweden's largest onshore wind facility and analyse the potential for future projects in the region.

The Nordic Power Market

Nordpool, the integrated electricity exchange covering Denmark, Finland, Norway and Sweden, is widely regarded as the most liquid and transparent electricity market in the world.

With more than 400 members, Nordpool offers a liquid spot and forward market up to 5 years ahead.

Prices are transparent, and current prices for all traded contracts can be viewed on Nordpool's website, which is accessible to the public. The greatest liquidity, however, remains in the 1-3 year market.

Renewable Energy in Sweden

Sweden is a pioneer in promoting renewable energy. Hydropower production has been developed there for more than a century; and biomass from the considerable forest industry has been in place for over 30 years.

To meet Sweden's ambitious renewable power targets, the government introduced a green electricity certificate system in May 2003. The objective is to increase electricity from renewable energy sources by 17TWh (or 17 million kWh) over 2002 renewable energy production by 2016. 

Like the UK renewable obligation scheme, the Swedish green certificate scheme is a market based quota system, obliging retail electricity suppliers to provide a pre-determined percentage of renewable energy evidenced by a green certificate. Failure to present the requisite number of certificates attracts a penalty.

The system has strong cross-party political support and has been through two regulatory reviews since its inception.

As a market-based, technology-neutral support mechanism, the Swedish green certificate system encouraged project developers to first focus on "low-hanging fruit" - mostly back-pressure turbines and other improvements at existing large forestry, pulp and paper industries.

Both HgCapital and RES conducted bottoms-up analyses of future supply and demand of green certificates to understand the outlook for these certificates in the market. With two merchant revenue streams and some correlation between the two, this was a complex and time-consuming process, but critical in order to be able to take a 17-year view on green certificate prices.

Until recently, wind power projects were largely left out of the mix as certificate prices did not support the cost of building wind farms. With the easy options exhausted and the target rising, certificate prices have risen in the last 9 months reflecting growing market perception that new capacity is required to meet the government target.

The large installed hydropower capacity that exists in the Nordpool is ideal for wind power to enter as it offers significant regulating power.

Further, the addition of significant wind power resources may very well become an asset for the Nordpool as a whole.

The reliability of continuous supply is currently compromised by the homogeneity of renewable energy sources feeding into it. Exceptionally wet or dry seasons can result in export or import constraints with neighbouring countries and cause volatile prices in the short term. Adding wind to the mix should mitigate these effects.

The Havsnäs Project

Havsnäs is a landmark transaction. With 95.4MW of installed capacity the project is the largest onshore wind farm in Sweden, the second largest onshore wind farm in the Nordic region and the first project financing in the Nordic power market based on international standards.

The project was developed by RES Skandinavien; a subsidiary of RES. RES continues its involvement as construction manager for the project as well as retaining a minority shareholding alongside HgCapital.

Commerzbank, ING and NordLB underwrote a €127 million (US$199.16m) debt package on a 17-year term in a previously untested and merchant market.

The key banking challenges were to develop a structure to balance bank concerns over short and mid-term power price volatility, the hedging arrangements available in the market and maintaining equity upsides from potentially rising power prices.

Being the first project financing in Sweden for an electricity project based on LMA documentation also posed some challenges on implementing standard security structures in a Swedish law context. Despite these novel challenges, it took less than two months from release of the information memorandum to first draw.

A fully wrapped EPC contract from RES and a high quality developed project allowed the banks to focus on the key issues unique to the transaction, primarily the price outlook for electricity and green certificates and Swedish law related issues.

HgCapital was advised by Vinson & Elkins and Öbergs while Mannheimer Swartling advised RES. Norton Rose and Lindahls advised the lenders.

Sgurr Energy acted as lenders technical adviser and will continue to provide construction supervision on behalf of Hg and the lenders.

Conclusion

The Swedish market is poised for growth, but it's a market that requires a suite of skills to succeed.

These include EPC negotiations, financing, structuring of power sales and a detailed fundamental analysis of two merchant markets - Nordpool power prices and Swedish green certificates.

As such, the partnership between HgCapital and RES is a powerful combination.

The Havsnäs transaction demonstrates that infrastructure funds and private developers have the skill set and capital to successfully compete with utilities in market-based renewable support regimes.

The project at a glance

Project Name  Havsnas Wind Farm
Location  Hävsnas wind farm in Jamtland, Sweden
Description

 The project involves the construction of the Hävsnas wind farm in Jamtland, Sweden. It is the first true project financing of a merchant wind farm in Scandinavia

Sponsors  HG Capital
 Renewable Energy Systems
Operator  RES Havsnas
PPA  project will trade power and green certificates in the NordPool power market at fluctuating prices rather than the guaranteed prices given in other markets
Total Project Value  US$357.6 million
Total equity  US$91 million
Equity Breakdown

 HG Capital - 75%
 RES Skandinavien - 25%

Total senior debt  US$266.6 million
Debt:equity ratio  75:25
Mandated lead arrangers  Commerzbank
 ING Bank
 NordLB
Legal Adviser to HgCapital  Vinson & Elkins
Financial Adviser to HgCapital  Deloitte
Legal adviser to lenders  Norton Rose
Legal adviser to lenders (Swedish)  Lindahls
Legal adviser to HgCapital (Swedish)  Obergs
Legal adviser to RES (Swedish)  Mannheimer Swartling
Technical adviser  SgurrEnergy
Date of financial close  March 2008

Snapshots

Transaction Snapshot

Havsnas Wind Farm


Financial Close:
27/03/2008
SPV:
RES Havsnas
Value:
$357.61m USD
Equity:
$91.00m
Debt:
$266.61m
Debt/Equity Ratio:
75:25
Full Details