Philippe Crouzat, EDF Energies Nouvelles: now tapping parent for finance

It’s been a tumultuous year in renewable energy, with looming incentive changes powering the latest boom in the US, a financing thaw in Europe thrown into reverse, and emerging markets fast becoming the engines of growth. Financiers are looking anxiously ahead to 2012, with worries that another credit crunch and a renewed global slowdown will hit the industry hard.

Sentiment has swung most dramatically in Europe, where the picture was improving rapidly in the first half of the year. But the European debt crisis, which accelerated over the summer, has seen bank lending seize up once more, as Eurozone banks struggle to refinance themselves.

“The European syndicated loan market for project finance has become increasingly challenging since the summer”, says Dominik Thumfart, the London-based co-head of infrastructure and renewable energy finance at Deutsche Bank, voted Best Finance House, Europe. The debt crisis has seen a number of European banks – especially from Europe’s southern fringe – essentially pull out of the renewable energy market.

And the government-guaranteed incentive schemes for renewables have turned from a financing asset to a liability.

“One of the sector’s key strengths … has now turned into one of its biggest Achilles heels,” he says, noting that some lenders and investors are “questioning the ability and willingness of certain European governments to honour their commitments” in terms of continuing to back existing support programmes and build out new renewables.

“In future, the closer a renewable energy project is to grid parity, the higher its chances are of attracting financing,” he adds.

“The pool of bank capital going into 2012 is markedly smaller,” says Michael Volkermann, Deutsche Bank’s Frankfurt-based co-head of infrastructure and renewable energy finance. This means the story for next year will be a scramble to find new sources of finance.

If Europe’s ambitious targets for renewable energy are to be met, more institutional investors will need to be attracted to the sector, say bankers.

For example, DONG Energy has been successful in bringing in Danish pension funds as equity providers, investing in UK offshore wind farms alongside the Danish utility.

“Operational projects clearly have an easier time attracting investors than construction projects” says Volkermann. “For a considerable time to come, there will be a role for banks in construction finance,” given their understanding of the risks involved.

“But there are signs that there will be an ever larger number of financial investors coming in during the operational phase,” he adds, noting that Deutsche has, with an undisclosed partner, put together a €1 billion ($1.3 billion) energy infrastructure debt fund that will help the bank refinance renewable energy projects once they are operational. “I know other banks are working on similar vehicles,” he says.

The message in Europe is clear: “If you’re a developer, you can’t rely on the commercial debt market,” argues Jeremy Connick, a partner in the London office of law firm Clifford Chance – voted Best Law Firm, Europe. It doesn’t mean that finance isn’t available, but developers may have to look more broadly. “Some contractors – for example, Siemens – are offering financing,” he notes, adding that export credit agencies as well as multilaterals such as the European Investment Bank are offering support to the sector.

“The pool of bank capital going into 2012 is markedly smaller” – Michael Volkermann, Deutsche Bank

For the winner of the Best Project Developer category – France’s EDF Energies Nouvelles – its re-absorption into its parent EDF could not have come at a better time. In August, the company, which was floated in 2006 on Euronext Paris, was delisted, just as Europe’s debt crisis was blowing up.

“It has made our life different,” says chief financial officer Philippe Crouzat, explaining that most of its projects are now funded using corporate finance provided by EDF.

However, the developer, which has 3,500MW of operational assets in 13 countries, mostly in wind and solar, continues to tap project finance or bank funding where it is not the sole owner of projects, or where it seeks to have international and local banks alongside when entering new markets.

And, if its bid – with four partners – for part of France’s 3,000MW offshore wind tender is successful, it will seek project finance and potentially

William Bice, Milbank: “back to the future” as US market looks to tax equity investo

turn to the project bond market. “It’s a big amount – we’re aiming for at least a 1,500MW share of France’s offshore tender.” At a likely cost of more than €5 billion, such an initiative would stretch even EDF’s balance sheet.

However, Europe’s project finance market has some time to recover before EDF Energies Nouvelles comes shaking the tin. While the tender winners are likely to be announced next April, Crouzat does not expect to be raising the finance before the end of 2013 at the earliest.

KPMG estimates that €120 billion in investment will be needed by 2020 to meet Europe’s offshore wind ambitions. Connick at Clifford Chance says that the size of investment required is encouraging innovation in contract structuring, for example in structuring project financings to allow for minority investors.

In the US, business has been strong throughout the year, with wind energy installations up 72% year on year by the end of the third quarter, and developers rushing to get projects in place to qualify for the 1603 cash grant programme, which expires at the end of 2011, and with an eye on the expiration of the crucial Production Tax Credit (PTC), which runs until the end of 2012. Meanwhile, falling prices of solar photovoltaic modules have seen investment in projects using that technology rise much faster in 2011 than many analysts had forecast.                                                                                                                                      

However, Europe’s debt market woes have also cast a shadow over the US renewables market, where European banks have dominated.

But, argues Kerri Fox, the New York-based head of project finance at BBVA, the Spanish bank voted Best Finance House, North America, the effects haven’t been as bad as many feared. “The uptick in pricing has been less than what might have been expected,” she says.

“Many European banks that play in the US market have a US funding base,” she says. For example, BBVA’s Compass Bank division, with operations throughout the US ‘sunbelt’, ranks among the 25 largest US commercial banks based on deposit market share.

Moreover, compared with Europe, there is what Fox describes as “a very robust” project bond market, that offers renewable energy developers an alternative source of finance, direct from institutional investors buying so-called 4(2) private placements and 144A bonds. “Those investors have a very strong appetite for energy projects in the US. That’s a very big focus for our growing business,” she says.

“If you’re a developer, you can’t rely on the commercial debt market” – Jeremy Connick, Clifford Chance

“Without doubt, like any bank headquartered in Europe, we’re facing new challenges,” she says. But BBVA’s response has been to focus particularly on the bank’s strongest relationships, and to develop its advisory and project bond business, she adds. “We’re very much open for business.”

Other banks are also pushing into the market, with Japanese houses, such as Bank of Tokyo Mitsubishi UFJ – in second place in our survey – increasingly active, as are smaller US regional players, such as Ohio-based KeyBank, Utah-based Zions Bank and Wisconsin’s Associated Banc-Corp.

The end of the cash grant programme – which has provided nearly $10 billion in funding over the past two years – spells another change, in that tax equity investors will become vital once more in funding the sector. “It’s back to the future,” says William Bice, a partner in the New York office of Milbank, Tweed, Hadley & McCloy, voted Best Law Firm, North America.

Unlike many smaller developers or overseas investors, tax equity investors have a US tax base against which they can offset the PTC earned by renewable energy plants. Traditionally, they have tended to be financial entities, but some non-financial firms – most notably Google – have entered the market. As well as reaping a tax advantage, “these companies see value in the ‘green glow’” of investing in renewables, Bice adds.

However, such investing is not for the faint-hearted. “Even well-capitalised non-financials need people who are very experienced with partnership accounting rules,” notes Bice’s colleague, Los Angeles-based partner Edward Kayukov. Furthermore, they have to understand the power business. Nonetheless, “there are indications that a couple of other large non-financial companies are looking to get involved,” he adds.

Richard Saines, a Chicago-based partner at runner-up law firm Baker & McKenzie, says that “there is a lot of offshore money looking to get involved in the US market. “There are [Asian] manufacturers and developers looking to invest in the US and [they] are prepared to put in equity in a way that many US players are not – as part of a vertically integrated approach, as a way to sell their products.”

While state-level renewable portfolio standards (which require utilities to source a percentage of their power from renewables) are likely to drive the market in the US, support from Washington is crucial. Here, what Saines describes as the “created controversy” around the bankruptcy of solar module firm Solyndra, which had received a $535 million Department of Energy loan guarantee, is likely to make life harder for renewables advocates. “In the short-term, this is creating a cautious mood,” he says.

However, the smart money is on the PTC being extended next year – with the industry already lobbying hard, reminding policy-makers that when it has been allowed to expire in the past, investment has collapsed.

Steve Fine, vice-president of environmental markets at ICF International – voted Best Advisory, North America – warns that if the PTC is not extended, certain jurisdictions could see opposition building to the costs of renewable energy.

“Without a PTC, we’ll see some consumer push-back o

n the impact on retail rates. The PTC holds that down somewhat, with the federal taxpayer subsidising local ratepayers.”

He doesn’t anticipate a reversal in renewab

le energy targets, “but a levelling-off – there will be a question mark over the appetite in certain jurisdiction

s”. Such pressure is likely to be exacerbated by the boom in US shale gas helping to keep down power prices. “Cheap natural gas is a good thing,” says Fine, “but it does set the benchmark against which renewable energy prices are compared.”

While Europe and the US continue to dominate the renewable energy markets, a clear trend reported by survey winners is the rise of the emerging markets. In its latest Country Attractiveness Index report, Ernst & Young – once more voted Best Advisory, Europe – noted that “demographic changes and surging economic growth in emerging markets now appear to be the driving force behind renewable energy investment.”

“Emerging markets are turning their attention to the potential for local renewable energy generation as these become increasingly competitive against conventional alternatives to meet a new thirst for clean power,” says Arnaud   Bouillé, a UK-based director in renewable energy at Ernst & Young.

“We have witnessed sizeable investment appetite, often supporting export opportunities, from emerging economies. Far Eastern investors among others are showing particular interest to take large positions within the power and utilities sector more broadly”.

Australia’s Pacific Hydro, voted Best Project Developer, Asia Pacific, is certainly looking beyond its home market to emerging economies: in this case, Brazil and Chile. The three markets “are all resource-based economies which are expected to continue benefiting from surging demand from China and India for their mineral and energy products,” says CEO Rob Grant. “As these economies grow, so too will their demand for clean and secure energy supplies and we believe we can play a significant role in meeting that demand.”

The company is planning to invest $2 billion in Australia over the next five years, $1.5 billion in Brazil by 2016 and, by 2020, around $2 billion in Chile. “The current impact of Europe is definitely being felt across the world in terms of banks’ lending capacity and higher cost of funds,” says Grant.

“There is no clear end to this impact. That said, we are finding well structured projects are still being financed even though banks are being more selective.” EF