Wind energy projects seek financing gust to get beyond draft stage

Romania, like any other emerging market, is exposed to bubbles. Real estate and consumer credit overexpansion taught the country some tough lessons and left a legacy that is still reverberating around the economy. Is renewable energy, the latest big thing, going to be the next bubble? Business Review asked financial specialists what factors are taken into account when assessing a wind farm project and why we haven’t yet seen local wind energy projects financed by international financial institutions.

Dana Verdes

In the past two-three years the renewable energy sector – especially wind farms – has been the standout new investment hotspot on the local market. But not all players who announced tens or hundreds of MW worth of projects have made good on their word, with many projects remaining just that.

Wind energy projects have been popping up all over Eastern Europe and the expansion is reflected in the level of credit volume approved by international financial institutions for this type of scheme. Representatives of the European Bank for Reconstruction and Development (EBRD) told Business Review that the bank has made some 16 investments in this sector in its countries of operations over the last three years, with a value of over half a billion euros.

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“Last year we concluded nine deals worth EUR 363 million, five deals in 2009 of EUR 124 million, while the funding approved in 2008 was EUR 71 million for two deals,” say bank officials.

Yet Romania hasn’t benefitted as much as the amount of mooted wind farm projects would suggest. EBRD officials say they are considering a number of projects in the wind sector in Romania.

Ana Maria Mihaescu, chief of mission of the International Finance Corporation (IFC) Romania and Moldova, tells BR, “Up until now the IFC hasn’t approved such credit lines in Romania. Currently, the IFC is in the final negotiation phase for such a loan and several other projects are in the analysis phase, at different stages of negotiation.”

According to IFC information, projects by EdP Renovaveis of Spain and its Romanian partner, Renovatio Group, in Cernavoda and Pestera, in the Dobrogea region, totaling about 228 MW, are in the final phase.

Local banks have been keeping an eye on these types of investments. “The development of the renewable energy market has been closely followed by Banca Comerciala Romana (BCR), as financing this sector has registered an increasing trend.

The value of loans given to finance wind farm projects hiked in 2010 compared with the previous year,” Ioana Gheorghiade, executive director of the project finance department at BCR, tells BR.

Key ingredients for financing

And the future looks bright. “Romania has the largest potential to develop wind energy projects of all Eastern European countries in the next five years,” says Gheorghiade. Yet the road from numbers on a piece of paper to reality is paved with many obstacles, say specialists, as the process for obtaining financing takes from 6 to 12 months.

“Progress on these projects is linked partly to the development of a legal framework for such investments,” say EBRD representatives. “For Romanian projects, probably the most important element at this point in time is the uncertainty surrounding the law, since it has been subject to changes and the implementing legislation is not yet in place. In addition, other issues must be considered, including the experience of the project sponsor and technical aspects such as wind measurements, equipment, grid connection and environmental issues.”

Other finance specialists say that the real estate motto “location, location, location” applies to this market as well. “We believe that the developer’s experience combined with a very good project location can mitigate many of the risks that may arise,” says Mihaescu.

The BCR official adds that another big factor in project assessment is the lack of legal impediments regarding land ownership and authorizations. 

“The bank wants to see if the investor is ready to make a solid contribution and has considered the worst-case scenario, taking into account the limits to the predictability of a project’s future revenues (the fluctuating price of electricity and green certificates),” says Gheorghiade.

Loan conditions

But how much project finance can banks stump up, and how much has to come from the investor? “There are no specific requirements. A project’s capacity to borrow is assessed based on a number of issues such as the wind measurements, revenue forecast for electricity and green certificates,” say the EBRD officials.

 The IFC chief of mission to Romania and Moldova adds, “The contribution varies from project to project, depending on the type of wind turbines chosen, the total investment value, wind resources and the developer’s experience.”

She goes on: “The interest rate and commission levied by the IFC are the same as on the market. We do not compete with banks, but we get involved in projects where the risk is considered significant alongside commercial banks or other market players. Banks are not overly eager to finance wind projects, especially the larger ones. The IFC can generally provide other benefits to the project: a longer grace or repayment period, an appropriate structure and its own experience of financing wind projects on a global scale.” The corporation contributes 25 percent of loans, of up to 15 years.

The BCR official tells BR, “The interest rate is established taking into account many variables such as credit period, warranties and the client’s financial situation.”Financial specialists say that the warranties required are typical of project finance, meaning the assets financed by the loan (equipment, land, claims transfer, insurance etc).

And the need for million-euro financing will hike as specialists say that the projects on the market are increasingly serious and professional.

“While two or three years ago there were many developers with lower financial power, now we can see some consolidation and an increased capacity to generate funded projects,” concludes the IFC official.

Financing a EUR 100 million wind project

If the projected annual free cash flow is EUR 17 million per year, divide it by 1.4 (= EUR 12 million) which could mean interest (8 percent) and repayments (over 10 years) on EUR 67 million. Then the sponsors will have to find the remaining EUR 33 million in equity. The IFC could put in up to EUR 6.6 million (19.9 percent) of that shareholder contribution, but would then, subject to the 25 percent rule, have just EUR 18.4 million to lend (25-6.6). The project needs an additional EUR 48.6 million in debt to reach EUR 67 million limit, which the IFC can help to raise from international banks (B loans) or work with the sponsor to obtain from other sources including domestic banks.

Source: Example given by Denis Clarke, IFC chief investment officer, at the Wind-Power Romania conference in January 2011

dana.verdes@business-review.ro