Wind industry experiences a “flight to quality” as banks turn down less profitable projects.

By Karl Harder

Wind energy is emerging steadily from the economic slowdown as investment for sound proposals remains strong. In the new financial reality, however, banks are being more selective than the during the boom years.

Prior to last year’s downturn there was an almost uncontrolled flood of capital into the wind sector often regardless of project quality. Some industry insiders have described the new situation as being a “flight to quality”.

While money was cheap in the boom times debt equity ratios were also favourable for developers. “During the credit crunch things got very difficult. But before the crisis it was almost too easy to get money and projects were often getting 100 percent debt. Now banks are looking to lend but under new terms and conditions,” says Eric McCartney from project finance advisory company, Chapin International.

Higher borrowing costs

Overall borrowing costs for wind developers have increased but not dramatically. There is now debt available but not on the same terms as 18 months ago.

Less profitable projects, such as those in locations with lower wind speeds, are struggling to make the economics work due to the higher borrowing rates.

“What we saw in the last 5 years was a massive wave of liquidity with being debt being offered for up to 18-20 years and margins fell below 1 percent and in some cases such as in the UK below 0.9 percent,” says Tom Murley, head of renewable energy at private equity group Hg Capital.

From the mid to late 80s until 2004 the long term average for borrowing was at a margin of 200-250 basis points (BP) or 2-2.5 percent above Libor or other reference rates, says Murley. Current rates are now up to around 300 BP above the reference lending rates according to New Energy Finance. In 2007 margins were around 80 BP.

“Until 18 months ago times were extraordinary so people who are now complaining now should realise that. We won’t see the same conditions again over next five years and probably not for 10 years,” says Murley.

In Europe the European Investment bank has emerged as a major source of finance. In 2008 the EIB leant 2.2bn Euros but New Energy Finance expects this to rise to 3bn Euros for 2009. In the UK the EIB is partnering with a number of domestic banks to loan up to 1bn pounds to wind farms.

Utilities win out

With capital available again and government support in place global wind capacity continues to grow although more slowly. The first quarter of 2009 saw 23 percent growth or 5,374MW installed, according to a World Wind Energy Association survey of 11 of the top 15 countries, representing 80 percent of the world market. In 2008 full year growth was 29 percent.

Rising lending rates and a slow down in wind growth have given the edge to the industry’s bigger players. This was evident in a recent spate of acquisitions such as German utility RWE’s recent purchase of almost 50 percent of Spanish developer Danta de Energias, and a 26.7 percent stake in C-Power. “Utilities, large energy groups and well-financed private equity groups are likely to be busy for the rest of the year weighing up opportunities to purchase hundreds of megawatts more of troubled wind and solar development portfolios in Europe,” wrote New Energy Finance in a research note in June.

With less demand for wind turbines, however, some smaller projects have found a stronger bargaining position. “Two years ago turbine manufacturers wouldn’t talk to developers in Africa because projects were too small but today I am working on a project in Senegal,” says Chapin International’s McCartney. “Turbine prices have fallen and there is a window of opportunity now to strike good deals. There is also just a 10 month lead time rather than 15 months previously.”