The credit crisis has created impetus for new financing options for the wind energy sector.

By Karl Harder in London

Looking back, the financial landscape of 2008 painted a stark contrast with the previous year when, according to New Energy Finance, virtually any wind project was getting financed.

In 2007, the pinnacle of wind energy’s boom, 20-year term deals with margins of less than 100 basis points were commonplace. By contrast, at the height of the crisis, terms were down to 5 years and as banks rushed to re-capitalise, margins rose to over £300.

The industry may be through the worst of it, but as Jean Perarnaud, debt advisor at HG Capital notes: “Things are not going to return to entirely to 2007 conditions."

"Banks basically stopped lending in 2008, what little money was coming out was on short terms and very high interest rates,”  he adds.

2009 and 2010 have seen a significant recovery in term periods it is now common to achieve 16 – 18 year full amortization loans. Margins have also started to come down though the recovery has been less dramatic.

Changes afoot

According to HG Capital’s Perarnaud, several longer-term changes occurring in the wind project finance market. 

Firstly, there will likely be a significant shift in the required debt equity-ratio. Eric McCartney from project finance advisory company, Chapin International, supports this idea.

“Before the crisis, it was almost too easy to get money and projects were often 100 percent debt financed. This is now impossible to imagine - in fact, it is difficult to get anything better than 80:20", he explains.

Secondly, as banks retreated to focus on core competencies, the lending pool shrunk significantly.  Consequently, the reduced capital availability has meant that only the highest quality projects are receiving finance.

Finally, syndication, (where one bank takes on the loan, then cuts it up and sells portions of the loan to other banks in order to spread risk), and the creation of credit derivatives has ceased  - for the short term, at least.

As the crisis proved, syndication did not spread risk but tended, particularly with mortgage-backed securities, to concentrate risk. However, syndication was a useful tool for project finance insofar as developers only had to deal with one bank, which made negotiations easier.

“Syndication now happens upfront.  You have to get four or five banks in a room and negotiate with them all of them at once. As you can imagine, this complicates matters significantly,” explains Perarnaud.

Nowadays, margins look set to stabilise around two times their pre-crisis level, at about £200-£250 above Libor. Fortunately for the wind industry these increased margins have not fed through into higher lending rates due to the historic lows in the base rate. 

“It is currently possible to get deals for 18 years on fixed term for 6 – 6.5% if you are borrowing in the region of £200m,” said Pararnaud. “This is great deal and these figures are not dissimilar from the rates pre crisis,” he adds.

While things may be returning to historic norms, the impact of the credit crunch on the wind sector was significant. Some operators were forced to sell when their variable interests rate spiked during 2008. 

The sudden capital draught affected projects coming through the planning process while also severely impacting the turbine supply chain as orders were cancelled.  This makes it important for developers to consider other methods for financing wind, that are not as vulnerable to the volatilities of the international money markets.

Alternative financing models

Taking a more conservative approach to banking, Triodos Bank, a Dutch bank with a large UK operation, does not source finance from the international wholesale markets but relies on its stable deposit base to lend from. 

As Steve Moore, Head of Wind Farm Relationship at Triodos explains, Triodos had a ‘very good’ credit crunch. “We were at no point capital restrained. If anything, it was the opposite; capital flooded to us as people sort safety from the high street banks. We were able to capture more business since the start of the crisis we have doubled our renewable finance team.”

Lessons from the traditional banking model learned through the credit crunch have inspired a number of new models of wind energy finance that are set to enter the market during 2010.

One such concept comes from Empower Community, a start up social enterprise based in the UK, which has devised a direct and easy way for the public to invest in wind projects. It takes an ‘organic’ approach to capital, directly linking communities with wind farms by initially financing the project with institutional money, then exiting the institutional finance with money from members of the local community, to whom 100% ownership is transferred.

A side impact of this is that over the long-term it removes the need for debt as the projects are 100% equity financed.  Empower Community has a launch pipeline of £300m of projects and has set its sights on 1bn under management in 5 years. 

Another early stage concept is UK-based start-up, Abundance, which has its sights set on re-designing project finance to be more in tune with the needs of the energy generating asset, while also basing their fund on locally sourced finance.

Both schemes aim to scale the traditional community ownership model that has been pioneered in the UK by Energy 4 All, indicating that a trend may be emerging toward bringing financing back into communities, rather than leaving it to the international wholesale markets.

The arguments posited by both Empower and Abundance is that this process will de-risk projects, while also increasing term-periods and, indeed, returns for developers. If they succeed in achieving the necessary scale, they could promise to deliver a win-win situation.

To respond to this article, please write to:

Karl Harder: karl.harder08@imperial.ac.uk

Or write to the editor:

Rikki Stancich: rstancich@gmail.com