A bonus for the banks

Thanks to the 2020 targets set by the European Union for renewable energy production, member states know exactly what they have to achieve. But in order to get renewable energy projects up and running, they need banks and other investors to stump up large volumes of finance. And a lack of experience of renewable energy – and hence, a lack of comfort – means this is far from straightforward.

“It’s a relatively new sector and there’s a lack of experience,” says Liam O’Keeffe, managing director and head of project finance and syndications at Credit Agricole Corporate and Investment Bank (CIB) in London. “The technology is quite new and does not have the track record of conventional power generation plants.”

However, he adds, the number of banks actively pursuing renewable energy projects in the EMEA region (Europe, the Middle East and Africa) is estimated at between 20 and 30. Given that the region has around 160 banks competing in project finance overall O’Keeffe points out that “there’s a growing body of expertise” that is now approaching one-fifth of the total market in the EMEA and is “growing all the time”. He also believes that raising £1 billion (€1.2 billion; $1.6 billion) for a good quality renewable energy project would currently be achievable.

Credit Agricole CIB has itself committed around €1 billion to renewable energy projects in areas including biomass, biofuels, wind, solar and waste-to-energy as it seeks to live up to its self-proclaimed sobriquet of ‘La Banque Verte’ (“the original logo [of the bank] was green but now we have genuine green credentials and are very committed to the sector”, says O’Keeffe).

For those banks remaining hesitant about committing to the space, one of the main reasons is the complexity of the regulations surrounding it. Incentive arrangements for investors can be difficult to understand and differ from one market to the next – while many European countries have feed-in-tariff mechanisms, the UK, for example, has renewable obligation certificates.

While getting your head round these regulatory complexities may not have been worth the trouble when renewable energy deal flow was scant, market observers now say the level of deal flow in the space has accelerated to the point where investors are prepared to go the extra mile. Data from Credit Agricole CIB’s Research of Project Finance Loan Markets shows that, of power deals completed in the first half of 2010 in the EMEA region, 34.3 percent was renewable fuel and 22.3 percent wind farms, compared with 43.3 percent conventional power.

Meanwhile, InfrastructureInvestorAssets data reveals that renewables was the third-most-popular investment sector in 2010 – behind only energy and transport – with $30.7 billion worth of deals giving it a near-16 percent market share. This put it ahead of social infrastructure, which recorded just over $22 billion of deals.  

More to come 

O’Keeffe says he sees plenty of scope for a larger pipeline of deals going forward. For example, with the 630-megawatt London Array offshore wind project set to commence first-phase construction in around a month’s time, he believes an increasing number of projects will arise in offshore wind in the UK and northern Europe. He also anticipates more solar projects outside the beleaguered Spanish market – citing an increase in activity in Italy and the potential for such deals in the Middle East’s Gulf states given recognition of a need to avoid over-reliance on oil and gas.               

Of course, any current discussion of prospects for renewable energy investment in Europe would be incomplete without reference to events in Spain. Acknowledging  that the retroactive measures proposed by the government in relation to the country’s solar photovoltaic industry have “really shaken” investors, O’Keeffe adds: “It’s a reminder that there is regulatory risk when you are relying on government support. The economics are in your favour but it’s a worry. Banks will want to see a track record of commitment [to renewable energy projects].”