Renewable energy exports are booming worldwide, but the sector is still heavily reliant on export credit agencies, writes Melodie Michel.

 

According to the US Energy Information Administration, global renewable electricity generation is expected to grow by an average of 3.1% per year between 2008 and 2035 – faster than all other energy sources. As energy demand keeps growing and fossil fuel sources are declining, the renewable sector is gaining market share.

However, as the industry’s precise performance is hard to forecast, it suffers from a certain lack of appetite from lenders, giving export credit agencies (ECAs) a crucial role in its development.

ECA importance

In fact, ECA support for renewables has grown exponentially in the past few years. For example, US Exim financing for exports of clean energy equipment more than doubles every year, and has grown from US$6mn in 2007, to US$720mn in 2011. Vandana Gombar, senior analyst at clean energy data provider Bloomberg New Energy Finance (BNEF), tells
GTR: “You can’t really find an ECA that doesn’t have a clean energy portfolio now. Maybe a couple of years ago they didn’t, but today all of them are active in this area.”

Traditional players in the sector have been joined by new entrants such as UK Export Finance and Korea Eximbank, and ECAs have started to involve new types of investors into these projects. For instance, in May, Denmark’s EKF covered its second export loan provided by a pension fund, to be used mainly on wind farms. At the time, the ECA told GTR that as pension funds prefer relatively large projects with a stable cashflow over a long period, wind farms were what fit their investment profile best.

Gombar explains that as traditional lending sources have shrunk, there has been more space for ECAs to expand their activities. “Pre-2008, you didn’t have a lot of people looking at ECAs because credit was available and they seemed like a long, paper-heavy route to get financing. But once traditional commercial sources of financing started shrinking, they became a very compelling alternative.”

BNEF research shows that debt and equity investments in renewable energy fell by 20% between Q3 2011 and Q3 2012, especially in the wind sector, an area that ECAs seem eager to support; the wind industry represents 48% of Denmark’s EKF’s total exposure. “They seem to have a higher risk appetite,” Gombar adds.

From a corporate perspective, having the support of an ECA allows for more favourable pricing arrangements, while banks rely on ECAs to venture into new renewable energy markets. Kathrin Eich, group head of structured export finance at Commerzbank, says: “ECAs are becoming more and more of interest for project development companies as well as corporates, and the more ECAs come into the focus of clients, the more new markets we enter. Without ECAs, we couldn’t have entered markets like Turkey and other countries in Eastern Europe where a pure non-ECA-covered financing would not have been possible. We feel comfortable with those country risks because we have ECA cover to back us.”

She explains that European exporters have had to look for new markets as government incentives in Western Europe have been interrupted. “The German and Western European renewable energy market is very strong, but the legislation in some of these countries has been put on hold, so wind turbine and solar exporters have to look for new markets where there may be higher sovereign risk,” she tells GTR, pointing out that ECA cover is what makes this expansion possible.

Emerging markets

Among emerging renewables markets, Turkey seems increasingly attractive to Western European exporters. Interestingly, the push comes from corporates more than from government policies or project developers. Eich explains that Commerzbank has seen a lot of corporate-driven deals, in which family-owned businesses have decided to start activities in renewable energies and to buy wind turbine themselves without a project developer backing them. They make contracts with wind turbine suppliers and the bank finances them on the basis of corporate risk with ECA cover.

Eich adds that this type of deal is easier for banks to support than project finance deals, as they do not depend on each country’s legislation, but on the corporate’s balance sheet. “If you go into project finance, where you have to rely on the future cashflows coming from the project, it’s very important to know what kind of tariffs you get, who determines them and for how long they are secured, who’s your offtaker, who’s paying you for the electricity generated etc.

“Some of the countries, for example Poland, have legislation in revision so project developers have to wait until they know what the new legislation will be on how the electricity tariffs will be set and what kind of subsidies will be given,” she says.

Commerzbank also sees more and more requests from Asian countries like Indonesia or the Philippines, but these markets take longer to penetrate, as they are project finance-based. The bank looks for markets where the pipeline of projects is sufficient to start the analysis of the prevailing legislation, parties and competitive environment. “You also have to check if there are any plans for nuclear power plants or coal-fired power plants which could become competition for your own project. It is a big effort to understand a new market with its own framework, so for now the focus is mainly on Eastern Europe,” Eich explains.

In the US, the government is supporting solar panel exporters wanting to break into new markets in South America, the Caribbean and India.

US Exim recently guaranteed a 10-year US$6.4mn loan from PNC Bank in Pittsburgh for the construction of a solar power system in Barbados, and backed a US$32.1mn Brazilian wind farm project.

The US is also active in Africa, and US Exim signed a US$2bn green energy scheme with South Africa in August. However, African renewable deals are still considered too risky for banks, and tend to fall under the remit of multilaterals. Commerzbank’s Eich says: “Hydro projects in Africa for example are still in the remit of the World Bank and other multilaterals. They are not being financed through commercial banks, or only to a small extent.”

She adds that hydro projects in general remain more controversial than wind or solar due to environmental concerns. “We have had some project presentations for hydro, but it’s not as easy as wind since it raises a lot of social and environmental issues.

“Big hydro projects in Turkey and China have a lot of NGOs fighting against them. You can’t just concentrate on the project as such, but you have to take care of the social and environmental implications of the project. As a financier you have to assume these responsibilities, as well as meet your internal guidelines,” she points out.

German dilemma

Germany is facing a particular dilemma, as government subsidies for renewable energy production have stopped, yet demand for alternative power sources is bound to increase as the country has pledged to phase out nuclear energy by 2020. Barclays head of trade and working capital Eugenio Cavenaghi explains: “Germany managed to achieve a leading position as an exporter in the solar industry because of early days policies from the government, which incentivised the production and installation of solar panels. It was very good to give a start to the industry, but what we need now is the ability to deploy these technologies in a mass way.” He adds that switching from nuclear to green power is going to take renewables from a niche product to an indispensable part of the German energy mix. “Consultants have calculated that by 2020 there will be an aggregated investment of between €100-200bn in German green energy alone.”

In terms of sectors, Germany is counting on wind for the strongest growth, as the solar industry faces increased competition from Chinese manufacturers. In fact, German chancellor Angela Merkel recently called for discussions with the Chinese authorities after Solarworld, Germany’s biggest solar panel maker, led a push by about 25 European manufacturers for the European Commission to look into alleged dumping practices by Chinese exporters.

“According to recent studies, the highest potential in Germany is wind,” adds Cavenaghi. “There are already a lot of ongoing projects for the construction of wind parks offshore in the North Sea where there is a lot of wind to be captured. There are also a lot more wind farms growing inland.”

Cavenaghi explains that a transaction the bank might finance could be a wind park being built offshore, and which requires a cable structure to be imported from a southern European provider to connect it to the power grid on land. “The cables alone are more or less as expensive as the wind turbines themselves, because of the distance and the special type of equipment you need to bring the energy from the park down to the land over several hundreds of kilometres without losing power,”
says Cavenaghi.

“In such case, there will be massive amounts of receivables that are generated from the manufacturer of the cables towards the entity that is building the wind park in northern Europe, and we would help the supplier by purchasing and discounting the receivables so that they always have free cashflow and keep their working capital under control while their order book is increasing, because luckily the whole sector is growing and demand is increasing.”