Scramble for Green Yield in Europe Has Big Power Beating Banks

  • Renewable energy investment rises unexpectedly in Europe
  • Developers going it alone to avoid restrictions from banks

Some of Europe’s largest utilities are choosing to finance renewable energy projects alone instead of involving banks, leading to an unexpected gain in cash flowing into the industry that’s struggling to cope with subsidy cuts.

Investment in clean energy in Europe, rose 2 percent to $41.2 billion in the first nine months of this year compared with the same period a year ago, according to data compiled by Bloomberg New Energy Finance, which starts a conference in London on Monday. Companies financed almost 60 percent of that sum, up from 52 percent a year ago. Banks extended project finance for much of the remainder.

The findings are an indication of stiffening competition for wind and solar assets, which come with predictable yields backed by government policies. It’s also a reflection of the financial clout of utilities led by EON SE, Dong Energy A/S and Vattenfall AB and of the focus of banks on meeting stricter regulations due to force them to tighten lending standards.

“We are seeing the relative success of market participants that don’t use project finance -- corporate level borrowers,” said John Pires, head of mergers, acquisitions and project finance at Northland Power Inc., a Toronto-based power plant builder working on wind farms in Europe. “It’s a totally different dynamic that we’ve seen increasing in the last couple of years, which will make the project finance market more competitive.”

Steady Market

The support that big utilities extended toward renewables so far this year has made Europe a surprisingly steady market for the industry. 

Worldwide investment in clean energy fell almost 30 percent to $159 billion in the first nine months of the year, Bloomberg New Energy Finance estimated in a report released Monday. That reflected new discipline from authorities in China over the industry’s pace of expansion and the extension of a tax credit in the U.S., which reduced incentives to complete wind and solar installations quickly.

“We’re seeing quite a bit of interest from investors in the Far East coming into Europe as their home market is cooling down,” said Alejandro Ciruelos, managing director of project and acquisition finance at Banco Santander SA. “These types of investor are looking to diversify their exposure to their home market by acquiring assets overseas.”

This year wasn’t supposed to be so good in Europe. A series of big offshore wind farms reached financial close last year, boosting the 2015 numbers past what BNEF thought could be achieved this year. Instead, big utilities came through with more projects, like EON and Statoil ASA’s $1.35 billion Arkona Beckan Sudost offshore wind farm in Germany and another from Vattenfall for $1.1 billion in Denmark’s waters. Dong financed three of the top eight projects in Europe this year for a total of about $3 billion, according to BNEF data. 

The top two deals that got project finance were SSE’s $3.9 billion Beatrice wind farm involving 13 banks including Lloyds Bank Plc, Societe Generale SA, KfW, Royal Bank of Scotland Group Plc and Commonwealth Bank of Australia. The $1.8 billion Merkur project in Germany was backed by 10 banks including ABN Amro, Commerzbank, Deutsche Bank AG and KfW IPEX.

“As of today, renewable investment in Europe is quite robust,” Laszlo Varro, chief economist at International Energy Agency said. “Offshore wind is accelerating.”

Part of the success comes from falling costs. Dong and Vattenfall drove the price of offshore wind to new records in July and September, smashing the industry-wide target of 100 euros per megawatt-hour four years early. Governments are forcing companies to compete for subsidy in auctions instead of offering fixed levels of support.

“For a lot of banks, renewables is the busiest power sector available,” said Carol Gould, head of power and renewables at Mitsubishi UFG Financial Group Inc. “While the projects are still making sense, I think its going to remain a very interesting area for them.”

For the banks, there’s more competition from pension and infrastructure funds as well as new capital reserve requirements that prod them to lend for shorter terms and with more covenants.

Big utilities often have the capacity to finance deals on their own -- and can come to a decision rapidly then refinance at their leisure, said Francesco Starace, chief executive officer of the Italian power generator Enel SpA.

“Projects in renewable energy have a small to medium size, and typically when they’re decided it’s done on an individual basis,” Starace said in an interview. “It requires speed of action, and this is not something that goes hand in hand” with traditional bank finance.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE