27 November 2012
2012 has been the most successful year for obtaining long-term debt finance in the UK onshore wind sector since the financial crisis began in 2007/08, according to a new report. Project Finance specialists at audit and advisory firm Mazars have carried out research that reveals more deals in excess of £15m closed between January and the end of October 2012 than any year since the onset of the credit crunch, with a total value in excess of £500m. These figures are even more striking when taking into account the wider context of a sharp contraction in overall infrastructure project lending.
Mazars’ analysis also demonstrates that this success has occurred despite a tightening in credit conditions for onshore wind projects. Average gearing levels (the proportion of the total project funding requirement met by debt) have fallen from over 80% to less than 75%, meaning that shareholders have to provide over £400,000 per megawatt (MW) capacity in construction equity, up from £300,000 per MW in previous years. Combined with shorter agreed repayment periods, higher required debt service cover ratios, and higher bank (margins have increased to over 3% above the cost of funding), it is clear that onshore wind projects have succeeded in the face of an increasingly difficult lending environment.
According to the report, there are two main reasons why so many deals have bucked current trends and reached financial close: good project fundamentals and positive macro-economic trends. For a project to be financed in the current market it must have strong wind speeds, or, where wind speeds are lower, reduced capital costs. But even naturally strong projects have relied increasingly on favourable trends in wider economy. Forecasts of higher power prices in the long-term have benefitted both the investment case and the ability to raise debt against future project cashflows. Also, lower swap rates have offset increases in margins and led to a lower ‘all-in’ cost of borrowing, and beneficial movements in exchange rates have reduced the effective costs of wind turbines (typically priced in Euros) in real terms, relative to the RPI-linked renewable energy price incentives and the rising wholesale power prices.
Ben Morris, co-author of the report and Senior Manager within Mazars’ Project Finance practice says: “The positive news is that good projects can still secure funding, even in today’s credit environment. However, project sponsors have become more reliant on factors outside their control to underpin their investment and credit case.”
He added: “The combined effect of positive macro-economic factors is very significant, and any reversal back to 2010 levels would lead to a sharp reduction in equity returns and a significant increase in the equity funding requirement.”
David Donnelly, Director of Mazars’ specialist renewable energy project finance team comments: “There is an opportunity for Government to reduce this vulnerability through the move to fixed feed-in tariffs under the Electricity Market Reform Bill - this will remove the current exposure to market power price.
He concluded: “However, this will only be of benefit if the price for the feed-in tariffs is set at the right level; Government will need to go beyond the underlying capital costs of projects – the main focus of the current call for evidence – to ensure that the impact of macro-economic factors on these costs, and the costs of and conditions for raising finance are also taken into account.”