UK onshore wind secures record project finance in 2012; but vulnerable to EMR, says report

Onshore wind projects in the UK have defied the credit crunch by securing record number of project finance deals in 2012, according to a report from financial consultancy Mazars.

But the company warned that the contracts for difference (CfDs) support on offer to renewables projects in the Energy Bill would make project finance more difficult to come by – and urged government to consider a fixed feed-in tariff instead.

According to the report, more deals in excess of £15m closed in the first ten months of 2012 than any year since the onset of the credit crunch in 2007, with a total value in excess of £500m.

Mazars described the figures as “striking” noting that they confounded the sharp contraction in overall infrastructure project lending.

The analysis also showed that the success 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/MW capacity in construction equity, up from £300,000/MW in previous years.

Combined with shorter agreed repayment periods, higher debt service cover ratios – the amount of cash needed to demonstrate an ability to service the debt - and higher bank margins, “it is clear that onshore wind projects have succeeded in the face of an increasingly difficult lending environment”, Mazars said.

According to the report, the wind industry has been able to buck current trends with a combination of good project fundamentals and positive macro-economic trends working in its favour. However, it is clear that project fundamentals are now playing a far less significant part in the investment climate than the wider economic context. Forecasts of higher power prices in the long-term have both added to the investment case for onshore wind, as well as allowing wind projects to raise debt against future project cash flows.

Ben Morris, co-author of the report and senior manager within Mazars’ project finance practice said: “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.”

Mazars called for the government to reduce this vulnerability by removing the CfDs provision in the Energy Bill and replacing it with a fixed feed-in tariff for renewables project, which would, the company said, remove projects’ exposure to the market power price.

“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,” said David Donnelly, director of Mazars’ specialist renewable energy project finance team.

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Policy, investment and markets  •  Wind power