Developments in renewable energy in CEE
Energy markets in Central and Eastern Europe (CEE) are facing challenges due to regulatory risk. With the increasing need for finance in this region, structured finance is a crucial source of funding for this industry, which is national in nature.
The energy market in CEE – as in Western Europe – differs greatly between countries, largely because there is no single regulatory framework. The difficulties associated with power transportation, including losses, high costs, limited inter-connectivity and the inability to store power, means that energy markets remain national in nature. Additional factors, including varying rates of economic growth, or political pressures, such as public opposition to nuclear power following the Fukushima disaster, further highlight the national character of energy markets.
Structured finance, which is based on a combination of assets and cashflow, is a crucial source of funding for this industry, defined by the credit quality and business characteristics of many borrowers in CEE.
Within CEE, a distinction can be made between EU and non-EU members, with the former subject to the EU’s 2020 targets for renewables. Whether those targets will be met – and with what mix of fuels – varies widely. For example, Romania has little wind and solar power but is close to meeting its 2020 targets because of large-scale legacy hydroelectric power production. In contrast, in Poland, which has historically depended on cheap coal for power, renewables have suffered because of a prolonged period of uncertainty following a government review of subsidies that was begun in 2011 and has yet to complete.
“Regulatory risk, along with FX risk in non-eurozone countries, is a prime concern when ING assesses a project,” explains Thérèse Brouwer, head of structured finance utilities, power and renewables, EMEA at ING. “However, a distinction must be made between regulatory moves to lower prices and changes to other aspects of the regulatory regime. It is also only natural for subsidies to decline as costs fall: a wind turbine used to cost €2.5 million per MW and now costs €1.5 million while solar has halved from €5 million per MW to €2.5 million.” Despite the fall in costs, renewables cannot compete with conventional power generation in terms of wholesale prices, so some form of support will continue to be required for the foreseeable future.
More generally, the perception that regulatory risk in CEE is higher than in Western Europe is too general, according to Brouwer. “When subsidy regimes change, the most important requirement is that grandfathering is honoured and existing projects continue to receive the subsidy anticipated,” she says. “In this regard, CEE’s record is mixed: Romania honoured grandfathering whereas Hungary and Bulgaria applied changes retroactively. However, Western Europe shows a similar divergence with Spain, for example, not honouring grandfathering.”
Opportunities emerge in ING’s core CEE markets
As the renewables market in CEE evolves, the financing of projects is also changing. In early 2013, ING closed the first fully commercial non-recourse wind project finance deal in Romania (a country that has high efficiency for onshore wind projects given its strong and reliable wind). The financing package includes a senior loan under the EBRD’s A/B structure, where one third was lent on the EBRD’s own account and two-thirds was syndicated to ING and two other banks. A similar non-resource deal, with no export credit agency (ECA) support, closed on 1 April this year.
“These transactions are possible because we know the sector well and have an in-depth knowledge of the companies involved,” says Brouwer. The structured finance utilities, power and renewables team worked closely with the ING structured finance team in Bucharest to facilitate the transaction.
In Poland, ING provided non-recourse project finance for the EnerCap Wind Farm in 2011 and is now restructuring the financing as a fully merchant structure (which relies on market risk rather than a guaranteed buyer of energy production). “The uncertainty over the support structure for renewables in Poland has led to limited activity over the past two years,” says Brouwer. “However, over that period prices for both the grey and the green component of energy production have moderately increased. ING, with the involvement of the client, an investment fund dedicated to renewables in the CEE region, is turning the challenges faced in Poland into an opportunity by refinancing the project.”