Winds of growth

The LUKERG Renew Gebeleisis wind power project in Romania, a 70 MW onshore farm located near the south eastern town of Corni, will enable the country to supply around 110 thousand homes (estimate) with energy and is an important step forward in the country’s plans to transition towards renewable energy sources.

The project was delivered by LUKERG Renew, a joint venture between ERG Renew, Italy’s leading wind producer, and LUKOIL-Ecoenergo, a unit of Russia’s oil & gas producer Lukoil. Established in 2011, LUKERG Renew has steadily grown its presence in Romania and in neighbouring Bulgaria and is now one of the key players in the region.

Driving much of the growth in wind power projects in Romania and elsewhere in the region are the European Union’s long term plans to decarbonise its economy by 80-95% by 2050.

The new wind farm has allowed LUKERG Renew to enhance its presence in the Romanian wind market and place itself among the leading operators, with an installed capacity of 150 MW. The LUKERG Renew Gebeleisis facility comprises 35 Vestas wind turbines capable of delivering some 70 MW. The wind farm will generate more than 170 GWh of electricity per year, equivalent to savings of around 72 kilotons in CO2 emissions.

Strong fundamentals
Driving much of the growth in wind power projects in Romania and elsewhere in the region are the European Union’s long term plans to decarbonise its economy by 80-95% by 2050. The plans have translated into binding commitments from member states to produce at least 20% of their total energy from renewable sources by 2020. These goals are guided by specific national renewable energy plans for each country comprising clear targets.

“The onshore wind industry began in Western Europe, but Central and Eastern Europe have gained a lot of interest, especially in the areas along the Black Sea,” explains ERG Renew’s general manager Massimo Derchi. “There is also optimism in future growth. On the one hand there is a home-grown trend towards sustainable energy production. On the other, the 2020 targets for renewables in Poland, Romania and Bulgaria mean that they will require about an extra GW of renewable energy to be installed each year to meet their objectives.”

Massimo Derchi, general manager ERG Renew

The European wind industry has thrived under these conditions and a number of regulatory frameworks have been put in place at a local level to support its development by helping to reduce the financial and operational risks for developers and investors. Growth has also continued, albeit at a slower pace, despite some of these frameworks undergoing subsequent revisions in the last two years.

“There are some areas of regulatory uncertainty that have created setbacks and delays in some countries,” says Derchi. “The economic crisis has also added to the pressures on governments and businesses, but what we expect to see in the longer term is a gradual rebalancing in favour of renewables.”

Coming of age
With this growth have come increased levels of quality and efficiency in what is now a highly mature market sector. This is reflected in the requirements of investors, who increasingly demand the highest levels of operational excellence and optimum returns, which only established players like ERG Renew are able to deliver.

“The times when anyone could become a wind developer and walk into a bank for a loan for a wind farm are over. Investors are much more careful about selecting projects,” says Derchi. “The market is now for players with an industrial approach that can survive in the long term and are capable of controlling the full value chain; the development, construction and maintenance aspects. That is what we do and we do it in an orderly and consistent way that creates value. You have to be top quartile to be successful in the long term.”

Up until 2011, ERG’s expertise in wind business had been primarily focused on Italy, as the company had limited capabilities for international business development. As it began to look at expansion abroad, in particular, at opportunities in East Europe, it found that it had shared goals with Lukoil, which is seeking to diversify its own energy portfolio towards renewables.

“There has been a very good fit. When we first began to look at the region we knew we couldn’t just go in and replicate our Italian experience in countries we didn’t know,” says Derchi. “Lukoil already had a strong a presence in Romania and Bulgaria and we already had a relationship with them through the sale of a stake in one of our Italian refineries in 2008, so it really was an obvious combination.” 

Partnership for growth
The joint venture, which was launched in May 2011, began its activities in Bulgaria in 2012. A year later, in Romania, LUKERG Renew searched for existing farms in windy locations that used the same types of turbines ERG uses in order to leverage their spare parts and technical know-how. The project they targeted and eventually acquired had been developed and constructed by leading wind turbine manufacturer Vestas, and had entered into commercial operations in February 2013.

The purchase concluded successfully and operations have since gone according to plan. Almost a year later, in April 2014, LUKERG Renew reached a deal with ING to refinance the purchase price of the project. The transaction saw the collaboration between ING’s Structured Finance team for utilities, power & renewables in Amsterdam and the Structured Finance team in Bucharest. ING provides provided 50% of a €67 million project finance term loan with a 12-year tenor together with Raiffeisen Bank International; the second non-recourse project finance deal for ING in Romania’s renewable energy sector.

According to Oktay Movsumov, Head of Project and Structured Finance of OAO LUKOIL, another positive aspect of the deal is that it is allowing LUKERG to continue growing without tapping shareholders for more capital. All of LUKERG's joint projects in the renewable energy sector are financed through project finance and with no or limited recourse to the shareholders.

ERG Renew’s General Manager Massimo Derchi says the strength of ING’s international network was a key factor in selecting it for the deal. “The more international we’re growing, the more we need a financial player that knows the industry and has a large enough footprint to sustain our growth. I believe ING is one of the few players that can offer this.

According to Martin van Engen, Vice President of ING Structured Finance Utilities, Power & Renewables, the success of the deal has been down to the excellent relationship and extensive track record it has with ERG, as well as ING’s strong internal collaboration. “There’s been a very efficient co-operation between the Structured Finance teams in Amsterdam and Bucharest, that had the dedicated and continuing support from the Legal and FM teams in both locations, as well as risk management,” he said.