The once-booming wind generation market is faltering as the credit crunch bites . Janet Wood assesses its short and long-term prospects.

Over the past few years, wind power has blown further into the European Union's energy mainstream. In fact, in 2008, according to the European Wind Energy Association (EWEA), more wind power was installed in the continent than any other electricity generating source. The sector has come a long way in a relatively short period, but now questions are being asked about whether the momentum can be maintained in both the short and long terms.

The short term is dominated by the global economic downturn. No industry is exempt from its effects, and recent figures underline the potential fallout for the wind sector. A report by analyst group GlobalData, Global Wind Energy Market Analysis and Forecasts to 2020, says the industry is witnessing turbine order cancellations, delays in development and sales of windfarms and difficulties in securing finance for new projects. The report predicts the worldwide growth rates for installed capacity will drop significantly this year and in 2010.

Talking to Utility Week, the EWEA stresses that, in the short term, the industry has been hit hard by banks' reluctance to provide finance for projects. This, in turn, means project delays. It is certainly forcing the industry to adjust to an environment where access to capital is of primary importance.

Nick Gardner, director for utilities and energy at Fortis bank in the UK, says: "The market was expanding, but now there is a €1 billion shortfall in funding." He says the centre of activity has moved away from central Europe, which had been a "hot spot" 18 months ago.

"There is retrenchment to western Europe and North America, especially the US. And there is nationalism, as banks are more
likely to do business in their home markets," says Gardner. Banks are also picking and choosing investments, he says, "focusing on the areas where they have most experience and confidence".

He adds: "Borrowers are struggling to find banks - it depends on whether there is a previous relationship." Multinational companies with strong balance sheets are in the best position, he believes. "There is project activity in utilities, but smaller organisations and those with no relationships with the banks are finding it difficult."

Taking longer

Even when the banks do approve the finance, the process is taking much longer. "It is taking longer to get through the approvals process," says Gardner. "There is competition in the banks for capital and that also needs approval. That process is taking up to twice as long and that creates bottlenecks for new projects."

At the same time, the cost of borrowing has risen, and that has cut terms. "Internal liquidity charges make long-term project finance more expensive. Deals used to have terms of 16-17 years. Now terms are more likely to be 12-15 years."

A major problem is that banks are no longer able to defray part of the debt they take on. Instead, all the lenders have to be on board at the start. "The bank syndication market - where they used to take on debt and sell it on - has effectively closed," he says. "Consequently the amount banks will lend has decreased. Offshore, it is difficult to go above £500 million without other sources of funding, and that means getting 10-15 banks all together."

Finally, he says, "the price [of borrowing] has increased dramatically". Credit margins on borrowing, which had been in the region of 100-125 basis points a year or two ago, have increased to 275 basis points.

Burden

Peter Sherman, head of finance at RWE Npower Renewables, told a London conference last month that the increase in the price of credit had resulted in utilities shouldering more of the burden in a deal. "Will finance houses take construction risk or price risk? Our experience (offshore) is that they don't like them. They want stable returns in cash each year and that means an increased burden on utilities to take those risks," he said, asking, "are utility balance sheets big enough?"

Sherman warned that the returns on offshore projects made it difficult to take on more risk. "I dream of a 12 per cent rate of return," he said. This is the rate that had been predicted, but so far it was nowhere near that figure.

The EWEA says another important issue, and one linked to the economic situation, is the recent fall in the price of carbon credits. For much of last year, allocations in the European Union Emissions Trading Scheme were more than €30 per tonne, but as companies have reduced their output, demand for credits has dried up and the cost is now just above €10 per tonne.

Some are questioning whether this is too low to encourage companies to use cleaner fuels or technologies. In the long term, it may not be a major concern, but if carbon prices remain low even when the economy recovers, there could be some industry head-scratching.

Cash-rich

The EWEA is quick to point out that the sector is attracting capital from cash-rich power companies and institutional investors. The latter group is undoubtedly looking for investment havens, away from high-risk areas, but where returns are higher than in government bonds markets.

While it is widely acknowledged that the EU wind industry is less reliant on bank project finance than it was three years or so ago, in the current climate it needs to have access to all channels of finance to ensure it continues its rapid growth. With this in mind, the EWEA says the sector is asking governments and the European Investment Bank (EIB) urgently to establish loan guarantees and other liquidity-enhancing measures to ease the banking squeeze and accelerate recovery.

Gardner says the EIB's presence in the market could help in more ways than simple hard cash. It could help bridge the gap between potential European funding and UK projects. "For international banks like us, one issue is funding in sterling. The EIB could usefully provide sterling credit lines," he says.
In the medium term - a year or more - Gardner suggests the EIB or the UK government could help free up capital.

"The government or EIB could buy existing loans, which are providing steady income, to free up capital," he says. Export credit agencies could also play a role, he says. Denmark's credit agency has already done so, providing funds in support of projects in other countries because they are buying Danish turbines.

Challenges

Despite the challenges, the EWEA says it expects the wind industry to emerge early from the global economic downturn and perhaps even to be strengthened. Investors have not left, the lobby group says, they are biding their time. And the industry unquestionably has strong political support. There are the agreed binding targets in all 27 EU member states for a share of renewable energy by 2020. And the recent EU economic recovery plan dedicates €565 million to offshore wind projects.

Furthermore, the recovery plan sets aside money for projects aimed at improving the efficiency of cross-border interconnectors and initiating the much discussed offshore electricity supergrid. Small steps have been taken regarding the European Commission's Strategic Energy Review of November 2008, which underscored a commitment to publish a blueprint for a North Sea grid. Indeed, grid access will become an increasingly key determinant in wind's expansion across EU member states.

So, who will lead the way? Beyond the challenges outlined, it is important to look at such issues as site availability, a stable regulatory framework, the planning system and technological know-how. With all this in mind, those expected in the vanguard are the usual suspects: Germany and Spain.

The EWEA says it also sees a "second wave" of countries providing industry momentum, led by France, the UK and Italy, and a "distinct third wave", particularly from eastern Europe, which became visible for the first time in 2008.

Despite the economic climate, the industry's mood is upbeat. It has a solid platform for growth and seems set to extend its footprint in the future. And whatever the downside of the credit crunch, it has freed up capacity among turbine suppliers.
Some EU nations will obviously do better than others, but in general the wind is behind the industry.

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