Many of the financing of North American solar and wind projects is arranged by European banks, some, in particular French ones, are exposed to the bad sovereign debt that’s brought a number of countries on the brink of insolvency and even raised doubt over the future of the Euro. At the bank level, the impact of that bad exposure was clearly felt last October when Belgium’s government rushed to partly take over lender Dexia.
Already reports are that investors and lender to European banks are demanding more collateral, which means a growing amount of capital banks could have lent is now tied up supporting a bank’s balance sheet rather than put to play support a solar or wind farm. Earlier this week that tightening liquidity pushed six Central banks, including the U.S. Federal Reserves and the European Central Bank, to inject new funds in a bid to avoid a potential credit crunch. The capital preservation by banks has already increased the pricing of loans. One banker, working on the financing of a U.S. wind portfolio owned by a California utility, tells us that he’s currently structuring a 20-year term loan priced at 250 basis points over LIBOR, which is significantly higher than what loans were priced at in the Spring or early Summer.
Ironically, despite the crisis, in the U.S. project finance banks are busy processing deal pipelines built over the past couple of years. A large chunk of that financing supports projects that secured government subsidies and have to launch construction next year to remain compliant with the terms of these subsidies. It’s hard to estimate the current level of activity but an analysis issued in late 2010 by Market research firm GTM Research predicted roughly $17.4 billion in renewable energy project finance loans for 2011, much of that capital coming from European banks.
These economic and financial realities, and the end of the Department of Energy loan guarantees and other key federal subsidies, lead a number of bankers, polled by G.E.R., to predict a slower 2012. Capital won’t dry up, wind and solar financing will still be available but at steeper prices.”Banks aren’t going to stop financing [renewable] energy projects but do expect longer tenors,” a banker with a Canadian bank tells G.E.R. The consensus, amongst bankers is that while project finance capital will continue to be available, accessing it, given the current economic uncertainties, is bound to be more expensive, giving an edge for developers with large balance sheets or backed by big corporates.
Terrence Murray, Chicago