Plugging the green finance gap

With banks nursing bruised balance sheets, green energy groups have been forced to find a new route to funding.

Clean energy projects in Europe are increasingly turning to export credits to plug a financing gap, a valuable sticking plaster as some banks desert the sector due to the global economic crisis.

Government export credit agencies (ECAs) boost deals either through direct project lending or loan insurance, and supplied new business worth over $800 billion last year, according to the Berne Union trade association.

They traditionally back big-ticket exports to emerging economies which banks view as too risky, sometimes earning a bad press for supporting deals including aircraft and weapon sales to countries with uncertain human rights.

Now European energy projects struggling to raise debt financeare turning to export credits to plug a gap left by banks nursing bruised balance sheets.

Bank lending to European wind power projects last year was down more than 60 percent compared with 2008, according to Thomson Reuters Project Finance International.

The export credit arrangement suits both governments, where exporting countries boost local manufacturing while importers get cheaper debt for domestic, low carbon energy.

It may especially benefit less proven green technologies such as carbon capture and storage (CCS) and offshore wind.

The greater involvement of export credit agencies has seemingly slipped the attention of traditional consultancies and aggregators, meaning there is no data on its impact on global clean energy.

Commercial lending

CCS is an unproven technology which aims to trap the greenhouse gas carbon dioxide from fossil fuel power plants and pipe it underground, for example into depleted oil fields.

The chief executive of the "Don Valley Power Project" in northeast England expects export credits to be a vital plank in the proposed, 4.5 billion pound ($A6.7 billion) project.

Engineering works would include the construction of an advanced coal gasification power plant and carbon capture plant, and the laying of 300 kilometres of offshore pipelines.

"Export credit is a key element especially in view of the current commercial lending market," said CEO Lewis Gillies.

Offshore wind is also viewed as high-risk, as an emerging technology critically dependent on government support.

Denmark has a large turbine industry including leading manufacturer Vestas. Its export credit agency EKF has been increasingly active backing overseas projects.

EKF has in general increased its exposure since the financial crisis, and disproportionately so, to wind.

Last year it guaranteed a third of an 822 million euro debt financing on an offshore wind power project off Germany, and commented at the time: "The parties were not willing to take on the entire risk themselves."

In October it guaranteed 10 billion Danish crowns ($A1.7 billion) debt finance made available by the Danish pension fund, PensionDanmark, primarily for wind projects. The agency also lends directly, for example to a West Australian wind farm last year (Collgar wind farm).

Project finance market

ECAs in Denmark, Spain, Germany, the United States and South Korea have been especially active in renewable energy.

In 2009, all OECD countries active in export credit agreed to extend the allowed repayment period for renewable energy projects to up to 18 years, from up to 10 years for other sectors.

That may help deals involving alternative lenders, but banks in general have shortened debt repayment periods to six or seven years from 15 years previously, as they rein in risk and leave developers with a refinancing headache.

The sight of governments stepping in with export credit mirrors the greater role of the European Investment Bank, owned by EU member states, now one of the world's biggest renewable energy lenders.

The EIB has increased its lending exposure generally and especially to soften the impact of the financial crisis on the strategically important clean energy sector.

Last year low carbon support reached 30 per cent of total lending, it says, including 5.5 billion euros worldwide in renewable energy.

This story was originally published by Reuters. Reproduced with permission.

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