Financing Perspectives for Renewable Energy Projects in Central Eastern Europe

Prior the Lehman crises, one could have been considered arranging for bank financing for high efficiency cogeneration or renewable energy projects as ‘plain vanilla’ transaction. Banks were eager to finance on a non-recourse base energy investments. The crises hit the European banking structure resulting in virtual disappearance of long term financing, in particular non-recourse project financing in the infrastructure and energy sector. Lately, we see that banks are ready to offer again non-recourse project financing in these sectors for selected projects. I try to explain in a nutshell, why.

One of the most important features of energy investments –let it be conventional or renewable energy– is its long term nature, i.e. the assets being invested are intended to be in operation for decades, but hardly any time less than 15-20 years. The long term lifespan of an energy or infrastructure project is generally associated with long payback period; often well above 10 years simple payback. The long payback period clearly requires long term bank financing structures. This is what virtually disappeared from the map of Central Eastern Europe (CEE) in 2008 – 2009, and so did the new investments in conventional energy sector.

Renewable energy, though, was a front runner in the line even in project financing after the first crisis years. EU’s ‘20-20-20’ initiative (i.e. (i) a 20% reduction in greenhouse gas emissions as compared to 1990, (ii) a 20% improvement in the energy efficiency and (iii) a raise of renewable energy in the energy production up to 20%) has set the target levels for all CEE countries which are necessary to be met by 2020. Despite of the economy downturn, government policy incentives in CEE (mostly feed-in tariff, while in Poland and Romania certificate systems) survived. In certain cases support has even been extended for short periods, to promote a few technologies, like solar photovoltaic or wind.
While banks have been busy in restructuring their portfolio, they abandoned project financing for a while. However, after a few years they had got to an unhealthy debt to deposit ratios region wide, but now on the other edge – they ended up having more deposits in their balance sheet than loans. So money is indeed there in the banks and waiting for good projects to be financed. The emphasis is on ‘good’ as well – a renewable energy project has to have quality sponsor, secured revenue stream (which is certainly the case if feed-in tariff is applicable) and proper risk profile. In general, all of these can be met in case a renewable energy investment.

Historically low interest rates also help finding a common denominator in pricing for sponsors and banks. Spreads are still significantly above than they used to be prior 2008. In the meantime, the quantitative easing measures of central banks resulted in low reference rates in the market. Hence investors and the bank can fix the interest rates with a medium term interest rate swap at relatively low rates which can be attractive for both lenders and debtors.

In summary, we can clearly see appetite from banks for good projects, among others, long term renewable energy investments in CEE. The unprecedented low interest rate environment balances the higher spreads, while quality projects are attractive for banks, even for long term financing.