Eddie O'Connor: involved in Smartwind consortium, which was awarded a contract to develop 4GW of offshore wind farms by 2020

The key issue in the renewable energy sector is raising finance and deal structures, and a recent three-day conference in New Orleans saw discussions on those topics take top billing. In the second half of last year, the number of active lenders decreased significantly due to capital constraints in the debt markets and a desire by banks to preserve their liquidity.

With most banks effectively closed for business, the landscape for projects changed with lending capacity and volumes decreasing, risk appetite curtailed and credit terms shortened. Many projects were stalled.

In the US, the effects of the economic downturn materially eroded the effectiveness of tax equity structures which had historically played such an important role in financing US renewable energy projects. Companies that generate most forms of renewable energy are eligible for tax credits which can be utilised to offset taxable US corporate profits. In return for investing large sums of capital in projects, these tax investors, typically the large US investment banks such as JP Morgan and Morgan Stanley, have reaped substantial benefit from structuring fees and soaking up the tax credits themselves from these renewable energy projects.

The US government responded to the crisis by providing an interim solution to financing constraints by introducing the American Recovery and Reinvestment Act of 2009. This stimulus has introduced direct upfront payments to renewable energy companies opting to forgo tax credits in favour of immediate cash reimbursements equal to 30% of the capital expenditure. In addition the US Department of Energy's (DOE) loan guarantee scheme was enhanced to underpin project level debt for projects which use innovative technologies. However, to date, the market has not fully embraced the process which is viewed as cumbersome in terms of application and approval. Developers have been unwilling to bear the upfront costs involved in this scheme and many lenders are reluctant to accept security which ranks below the DOE's superior rights. To date the DOE has made four conditional commitments for loan guarantees including Solyndra Inc, a solar panel manufacturer, and Nordic Windpower USA, a two-blade wind turbine manufacturer. Considering the size of the US renewable energy market, the loan guarantee system has not had the impact that the US government intended. However, as the market gains a better understanding of the DOE system, and seeks innovative ways to financial structuring, it is expected that more companies will avail of the loan guarantee as an alternative source of finance in 2010.

In Europe, government support policies are less affected by an economic downturn in that they support the revenue line with fixed feed in tariffs and Renewable Obligation Certificates (ROCs) and are not dependent on tax revenues. While many of the European lenders have retrenched, the European Investment Bank (EIB) continued to be an active provider of low-cost long-term finance in the area. The EU target for renewable power is to achieve 20% of total energy consumption through renewable sources of power by 2020 and sees this being achieved primarily through offshore wind and solar power.

The EIB has played a critical role in supporting offshore wind and lending in this sector is projected to increase. In early January, the Smartwind consortium, led by Eddie O'Connor's Mainstream Renewable Power and Siemens Project Ventures, was awarded a contract to develop 4GW of offshore wind farms by 2020 as part of the Crown Estate's ambitious offshore wind programme of a planned 32GW of installed capacity. This wind farm programme will require substantial funding to complete and the key challenges for lenders will be to understand and measure the risks associated with offshore wind projects, to price that risk appropriately and to develop a comfort level and understanding of the wider industry synergies which can be accessed via other infrastructure assets, including undersea cabling.

Solar power is seeing costs continuing to decrease, technology improvements, economies of scale, and attractive contracted cash flows underpinned by regulatory support and government backing meaning there has been steady growth in lenders' appetite for loans in this industry. Recently Investricity, an Irish solar company, secured EIB finance for a French project due to be operational in mid-2010 which is expected to deliver institutional and private clients of Dolmen Corporate Finance a projected IRR of approximately 15% over the long term (up to 25 years) life of the contracted cash flow. These investor returns improve dramatically in the event that the project was sold in the first 10 years of operation.

As economies struggle to repair the financial system, we have seen less internal competition for funds with lenders returning to the project finance market in the second half of 2009, albeit cautiously. Strong relationships with experienced clients in banking proved to be the critical element in the success of completed deals. Project level financiers are making increased demands on developers to demonstrate that projects are technically sound, financially viable, show stable and consistent long-term economic returns and comply with environmental protection and procurement regulation.

Síghle Murphy is a manager at Dolmen Corporate Finance

Ratios trend downwards

Before the banking crisis, the debt equity ratios were high at around 90:10 in mature markets such as Europe and North America.

However, in the current market this has trended downwards to 70-80% on good renewable energy projects with robust technologies and strong wind capacity factors. The commitment term is often influenced by government support such as feed-in tariffs, renewable obligation certificates (ROCs) and tax credits, and seems to have stabilised at 15 years.

In 2007 banking margins for commissioned assets were in a range of 80-120bps but have now increased to 250-300bps.