With a general dependence on project finance to successfully deliver wind energy projects, high levels of risk aversion and capital rationing have led to a sharp decline in the availability and liquidity of funding in both the debt and equity markets.

These factors have impacted pricing, ultimately having a profound impact on the ability to develop greenfield wind farm projects through to financial close.

The calm before the storm

In the years prior to the financial crisis, as the wind farm sector enjoyed year on year of growth, particularly in the European and US markets, debt and equity financiers developed their understanding of the asset class and the predictability of its cash flows. This, coupled with an increased attractiveness of demonstrating environmental awareness, led to a strong willingness to lend to and/or invest in wind farms.

Debt providers were beginning to finance wind projects on a merchant basis, without the existence of a Power Purchase Agreement (PPA), and were becoming increasingly comfortable with a broad range of contracting options – including the existence of multiple contracts – during the wind farm construction and operation phases.

As a result, the wind farm sector experienced record growth in 2008, with over 27gigawatts(GW) of additional installed capacity worldwide, according to the Global Wind Energy Council – an increase of 28.8 per cent in the total global wind installed capacity.

Construction delays

However, following the change in dynamics caused by the global financial crisis, many wind projects that planned to commence construction in 2009 have been delayed. Given the scale and capital intensive nature of wind energy projects, this has largely been due to the inability to secure sufficient and affordable project finance debt and equity.

The economic viability of wind energy projects has been adversely impacted as a result of the increased borrowing costs being charged by debt providers, with debt margins more than double those charged pre-financial crisis. In addition, debt providers have imposed significant restrictions on both the tenor and commercial terms for providing debt, illustrating their increasing focus on risk aversion.

These elements feed directly into the energy price required to finance these higher costs.

Furthermore, debt financiers now almost exclusively require the sale of electricity to be pursuant to a long term PPA with a credible counterparty to provide any sizeable amount of non-recourse debt. These counterparties – typically large retailers – are less likely to enter into any long term agreements for the sale of electricity that are uncompetitive relative to other forms of power generation, even after taking into account the Renewable Energy Certificate requirements set forth by the Federal Government’s expanded Renewable Energy Target.

Debt providers are now also dictating the types of contracts a wind farm developer can agree to, including discounting a number of turbine suppliers as ‘unbankable’ by placing limited assurance on their ability to meet the respective guarantees provided by them. This has forced wind farm developers to utilise less economical contracting options, which provide security to debt financiers at the further expense of the competitiveness of wind power.

The changing dynamics of supply and demand

Impacts of the financial crisis on other market participants, such as turbine suppliers, have partially offset the increased costs of finance.

Turbine providers pre the financial crisis faced an overwhelmingly large order book, with demand significantly outweighing supply, putting them in a position to dictate the terms and price of supply contracts. However, turbine suppliers have experienced significant volumes of turbine order cancellations since the onset of the global financial crisis as developers face short term financing challenges. This has dramatically shifted the demand-supply dynamic within the market, with turbine suppliers significantly reducing prices in order to secure orders.

Surviving

Nonetheless, despite the dynamics of the industry changing as a whole, the fundamental drivers that have made wind power the forefront renewable source are still prevalent.

With a global focus on addressing climate change and government initiatives providing legislative support, wind power will continue to be the pre-eminent renewable energy source given its proven track record of technology and cost efficiency relative to other renewable sources.

As economic conditions continue to improve, the market will once again move to a state where debt providers will readily lend to the wind power sector and turbine suppliers will re-establish their dominant negotiation position with wind farm developers.