A more green and pleasant land

By bne IntelliNews September 2, 2009

Nicholas Watson in Prague -

News in July that oil-tycoon-turned-green-entrepreneur T. Boone Pickens was abandoning plans to build the world's biggest wind farm in Texas was confirmation the credit crunch had finally caught up with alternative energy in the US. So why is the sector in Central and Eastern Europe proving so resilient?

That the credit crunch would take its toll on the sector was never in doubt: wind, hydro, solar and biomass power is a capital-intensive business, which, like the fossil-fuel power industry, has long lead times for projects. This means that while 2008 finished a record year for the sector despite the implosion of the capital markets, subsequent years would see a slowdown as the financing needed to complete planned projects dries up.

But while the credit crunch is hurting the renewable energy market worldwide, it isn't doing so uniformly. On a regional basis, investment in renewables in Europe in 2008 was $49.7bn, a rise of just 2% from the year before, while in North America it was $30.1bn, a fall of 8%. However, investment in emerging markets surged 27% to $36.6bn, accounting for nearly a third of global investments.

This doesn't come as any great shock to some. Goldman Sachs says that based on its long-term view that the developing world will grow faster than the developed world over the next few decades, "it stands to reason that the emerging economies will consume an increasing proportion of the world's energy." Indeed, the US Energy Information Administration forecasts that non-OECD countries will overtake the OECD nations in energy consumption as soon as 2015 - a shift that will be led by the rising energy demand of the so-called BRIC nations, particularly that of China (the others are Brazil, Russia and India).

ReNew Europe

An explanation for why the renewable energy sector in emerging Europe is proving resilient to the crisis isn't too hard to see.

Long before US President Barack Obama's administration replaced the fossil-fuel friendly and climate-change sceptical one of George W. Bush, the European Commission had come up with a set of far-reaching package of proposals that will push the EU toward meeting the goal of reducing overall emissions to at least 20% below 1990 levels by 2020, and increase the share of renewables in energy use to 20% by 2020. Though the third part of the 20-20-20 target - to reduce actual consumption by 20% by 2020 - is voluntary, with European energy and environment ministers now discussing whether that too should be made mandatory, it's clear the drive behind the greening of the continent is inexorable.

Another impetus pushing emerging Europe toward renewables is the continent's heavy dependence on Russia for gas used in power and heating. Some countries in the EU like Bulgaria are entirely dependent on Russia, others less so, but together the bloc relies on the Kremlin to supply it with about a quarter of its annual needs. That wouldn't matter so much if Russia were a reliable supplier, but its increasingly fraught relations with Ukraine, which is responsible for transiting most of that gas to Europe, has resulted in it being cut off several times, the most recent being earlier in January, which the Oxford institute for Energy Studies called "the most serious security event in relation to gas that has ever happened in Europe."

Sweden has promised to make tackling climate change the central plank of its six-month rotating presidency of the EU, which began on July 1. The government intends to be the architect of a global warming breakthrough at a UN summit in Copenhagen set for December this year, a successor to the Kyoto protocol, which will get the 27 countries of the EU to agree to share a bill running into many billions of euros to assist developing countries cope with the impacts of climate change and cut emissions.

Governments in Europe are also looking to "green growth" as a way to drive their economies out of the current crisis - killing two birds (cutting emissions and getting economic growth on track) with one stone. On June 25, ministers from 30 OECD countries and 10 others, including Estonia, Russia and Slovenia - met in Paris to sign a "Declaration on Green Growth."

All this, says Andras Szalkai, a portfolio manager for East Capital, who has some renewable investments in a fund for Central European small and mid-cap stocks, makes the sector more resistant to the effects of the crisis. "Because politicians are pushing this, this is still getting funding from banks," he says. "The present level of projects won't be enough to fulfil the 20-20-20 levels, so there's a lot of scope for growth."

While some projects are still getting some funding from banks, the crisis is nevertheless still making its mark felt on the sector in the region. Shane Woodroffe, a partner at EnerCap, a Prague-based investment firm that was one of the first to target the renewable energy sector in CEE when it opened for business in late 2007, says the effect of the crisis was two-fold: it became more expensive and funding became less available. "Those banks that were still open for business - of the banks that were available in our sector 'pre-crisis,' around a third to a half were still open for business - most started cherry-picking what they saw as the best deals. They also started with their existing clients, which worked against us, as we were a new fund. They wanted gold-plated projects and a more conservative structure - less gearing and shorter tenors. Funding fell to a 75/25 split and even 70/30 in some cases."

A year since Lehman Brothers went bust, forcing banks into hibernation and the region's currencies and markets into freefall, things have improved. "The currencies have come back a long way and once currencies stabilize, it makes banks feel more comfortable," says Woodroffe.

But in between, another CEE region-specific factor has helped keep the wind turbines turning: the European Bank for Reconstruction and Development (EBRD).

Relevant again

It's fair to say that before the global financial crisis broke in the autumn of 2008, the EBRD, an international financial institution set up in the 1990s to help former communist states make the transition to market economies, was sliding into irrelevance.

The biggest investor in the region, it's remit to provide what it calls "additionality" - funding that commercial banks won't make - was being usurped by the markets, which were happy to seek the growing and seemingly guaranteed returns coming out of former Soviet bloc. But now the crisis has given it a new lease of life. "We always work on a basis where the commercial sector is either not there or isn't there on its own - that's what we call 'additionality'," says Anthony Williams, head of media relations for the EBRD. "Now with commercial banks around the globe becoming more risk averse and pulling back from lending as the crisis has deepened, this 'additionality' has come back with vengeance."

Nandita Parshad, director of power and energy at the EBRD, says her department is seeing increased demand for financing generally across the 31 countries of its operations, including the more advanced countries such as Poland and the Baltics, where it had not expected to see any more requests, as well the less advanced countries of the Balkans and former Soviet Union.

The EBRD lent about €600m to the region's power sector in 2008 and expects this to rise to €850m this year. In the first half of this year, the EBRD doled out a record amount of €3.5bn, which is 50% of the initial target of €7bn for the year, which Williams says is more likely to be a "floor than a ceiling." Last year, the EBRD invested a total of €5.1bn.

The EBRD announced it plans to invest €3bn-5bn in energy efficient and renewable energy projects in CEE over the next three years, for which it hopes to attract further co-financing of up to €10bn. The mix is also changing as renewables overtake the projects dedicated to energy efficiency as EU member states bring in the necessary regulatory framework. "The bank launched a stable energy initiative about three years ago that was going to invest €1.5bn over those three years to make mainly in the first phase energy efficiency projects, and a little bit of renewables, then the next phase where we can expand spending and the balance between the energy efficiency and renewables will change more toward the renewables," says Williams.

Certainly, this crisis time should be what Woodroffe calls "a great time for the EBRD." The only blot on the horizon is not the money - the EBRD has plenty of that - but rather the personnel to run this huge increase in projects. "They have more projects but not more people. They have bulging pockets but need to hire more people," he says, adding that at least now there's a big pool of out-of-work bankers out there.

For its part, the EBRD tells bne that: "The power team is hiring staff in order to deal with the rising demand. In order to provide a consistent crisis response, the power team has been strengthened with the arrival of new, experienced bankers."

Finding the right people to spot and properly finance these investment opportunities is crucial, because the EBRD is not a charity. "We see ourselves giving a priority to renewables and trying to do them wherever feasible, but we'll only do them where they are feasible and bankable, and where countries have a robust framework and incentives to make them work," says Parshad.

And that issue of regulatory frameworks, incentives and how they are applied in the marketplace, say analysts and industry experts, will remain the critical factor in how the sector will progress over the next decade. "In the Czech Republic, the regulatory schemes and framework is perfect, feed-in tariffs are wonderful - it all looks great on paper," sighs Jan Ondrich, the energy expert for the public affairs advisory Candole Partners in Prague. "You should see lot of money flowing from the business, but there's lots of red tape. You need 10 permissions that may take up to five years to get permits to build a build a wind park where it will only take two to three days to erect the actual turbine."

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