Before renewable energy projects can truly take off in the Asia Pacific region, developers must first close the financing gap that exists between them and investors, say finance and advisory experts at the Clean Energy Expo Asia 2010.
“We see a growing gap between investment appetite and good projects,” said Paul Curnow, a partner at law firm Baker and McKenzie. “One of the key reasons in Asia is the size of the projects. Outside of large developments in China, Australia and India, and perhaps some of the large geothermal projects in Indonesia, most projects are so small that they are not attractive enough to banks.”
International financiers, he said, usually look for projects with a minimum threshold of US$50 to US$100 million dollars. However, many Asian countries lack the infrastructure to implement projects of such size.
Another major barrier cited is regulatory uncertainty – not just the question of whether a regulatory framework is in place for such projects, but whether the policies will change.
On top of this, rises in the cost of capital are causing North American and European banks to slash the amount of funding they are willing to offer the industry.
“Capital itself is becoming more and more expensive as a measure of return on equity, and with the rising costs of capital, we’re finding that projects which were previously viable are now viewed as very marginal,” said Ken Cheung from Watson, Farley & Williams LLP. This has directly affected the number of projects being funded internationally.
As international equity plays a smaller and smaller part in the renewable energy sector, local banks and institutions are coming in to fill the void which was previously occupied by American and European financiers.
In countries such as China, India, Korea and Thailand, local banks are now providing the majority of equity in renewable energy, very often with government support. However, this does not make it much easier for companies to get funding.
There is no lack of cash among financiers, Mr Cheung pointed out. Instead, from the banks’ viewpoint, what is lacking is low-risk projects with good returns. The key reason for this is that renewable energy is not competitive with fossil fuels, a point that has been repeatedly brought up in discussions of the sector.
More importantly, however, many corporate investors have relatively short investment horizons. “There is really no firm carbon price signal beyond 2012,” he said. “As a result, it’s really difficult to predict cash flows beyond 2012 for a lot of these projects, which creates problems for long-term financing.”
While government intervention in the form of tariffs and tax breaks can make renewable energy projects more attractive to banks, much of the effort will have to come from companies in the sector. Primarily, they need to have tested and approved technology.
“Banks are simply unwilling to gamble on technologies which aren’t fully approved or developed,” he said. The banks also look for an experienced development team which can manage complicated projects, and a strong contractual strategy of the sort that the banks themselves are familiar with.
In making their pitch for financing, said Jotdeep Singh from Rabobank Asia, renewable energy companies also need to present their business case in a way that appeals to the banks.
“The biggest problem when companies go to get financing is that they focus on the technical aspect of the project, but banks want to know about the returns,” he said. “They want to know how soon they can exit.”
Companies also need to be acquainted with many aspects of financing, ranging from the regulatory environment to the policies of the various stakeholders involved.
They are also advised to develop a complete risk profile and have risk management mechanisms in place – risk being one of the major bugbears of investors.
But even putting forth their best effort, Mr Singh added, developers should not expect to get everything they hope for. “It is important to understand that both local and international banks will be selective, and not everyone will get financing,” he pointed out.
Eco-Business.com’s coverage of the Clean Energy Expo Asia 2010 is brought to you by Conchubar Capital Management.
