Slack U.S. power prices slow renewable energy funds-bankers

Wed Jan 13, 2010 4:58pm EST

Related Topics

* Weak economy hurts power prices, dampens solar, wind funding

* Banks' appetite for project debt up from weak 2009

By Matt Daily

NEW ORLEANS, Jan 13 (Reuters) - Sluggish U.S. electricity prices are crimping a resurgence in financing for new renewable energy projects, according to energy bankers.

While the bond market's appetite for project debt has returned and federal incentives have attracted spending from the private sector on new projects, weak electricity demand has made it difficult for project developers to lock in long-term sales contracts at prices needed to make new wind and solar farms profitable.

"Clearly power prices are down, and people are hesitant," John Eber, managing director of energy investments at JPMorgan Capital Corp, told the Projects & Money conference. "That's putting a lot of pressure on project economics. There's a lot of wait-and-see to see if those prices come up."

Power demand is typically linked to the economy, and the recent recession helped knock usage down as much as 20 percent in some spots last summer, he said.

Data from the U.S. Energy Department's Energy Information Agency shows overall 2009 U.S. electricity consumption fell 3.6 percent, the biggest drop in more than a decade. That decline came a year after power consumption dipped 1.6 percent.

Financiers typically demand that developers of renewable power projects secure contracts for electricity sales years into the future in order to lock in revenues at prices sufficient to pay off any project debt.

Still, the amount of money spent on new projects will climb from 2009 as the credit crisis that choked off bank lending eases and financial institutions are drawn back to the industry, which includes solar companies such as Suntech Power Holdings STP.N and SunPower Corp SPWRA.O and wind turbine builders Vestas Wind Systems (VWS.CO) and Suzlon (SUZL.BO).

"The biggest challenge in the market is not the availability of finance," Raymond Wood, managing director for alternative energy at Credit Suisse, told the conference.

"The real challenge in the market (is) can you generate a superior return on invested capital."

Financing was very cheap for many projects in 2007 and the early part of 2008, particularly for wind farms, which have better returns than photovoltaic solar systems.

The Obama Administration's move to change a tax break for renewable energy plants into a cash grant for developers helped overcome the financing problems caused when most banks exited the market. Nearly $2 billion has been spent so far on the federal program that can cover up to 30 percent of a project's costs.

Still, project developers rely on banks to finance about half the start-up costs for renewable energy systems, which typically are syndicated in the debt markets.

To tap into that market, the debt levels must typically start near $100 million, a threshold that many smaller projects will not reach. That could make it difficult for some of those projects to win funding, according to Steve Bissonnette, first vice president for DZ Bank AG.

"I still think that that segment is not being as well served by the market," he said.

While the banks focus on the U.S. market, funding for new wind and solar plants in Canada is more difficult, said William Sutherland, senior managing director at Manulife Financial Corp.

"North of the border (there is) little funding available, south of the border lots of funding," he said.

Bank interest in buying debt could evaporate after two or three large syndications come to the market, Bissonnette said, since banks are allocating less money to the sector than they did in 2007.

"I think we'll see improvement in the markets, but I'm not sure it will be everything everybody wants this year," he told the conference.

(Reporting by Matt Daily; Editing by Phil Berlowitz)

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