Credit-wary investors put green projects in red

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Green projects, which have become the buzzword in the past few years, are not only currently struggling for financing, the sense of urgency in pursuing them has also been affected considerably.

Due to the distressed financial market conditions, the flow of equity and debt investment into renewable energy projects has been disrupted since the fourth quarter of 2008.

In the US, major changes in federal legislation have also had add-on effects on renewable energy financing.

According to US Department of Energy's National Renewable Energy Laboratory (NREL), tax credit incentives that had been a principal driver of investment in renewable energy projects, have become largely ineffective in the current economic climate.

Reduced corporate tax liabilities have sharply diminished the amount of tax-related investment funnelled to renewable energy projects by traditional "tax equity" investors, including large investment banks, commercial banks and insurance companies.

Figures from NREL show that the pool of large tax equity investors was small to begin with - including only about 20 institutions in 2008 - but has shrunk to approximately four to six active institutions in early 2009.

The amount of tax equity investment available from traditional sources will be insufficient to fully support near-term renewable energy project development, it said.

Meanwhile, availability of debt funding to finance renewable energy projects is also limited as a result of global credit tightening.

Lenders to renewable energy development are conserving capital and limiting their lending activities.

According to the United Nations Environment Programme (UNEP), investment in the renewable energy sector increased to $155 billion (Dh569.30bn) in 2008, from $148bn in 2007. However, investment in the second half of 2008 was down 17 per cent from the first half and fell 23 per cent from the final six months of 2007.

Furthermore, share prices in clean energy fell by 61 per cent in 2008, a steeper fall than that registered in the overall stock market. And as an indication that the crisis continues to have its effect, investment in the first quarter of 2009 fell to $13.3bn, the lowest amount since the first quarter of 2006.

The UNEP report found that in every case, investment slowed dramatically by the first quarter of 2009. Most companies in the renewable energy sector - from small-scale project developers to independent power purchasers - will feel the effects of decreased investment.

While private capital investment, via venture capital and private equity investment, in early-stage technology and expansion increased by 60 per cent to $11.1bn in 2008, the report also found that only $1.8bn was invested by these sources in the first quarter of 2009.

Investment via public markets in clean energy companies decreased by 51 per cent in 2008 to $11.4bn. The 70 per cent decrease in energy prices has led many investors to favour established businesses and to avoid companies with high capital requirements.

Investment by companies in renewable energy projects through asset financing slowed during the final quarter of 2008, as banks responded to the financial crisis by shortening periods for loan repayment.

And while the costs of commodities and shipping have decreased, lower oil and gas prices have made it harder for renewable energy sources to compete.

According to the UNEP report, only government support through stimulus packages, especially in the US, will help small and medium-sized developers. In large part due to the anticipation of ongoing government support for renewable energy, 75 per cent of institutional asset owners surveyed by New Energy Finance are expected to increase their investments in clean energy by 2012.

In the region, governments through the sovereign wealth funds are still determined to continue renewable projects. But most of them were either delayed or kept on hold.

The feasibility study contract for Dubai Electricity and Water Authority's (Dewa)Dubai Electricity and Water Authority's (Dewa) $350 million power plant, for example, has still not been awarded. The contract was expected to have been awarded in February 2009.

DewaDewa has issued the main tender for its $1bn wind farm project in July, with its bid submission due in September 2009.

This project calls for construction of a test wind farm for power generation. The scheme is a research on wind as an alternative source of power in the region and aims to supply up to 10 per cent of Dubai city's power requirement. The scope of work involves meteorological study, design, supply and installation and operation of 70-metre tall wind turbines.

The industry is, however, keeping a close eye on the progress of this project as the utility company has already announced some project delays.

DewaDewa had earlier announced that it had deferred the bidding for the $8.6bn Hassyan power and desalination plant until September next year. This deferment happens because of the emirate's sufficient surplus and reserves and the contractors' own request, Saeed Al Tayer, DewaDewa CEO and MD, had told Emirates Business earlier.

Industry insiders said DewaDewa's planned $2bn coal fired power plant had been cancelled because of the project's viability. Al Tayer, on the other hand, had denied there had been any cancellation in DewaDewa's planned projects.

He had said the project was under feasibility study. The coal project calls for design and execution of a coal-fired power plant in Dubai.

The plants will use steam turbines with a capacity of 300MW-1,000MW.

DewaDewa is also continuously seeking use of cleaner sources of energy, including renewables, nuclear, clean coal technology (IGCC, integrated gasification combined cycle) to address the limited supply of gas in the region.

Al Tayer had stressed that diversification of power generation portfolio, in the light of fuel price volatility and availability constraints, was needed to meet the growing energy demands.

He had, however, said nuclear energy would not provide a quick-fix solution to the capacity issue nor change the dominance of gas-fired power plant in the region in the medium or long term.

While all these projects are still in the pipeline, experts do not expect that they will be completed soon. DewaDewa has also been under pressure to pay its $2.2bn loan, which it had nevertheless managed to refinance, ahead of time and without the help of the government.

Hower, Remi Eriksen, DNV Chief Operating Officer, believes it is not all doom and gloom in the renewable sector.

"Some projects have been delayed due to uncertainty in financing but at the same time, 'green' investments are regarded as more safe in the longer term than other investments, so the crisis has also attracted new players to this sector," he said.

"There has been a high M&A activity in the renewable sector for years and the impression is that this has further increased this year, with a strong focus on the larger utility companies buying production assets," Eriksen added.

GCC keen on projects
Sanyo, the world's fourth-largest maker of solar cells and panels, has confirmed to Emirates Business that despite the crisis there are GCC countries that are still interested in pursuing solar plans.

"We are getting lots of enquiries. The Oman Government is keen to develop renewable energies and the Saudi Government as well. So I think 2010 will be the year we can grow more," said Takashi Hirao, Chairman of Sanyo Gulf.

But at the moment the sector would have to continue tightening its belts. "Because of the financial crisis, there is a glut in the panels," he said.

"There is an excessive inventory in the marketplace because most of the projects have been shifted back. So it is said that globally, the solar panel business will be 25 per cent down from last year's level."

In the mean time, the momentum in harnessing the wind energy seems to be less affected.

UAE-based offshore firm LamprellLamprell for one is upbeat to expand into the wind farm installation market in the next six months.

"I think it's good to diversify because we are actually looking at not only the oil and gas sector but other sectors as well," said Nigel McCue, CEO, LamprellLamprell.

"And some other sectors can be quite large and they'll be interesting markets as well," he added.

In the UAE there are lesser wind farm projects compared to solar. One of which is the $163 million (Dh610.36m) Windsor Manor project in the Business Bay that involves the construction of a 29-storeyed residential building. Completion has been moved by a few months to October this year.

Also under execution are the $45m Jumeirah Lake Towers Development Wind Tower I and the Wind Tower II, both slated for completion by the end of this year. Overall, there are about $6 billion wind projects in the region.

Solar projects viable in the UAE
Developing solar projects in the UAE has been tested to be viable.

Smaller solar projects such as the $13 million (Dh47.74m) Solar Technologies facility in Dubai have already been completed in 2007. The project built in the Dubai Techno Park involves the construction of a 400,000 square feet facility for designing and assembling high technology solar energy products and solutions such as solar thermal power plants and solar thermal air conditioning solutions.

The $10m Beam Down Solar Plant in Abu Dhabi and the $110m Le Solarium Building in Dubai Silicon Oasis Development were finished last year.

Construction of new projects, however, has been pushed back.

Abu Dhabi, which is believed to be less affected by the credit crisis, is also revisiting its renewable projects.

According to ProLeads, Masdar is planning to retender and relocate the $550m Shams 1 Solar Power Plant project in Madinat Zayed. No timeline has been set for it so far.

The project, whose main tender is scheduled to be issued in December this year, involved the design and execution of a 100MW solar power plant located at Madinat Zayed in the west of the UAE's capital. Since the first project is expected to be delayed, subsequent projects such as the $550m Shams 2 will be moved as well.

Overall in the Middle East, solar projects worth about $40bn are either at execution, bidding or study phase. More than half of those are in Algeria.

Solar projects are deemed to continue due to the power shortage in the region. Despite being hydro-carbon rich, countries in the Middle East are reliant on gas to fuel their power stations. Gas supply is limited and is mostly concentrated in Qatar, Iran and Russia.

Although some of the GCC countries are producing gas, the output is not enough to meet their domestic needs.

By Karen Remo-Listana

© Emirates Business 24/7 2009