Banks are reassessing collateral required from power project developers as they seek higher potential returns, according to Gints Sorokins, board member at OS Energy. This tends to delay new-builds and risks to derails a number of projects.
“Collateral required by banks cans be demanding in many cases, so project developers have to either put up a large deposit or secure against other existing profitable projects,” he said, conceding that these latest practices “can severely slow down the process of project development and limit which projects can go ahead.” In his view, “this process has to be simplified.”
Risks and returns for new power plant projects varying widely, not least due to operational risk. Lenders seek to hedge these perceived risks and many banks now require stringent collateral, however, the case for standardization is growing.
COP21 makes gas increasingly hard to finance
“Copenhagen and Paris have really pushed the energy transition. Countries have agreed on goals but when you look at these goals it makes gas a very challenging option to finance in future. We as a bank would like to standardize the approach but there are considerable hurdles in the way,” said Leon Pulles, senior investment advisor at Royal Haskoning DHV Investment Services.
While gas and coal are mature technologies the major risk for new projects remains the future policy landscape and the likelihood of increasing penalties.
“There’s still a good space for gas in some countries, but in Europe the more promising concepts are currently in renewables,” he explained. “In the Netherlands, our power sector was liberalized and significant coal and gas [capacity] was built between 2005 and 2012 – both are suffering now.”
More standardization needed, “money is there”
Although the outlook for project finance for gas power projects in Europe remains weak, industry leaders see a more positive future for European financiers and technology companies to invest – provided standardization can be achieved.
“The money is there but to get to a project completed is far from easy,” Sorokins said, suggesting “Europe has reached a peak in some respects for new projects.
“Banks need to re-evaluate what is and isn’t risky if they want to expand and support projects. This is particularly true with many projects in developing countries, where we find banks can be reluctant.”
Despite interest from both banks and project developers to improve standardization, complexity remains not least due to large variation between projects outlines and regulatory environments around the world.
“We are focused on smaller decentralized projects but at this moment gas prices make the plants unprofitable or risky. We are sitting on a pile of money waiting for good projects,” commented Emiel van Zwet, account manager at ASN Bank.