Developers wrestle with complexity
By Henry Edwardes-Evans
June 22, 2009 - Financing conditions remain "tricky" for independent power projects, sources told Platts in June, with the differing expectations of generation equipment suppliers and power offtakers adding to the complexity of project development.
To some extent this has left the door open for vertically-integrated utilities. While ramping down their investment programs, the big energy companies retain the resources and cashflow to build through the recession.
"This is certainly a tricky time for project and infrastructure finance, and what we are finding is consistent throughout the sector," an independent European power station developer said June 1.
"Essentially you have a triangle of conflicting forces playing out. At one point you have capital costs. At another you have the offtakers, either tolling or those signing long term power purchase agreements. And then you have the banks."
The developer was busy flitting between the three trying to get them to align. "Unfortunately we keep getting into points of disequilibrium," he said.
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On the plus side, engineering, procurement and construction prices were "definitely coming down," the developer said. "A year ago costs were absolutely on the rise with all sorts of onerous conditions, such as reservation fees and strict production slots," one said.
"Then the rigidity on the reservation fee starting falling away, as did rigidity on the production side and now finally prices are coming down."
The source put current CCGT capital costs at around €750/kW, down from €1,000/kW at the top of the market in the UK. "Those very high prices cannot be supported today," he said.
Others put CCGT capital costs at nearer €800/kW for northwest Europe, with the range depending on choice of air or water cooling and other site-specific options.
Spanish CCGT costs published in the country's Official Journal, meanwhile, have never got much above €500/kW, helped by lower labour rates and what one can only assume to be optimistic assumptions.
Chasing a falling market
A key conflict, one developer said, was that equipment suppliers were looking back at the 2007/08 heyday of EPC prices, while offtakers were looking ahead. "Suppliers are adjusting down from very high prices, while offtakers have already priced in those reductions in EPC costs and are now factoring in the drop off in demand as a result of the economic crunch," he said.
"We were all concerned back in October last year that we would be at risk of chasing a downward market, and that has come to pass, with the result that a lot of deals have been put on hold."
In the UK, players were less certain that EPC costs had come off yet to any significant degree. "If you've got to stick a boiler in there that is a lot of specialist engineering work," a large utility source said.
"It is still much easier to build a CCGT than an offshore wind farm, and demand for gas-fired kit has not slackened to the same extent. The CCGT price is not what it was five years ago [around €500/kW] and it never will be."
The source noted that the price for a large, 1,200-MW CCGT project in the UK had gone up from £350 million in 2005 to £500 million a year later and on to £1 billion in 2008, "and it would be higher than that today."
For new entrants, perhaps the biggest potential deal breaker is the continuing trauma in the world of finance. None of the established lenders are chasing up business, developers agreed. "Only the best of the best deals are getting looked at and financed," one said. "The banks are repairing their balance sheets and are very wary about funding."
In general, lenders are sticking to shorter-term financing known as mini perms, usually payable in three to seven years, after which the debtor has to re-finance.
"The spreads are substantially higher than they were at Christmas time, so even though €ibor and Libor rates have dropped, the spreads on top are higher by a factor of two at least," a developer said.
"And the commitment fees up-front are much higher, so the net effect is that, even with lower interest costs, when you do get financing which is more constrained, then the cost of financing that debt is much higher. The shorter terms force you to put more equity in, which reduces your returns. In combination, this squeezes the economics even more."
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Credit crunch buys developers breathing space