Are renewable energy projects difficult to finance? It is a question that draws a mixed, and sometimes emotional, response. Ask some people in the industry, and the answer will be yes, while others insist that if you put together a sound plan, financing is not hard to secure.

Financing renewables comes with challenges that need to be overcome. The financial community has less knowledge about renewables than conventional energy projects, which can raise doubts on risk. The technology is not as well established and needs to fight harder to prove that it will deliver the promised results. Rates can be unfavourable locally, leaving developers with little alternative but to turn to international lenders with more experience in financing renewables.

New opportunities

So it is an emerging market in the region, but one that is also creating excitement, particularly around the range of financing methods on offer.

If the regulator, offtaker and developer play their roles, then the banks will be there with their cheque books

Vahid Fotuhi, Middle East Solar Industry Association

“There is a whole plethora of vehicles in place to finance projects that are sound,” says Vahid Fotuhi, president of the Middle East Solar Industry Association.

“The onus is both on the regulators to put in place sound power purchase agreements and for the developers to make sure that they structure their project [in a way] that is technically sound. If the regulator, offtaker and developer play their roles, then the banks will be there with their chequebooks ready to sign on the dotted line and bring financing to these projects.”

High interest

While local banks have regional knowledge and experience, it can be hard to borrow at a favourable rate for renewable projects. Banks do not always want to be the lead lender for renewable projects, sending developers to seek funding overseas.

“There can be a tendency to assume that banks will be eager to lend for renewable projects”, says Tim Armsby, partner at legal firm Eversheds. “Companies have had difficulty finding local banks willing to lend or where they have, the pricing can be high. The tenor for financing tends to shorter than if using international financing.”

Alternative models

For larger schemes, independent power project (IPP) and public-private partnership (PPP) models are seen as a popular approach to funding. According to EY’s (formerly Ernst & Young) latest Cleantech report, which will be released in January, 47 per cent of companies surveyed cited IPP as their preferred financing model, followed by PPP (20 per cent).

Presenting the results at the Clean Energy Business Council’s annual conference earlier this month, Nimer Abu Ali, director Mena Cleantech at EY, said the region “needs robust frameworks to create confidence among investors”.

Scale is vital

He told MEED that for debt, North Africa and the Levant would most likely be funded by multilateral and international lenders. For equity, the GCC governments have their own funds, but again, North Africa and the Levant will turn to multilateral and international funds.

Capital markets provide a good way to tap into a large pool of investors, but for a project to be attractive, scale is seen as important. Deal size is seen as critical, because any bond or sukuk issued needs to also be attractive on the secondary market.

With many renewables projects still small in size, it can be difficult to go to the capital markets for funding.

Lee Irvine, senior associate at law firm Latham & Watkins, quotes a benchmark figure of $300m. “There needs to be enough liquidity that investors can trade it. It needs to be tradable and [therefore] needs size to allow that to take place.”

Spreading risk

However, there are ways that small-scale renewable projects can reach the size required, such as developers of different schemes coming together, creating the total size that makes the grouped projects attractive to finance. To an extent, this also reduces the risk, as funding is spread across a number of schemes.

Investors [in green bonds] want to make sure any proceeds…complement ethical investment standards

Lee Irvine, Latham & Watkins

Green bonds are seen as a means of financing renewable projects, and have had some success in other regions of the world. However, they are still in their infancy, with many investors unsure what to expect from investing in a green bond or sukuk.

The value of green bonds issued globally is expected to reach $40bn by year-end, three times higher than 2013 levels. Compared to the value of conventional bonds, this figure is small. To date, none has been issued in the Middle East or North Africa.

Growth potential

Nasser Saidi, president of Nasser Saidi & Associates, says that green financing is attracting new investors, and that banks are willing to take risks for well-structured projects. “As part of its next phase of growth, the UAE and the GCC can become a global hub for renewable and clean energy finance, with green sukuk promoted as an important financing tool that can tap plentiful Islamic finance liquidity,” he says.

Green bonds and green sukuk would offer a degree of guarantee that they would be used for ethical purposes. “Investors want to make sure any proceeds are used in the specified manner and complement ethical investment standards,” says Irvine.

Government issue

Reporting requirements can be strict, with investors expecting clear information on how funds are being spent.

While no green bond or sukuk has been issued in the Middle East yet, there is growing interest. Dubai’s Supreme Council of Energy, for instance, has been investigating the option of using a green sukuk. Irvine thinks 2015 could be the year when one comes to market, most likely issued by a government.

“We have seen interest in green sukuk in the last year, because regular investors invest in sharia-compliant instruments. So we see enquiries. I’d be surprised if one isn’t issued during the course of [2015]. I think it will be government [or a government-related entity] issued just because of the nature of enterprise in the region,” he says.