Romania does not need a second wave of investments in new capacities from renewable sources, said Sanda Abrudan, Head of Energy & Resources, Vice President Advisory & Specialized Lending Corporate Investment Banking, within UniCredit Bank. Rather, “a continuous and sustainable flow of investment in the coming years” is needed. From this point of view, the period up to 2030 is defining because it sets the framework for these investments.
How do you see the evolution of the credit market for green financing, energy efficiency, green energy projects and environmentally friendly projects in the coming years? Is the SME segment more active than the big players? Can you also give some percentages of growth for 2022 vs 2021, per segment, but also in total?
We certainly see increased interest, both for investments in this area and for supporting these investments through credit products.
First, environmental, social and governance (ESG) considerations are already largely included in all new investment decisions, and not just in the energy sector. We have all taken on ESG goals: industry, transport, banks, consumers, investors, etc.
Romania is in great need of investments in new and efficient energy production capacities to replace expensive energy produced from fossil fuels with cheaper, sustainable and low-emission solutions. And this is not only to fulfill the objectives assumed at the European level, objectives that are to be revised upwards, but also to increase the competitiveness of both the energy sector and the industrial sectors, including the energy-intensive ones. Increased competitiveness also means lower electricity prices, and the only way to lower the price in the long term is to invest in new renewable capacity.
The evolution of financing supports dynamic investments in ‘green’ projects that contribute to ESG objectives. The percentage growth of these fundings in 2022 was very high (not in absolute terms), but this is also because it started from a modest base in 2021. As a result of unprecedented volatility and high electricity prices in 2021 -2022, in 2022 we saw more interest in the area of energy efficiency, including in energy production capacities for self-consumption, both in the area of smaller companies and large industrial consumers.
From 2023 we see more and more investment projects in new, large-scale renewable energy production capacity reaching the stage of financing discussions, but we also see loans granted.
This is the first year after a gap of over 10 years that we are seeing new power generation capacity coming on stream in the market – probably cumulatively over 500 MW by the end of this year, plus the prosuming side.
As the volume of credits granted by us, only for renewable projects, in the 1st quarter of 2023, the growth percentage is over 20%. The share of green loans in total loans granted by banks is also increasing, but the level is still low compared to the EU average.
What should be done to have more PPAs in the market? What about CfDs? What is the current situation and how do you see the evolution of these instruments in the short and medium term?
In the PPA market for the time being we see quite limited interest and it is important to look at the perspectives of the parties involved in such a partnership, in addition to the particularities of the local market as well as the legislative and regulatory ones.
On the one hand, renewable energy producers have higher costs in Romania, mainly due to large imbalances in the network, limited investments for the time being in storage and network flexibility solutions, the low degree of digitization of distribution networks and transport. Significant investment projects in new production capacity are only now starting to reach the stage of financing discussions, but we are also seeing a tendency from investors to postpone PPA decisions. We are also seeing PPAs signed in the last few months, but few for now.
We also perceive a lack of willingness among off-takers to commit to current power rates and/or longer contract durations, mainly due to extremely high price volatility.
So, this accumulation of factors, as well as the temporary context of a regulated market with capped final prices for end consumers, made that the PPA market developed less than we expected. But the prospects for the development of the PPA market are significant. First, what we are seeing more and more is that the manufacturing sector in general is developing a new, more efficient way of doing business after the extremely high volatility of electricity prices over the past two years. Therefore, we see increased attention to a systemic approach to business models, in the sense of the increased importance of both the provision of raw materials (including energy) and sales contracts (offtake), right from the moment of investment financing; whether we are talking about a production/service process (industry, automotive sector, telecom, etc.),
In practice, investors and consumers alike are increasingly making sure that they address the entire supply/production/sales chain and thus reduce their elements of volatility in costs and revenues, in order they have a solid business plan and also to obtain the support of financiers.
What is important, however, is that even for industrial consumers, ESG criteria are increasingly present in decisions, and this also means purchases of ‘green’ energy. We are seeing more and more end consumers purchasing green energy as an essential part of their sustainability strategy. And corporate PPAs help them reduce their carbon footprint, have predictability regarding energy costs (even reduce them) and finally increase their competitiveness in the market in which they operate. So for consumers, signing a PPA is also a tool to cover the risk of rising electricity costs.
We also see the importance of PPAs in the current consultative process regarding the new design of the European electricity market, as they are considered an effective tool to support the development of new capacities.
In terms of supporting the financing of new capacities through the CfD mechanism, the launch of this mechanism as early as this year is eagerly awaited by both investors and financing banks, and we see it as complementary to PPAs.
What were the biggest drivers of lending and co-financing growth for 2022/Q1 2023 in the green segment? What are the typical loans offered by the bank, including in the case of co-financing European projects, and what are the terms – guarantees, typical CAPEXs and recent IRRs – acceptable to investors?
Lending growth in the green finance segment comes mainly from investments in energy efficiency and, more recently, investments in new medium-sized generation capacity. Co-financing on the green segment is expected as soon as the operational programs from the programming period up to 2027 are approved, for now there are no ongoing operational programs on this segment, apart from the open calls in the NRRP.
However, there are guarantee instruments (from institutional banks, such as the European Investment Bank) available to commercial banks to facilitate access to financing for certain categories of investors and certain types of green/sustainable projects.
The specific loans that are granted for investments in new capacities are loans in “project finance” structures with recourse to the assets of the project itself, real estate and movable guarantees (on accounts, receivables, contracts, including PPA). Important in this type of financing are Due Diligence reports on the technical side including environmental, legal, financial, electricity market and price estimates, specific insurances in the project, etc.
We want a sustainable increase in sustainable financing, this also means elements of prudence in the way we assess market and credit risks.
As a level of CAPEX, we see a return to a downward trend after the highs reached in the last 9-12 months. Of course, situations differ depending on the technical solution of the project and the types of panels. For solar projects larger than 100 MW we see the CAPEX in the range of 570,000-650,000 euros per MW (EUR/MW), just the CAPEX with the plant itself, without the connection part which differs from project to project. For smaller solar projects, the costs are somewhat higher, in the range of 600-700,000 EUR/MW.
For wind projects, the CAPEX is in the region of 1,100,000 EUR/MW (of which the cost of the turbine is approximately 900,000 EUR), to which are added costs that can be significant with the grid connection, civil construction, electrical infrastructure, etc.
In terms of project IRRs, a realistic level seems to be in the region of 9% for solar projects and 10-12% for wind. However, it depends on many factors: from the connection solution to the estimates considered by the investors, especially those related to the evolution of production, the costs of imbalances (especially in wind projects), operation and maintenance costs, the evolution of the price of electricity, etc.
How has the prosumer segment evolved, and also the medium and large solar and wind farms segment? What else does UniCredit offer investors?
Prosumers are a very dynamic segment of the market, with significant growth in the last 3 years, and this aspect is increasingly contributing to the goals and ambitions of the green energy transition. The increased interest in the prosumer segment is a natural thing in the new energy market model and is mainly driven by two factors. First of all the high prices of electricity and the concerns of all categories of consumers in this regard, even in the current context of temporarily capped prices. Second, the technological advance that modernizes the operation of networks and allows prosumers to control production and consumption.
In the context of national green energy targets, incentivizing prosumers must have an important place, of course as distributors invest in smart metering solutions and smart grids.
According to distribution operators, they have seen a very large increase in requests to connect prosumers to the network, from a few dozen in 2021 to several hundred in 2022. At the beginning of this year we had 40,000 registered prosumers, and for the end of the year it is estimated to exceed the threshold of 100,000. So the expectation is to see further significant increases, especially if the authorities unlock existing funding programs and if they introduce other tools to support those who want to become prosumers.
Romania is the country with the highest percentage increase in GDP in Europe, it is well positioned in terms of project authorization duration, we have significant resource potential for both new photovoltaic and wind capacities, financing methods and sources exist. We are seeing more and more projects moving towards the construction phase and the first new operational capabilities this year. We hope to see over 500 MW by the end of this year (without prosumers) and over 1,000 new MW per year in the years to come. Romania does not need a second wave of investments in new capacities from renewable sources, but a continuous and sustainable flow of investments in the coming years. The period up to 2030 is defining because it sets the framework for these investments.
Romania really has record amounts available through various European and local financing mechanisms, both for the production of energy from renewable sources and for energy efficiency measures. We want the absorption of these funds to be a priority for the Romanian authorities.
Our clients benefit from the expertise we have in the energy market and financing structuring services specific to investment projects, coordination services, agency, consulting services in mergers and acquisitions. UniCredit has a strong team in Central and Eastern Europe, with local specialists supported by highly experienced product teams in business centers in Milan and Munich.
How do you see the development of the green bond market in Romania?
No significant progress has been registered in this segment so far, the number of green bond issues on the local market is low. For the financing of green projects, investors consider less complex and more accessible options more suitable, both in terms of process and costs.
General “greenwashing” concerns remain a challenge for sustainability bonds, which penalize issuers with higher borrowing costs if they do not meet certain ESG targets, so reporting and monitoring specific indicators will continue to be a challenge. Difficult economic and market conditions globally and increasing attention to the perception of greenwashing are tempering the pace of growth in this segment.
Globally, environmental, social and governance (ESG) bond issuance reached a high in the first part of this year and is expected to reach $900 billion, supported by new bond issuance green in Europe, with investment in new renewable capacity being the main driver of growth.
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This interview first appeared in the printed edition of Energynomics Magazine, issued in June 2023.
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A realistic image of the current situation of the green energy in Romania, very well and straight explained.
It is always a good idea to see the matter from different perspectives, and the financing authority is one of the main stakeholders in all the projects.