Regulation thwarting energy infrastructure fundraising

The success of European efforts to bridge a €210bn energy infrastructure funding gap with private capital hinges on the resolution of regulatory issues, particularly in the renewables sector, according to industry experts.

To address a multi-billion euro funding shortfall and attract commercial finance the European Commission launched the Connecting Europe Facility (CEF) in 2013, which offers financial support to projects through grants, project bonds, and guarantees investors will receive principal and interest payments.

A total €5.85bn was made available for improving trans-European energy infrastructure between 2014 and 2020 (see EDEM 18 November 2015). Projects of Common Interest (PCIs) are eligible to access this funding.

It was followed in June this year by the European Fund for Strategic Investments (EFSI). The EFSI will be built on guarantees of €16bn from the EU budget, and €5bn from European Investment Bank (EIB) resources.

Credit ratings agency Fitch said it would ultimately be positive on energy infrastructure but only if renewable subsidies were removed.

“But this will take time, and it will be complicated,” Federico Gronda, senior director of global infrastructure at Fitch said.

“We are currently negative because of risk in this area. It is not possible to say if there will be further challenging legislation passed.”

EFSI products will include debt financing (selling bonds to investors), guarantees, equity (via share sales), and venture capital (money provided by investors to start-up firms). The EIB forecasts that the fund will unlock private investments of more than €315bn over and above what it would otherwise be able to provide.

“The process for accessing the EFSI is the same as applying for an European Investment Bank (EIB) loan: the project promoter should speak with the EIB to see what best form of financing it can provide under EFSI,” a spokeswoman for the European Commission said.

“Regarding the availability of the EFSI for the energy sector, the only limitation is that a single sector of the economy shall get no more than 30% of the overall financing,” she added.

So far a UK wind project, Galloper Farm, has been granted €225m in funding, and the Belgian offshore Noblewind project has been given a €250m loan via the EFSI.

Investor interest

There is some evidence the funding system is generating interest among private investors.

“Energy requires substantial investments, and European energy infrastructure is a very hot sector,” said Tomas Gardfors, partner at global law firm, Norton Rose Fulbright.

“Pension funds have significant amounts to invest, and at a time when returns on gilts and bonds are lower; and oil prices remain at low levels, energy infrastructure is very interesting. These assets can be relatively safe, long term investments that offer a good yield.”

But concerns about the impact of regulatory risk on investor sentiment have been raised by a number of sources.

“Around two-thirds of the capital potentially available to fulfil European energy infrastructure investments will not materialise unless member states and the EU make a concerted effort to provide long-term clarity on the regulation side,” Antonio Mexia, president of the body representing Europe’s electricity industry EURELECTRIC said.

Political risk

Anxiety has arisen due to an increase in political risk – that is there is a risk of changes to laws, regulations or concession contracts governing the operation of infrastructure companies during the life of the asset.

The energy sector has been hit hard by political risk in recent years. Specific examples include the retroactive reduction to incentives for renewable energy projects in a number of European countries, and the reduction of tariffs on the Norwegian Gassled pipeline (see ESGM 30 October 2015).

“Regulation is always going to be a risk, and that’s not going to go away. But it has become clear that renewable support systems were problematic, and it is not possible to say if there will be further changes to legislation passed,” Gronda said.

“There is a common misconception, a fear that all investors are hard-nosed. But the reality is that the cash pension funds are investing with is future individual retirement capital looking for long-term yield. If there’s no money to be made, finding investors will obviously be difficult. Nobody can afford to invest for the greater good,” Gardfors said. claire.wilson@icis.com