Banking renewables

The European Investment Bank (EIB) is the largest supranational bank in the world. Senior banker Katalin Quittner tells Stephen Dineen about financing Irish energy projects and lending in the future.

In these tumultuous financial times the EIB has maintained its resolve to lend. As European banks have been downgraded and credit tightened, it has retained its AAA credit rating and increased lending.

With a subscribed capital of €232.4 billion, it can lend up to two-and-a-half times its capital, reserves and other provisions. Last year it loaned €60.9 billion, funded through bond issues on international capital markets.

Ireland is no stranger to Quittner or the bank. “We don’t give up financing Ireland or Irish infrastructure just because Moody’s downgraded,” she explains, citing the bank’s announcement of appraisal of an ESB Networks loan several weeks after such a downgrading in July 2011.

Moreover, its traditional role of providing credit for public-private partnerships, semi-state companies, private investors and banks in Ireland is soon expected to extend into direct funding to government. It plans to lend for 46 school building projects in 2012-2013.

“I would not say that there was an impact especially on Ireland because of the crisis,” she explains. In fact, lending increased. “First two years we had a peak. For example, in 2009 the amount of Irish signature was close to €1 billion.” The €1.02 billion in 2009 was an increase from €450 million in 2008 and €345 million in 2007.

While the bank mainly supports large-scale infrastructural projects, “we don’t exclude small and medium-sized companies, but we don’t have the capacity to finance so many projects.” For smaller projects, the bank has implemented schemes for “intermediary solutions with the Irish banks.”

The bank’s remit is to finance six priority objectives within the EU:

• economic and social cohesion and convergence;

• support for SMEs;

• environmental sustainability;

• implementing the knowledge economy;

• developing the Trans-European Networks; and

• sustainable, competitive and secure energy.

Energy projects

The energy sector is part of “the primary scope of EIB financing”, according to Quittner. Of the €3.1 billion loaned to Ireland between 2006-2011, 45 per cent was dedicated to energy: gas and electricity networks, as well as conventional and renewable generation.

A notable, current project is the East-West interconnector. The EIB is funding €300 million of the €601 million project. Quittner says that the bank has also financed some cross-sectoral projects relating to energy, such as ESB Networks’ electric vehicles infrastructure project.

In 2011, energy signatures accounted for €10.7 billion of EIB lending, with renewable energy (43 per cent) and networks (35 per cent) the majority of the spend. Projects must be technically sound, financially viable, show an acceptable economic return and comply with environmental protection and procurement regulations.

Of €5.5 billion in loans to renewable energy projects (across the EU and to partner countries) in 2011, wind energy projects received almost half of this funding (44 per cent), followed by multi-sectoral projects (25 per cent) and solar energy (12 per cent). Wind energy projects have placed a high demand on EIB financing, according to Quittner.

To get loan approval, onshore wind projects must have an appropriate wind assessment of at least one year of onsite wind data and five years of reference data for correlation. All environmental planning permits and approvals must be in place, including copies of any environmental impact assessment.

Grid connection should be secured. Projects must have a decent economic return with a maximum levelised electricity production cost and all public procurement wind energy projects must comply with EU Directives.

Future investment

Looking to the future, Quittner says that the EIB will stay focused on climate-related projects.

“The target is 25 per cent but the reality is even higher,” she says of total annual lending. In 2011, these projects accounted for 29.5 per cent.

Quittner is “always thinking about” the need for grid investment. It must accompany the investment in “renewables, onshore, even offshore wind, concentrated solar plants,” projects she describes as fancy in financing scope. She sees infrastructural deficits in Ireland and France. The UK’s gas network needs upgrading.

As implementation of smart grid and smart metering technologies become “closer and closer” they are “a potential next scope of EIB.”

With the Commission estimating in 2011 that energy investment up to 2020 will total €1.1 trillion, EIB funds are likely to remain crucial. Last year it provided 11 per cent of the anticipated renewable energy finance required and 6 per cent of grid capital.

In June, EU leaders approved a €10 billion increase in the bank’s capital limits to help boost growth. This will increase its lending capacity by €60 billion over three or four years.

Maintaining the bank’s AAA credit rating is vital, she says. Losing it would “dramatically change our funding possibilities or our lending capacity.”

Maintaining fiscal discipline is key, according to Quittner. “The problem is, now, that we have to preserve a certain capital structure. We cannot finance more than that which is allowed by our subscribed capital,” she says.

“Otherwise we will have problems with the ratings agencies, which causes problems for our borrowing costs and then will cause problems for the customers,” she states. “That is the chain that we have to respect.”