Credit crunch puts Asian power projects at risk

Some Asian power plant projects will be scrapped and many delayed due to tighter financing in response to the global financial crisis, industry officials and bankers said on Tuesday.

But Asia’s growing demand for power will still attract equity financing and the region may even woo European investors, as economic growth and projects slow to a trickle in the West, they told a conference on financing energy projects. “Financing costs will increase. A smaller number of projects will be developed in Asia and lenders will be selective in supporting projects with a strong developer track record,” said Tom Mackay, head of business development Asia for International Power, a power generation company. Mackay declined to name any specific projects that could be cancelled but he and other panelists said renewables might have a tougher time than other power projects. “The bigger the project, the more difficult it will be,” Mackay added on the sidelines of the conference. Coal-fired plants may be more vulnerable than gas-fired ones, as they are more expensive and take longer to build. Project financing began to recover earlier this decade from the slump in the wake of the 1997-1998 Asian financial crisis. Standard Chartered Bank projected in April that project finance was growing strongly in Asia – led by Singapore and Philippine power projects – hitting a record of US$44.8 billion last year and in first-quarter 2008 grew six-fold over a year earlier, despite the global credit crisis. However the crisis has since widened, stoking fears of a global economic recession, leaving banks struggling to fund expansion of infrastructure and energy projects, forcing them to scrutinize deals more closely. “We are still open for business. Good projects with good sponsors can still get done at the right price. But we’ll probably see fewer closings of deals in the next year,” said Nicolas Vix, head of natural resources, infrastructure and power, structured finance Asia for French bank Calyon, investment banking arm of Credit Agricole. Club-style deals Debt financing is already more difficult to obtain and banks may prefer club-style deals, which combine several partners to share the risk from the outset of the project, officials said. This means that small firms will struggle to get debt financing and may require equity financing, or seek developers as partners. “We attend these conferences to find co-investors as there is no way we’ll get money from the bank,” said a senior official with a small Indonesian energy firm, who declined to be named. While developments may slow down, most will still come true. “Asia needs the power so we need to get these deals done,” said Jackie Surtani, head of project finance for Belgian financial services group KBC’s global structured finance team in Asia. Indonesia aims to boost power capacity by 10,000 megawatts of coal-fired plants by 2010 to help ease an electricity crisis that exposes it to blackouts, but the plan is behind schedule. Vietnam Vietnam’s power demand is forecast to rise 14 percent next year, top utility group Electricity of Vietnam (EVN) said, after 2008 consumption jumped 15.16 percent from 2007. The higher lending costs could force governments to raise power tariffs, which have been kept artificially low in most of Asia. While this in turn could make the projects more profitable for investors, a looming recession could deter most governments from raising rates, the officials said. “Does the government have the courage to go ahead? Is this the right time to accept the reality and power prices increases?” said Flora Zhao, director of business development for AES Asia and Middle East, a unit of AES Corp. State-owned monopoly power supplier EVN is seeking government approval to increase power prices by an average of about 16 percent next year. INVESTORS WARY OF VIETNAMESE POWER PROJECTS Tran Viet Ngai, chairman of the Vietnam Energy Association, said only 17 independent power producer projects and two power projects under the Build-Operate-Transfer model have been started, out of the total 47 projects registered earlier. All power projects must undergo bid procedures and then the investors need to fill “countless” documents before they can start construction, he said. After the power plants are built, the investors will have to depend completely on the purchasing of Electricity of Vietnam (EVN), the only buyer, he said, noting that was a factor that had discouraged many private investors and thus restricted investment into the domestic power sector. EVN is a state-owned monopoly that controls all of Vietnam’s transmission grids and network of retailers, including Hanoi Electricity Company and Ho Chi Minh City Electricity Company. Dang Thi Hoang Yen, chairwoman of the board of management of ITA Group, said the group had to deal with many procedural issues when investing in a power project. As well as many kinds of documents required for site clearance, private investors often have difficulties with regulations concerning EVN, she said. Dinh La Thang, chairman of Vietnam National Oil and Gas Group (PetroVietnam), said it took the group’s power arm almost two years to negotiate prices with EVN. But PetroVietnam was still lucky because some foreign investors spent up to six years on price negotiations. In August, PetroVietnam complained that it could only sell limited electricity to EVN, mainly during peak hours, because the monopoly power company wanted to make full use its own generation capacity. The United Nations Conference on Trade and Development (UNCTAD) said in a recent report that Vietnam had attracted many foreign investment projects but very few of them were committed to the power sector. Foreign investors only participate in the production of electricity if they know that what they can earn is worth the risks they face, UNCTAD said. To restructure the power market in Vietnam, production, transmission and retailing must be separated from one another, UNCTAD suggested. Moreover, the Institute of Energy, which plays the role of a consultant in formulation of national strategies and policies on energy and electric power development, should not be managed by EVN anymore. The Electricity Regulatory Authority of Vietnam, currently under the Ministry of Industry and Trade, should also become an independent organization, UNCTAD said. Source: Tuoi Tre Source: Reuters