Wind energy becalmed by shortage of finance

The credit crunch and falling oil prices threaten to hold up some of Britain's renewable energy projects just as the UK has raised its commitment to green electricity, financiers said yesterday.

While large projects backed by the bigger utilities are generally thought to be safe, smaller and more speculative developments are facing funding problems as backers adjust their lending criteria or, in some cases, consider withdrawing it altogether.

"The debt is just not there," said John Dupont, head of renewable energy finance in the UK for Nordbank, the world's largest clean energy financier. "We are still doing deals but the market is very difficult. This could result in a big delay for wind farm projects being developed in the UK."

"The market has definitely tightened," said Ian Whitlock, a partner at Ernst & Young specialising in UK utilities. "The lending rates over Libor and the covenants on renewable energy deals in particular are being toughened up."

Industry sources say several lenders, including Royal Bank of Scotland (RBS), have dramatically reduced their funding activities in recent weeks.

As well as scarcer and costlier debt, Mr Dupont said another factor causing problems for producers of renewable energy was the falling cost of oil, which was making projects less economic when compared with fossil fuel. The high construction costs involved were also threatening to cause delays, he added.

Sources close to the London Array project, the world's largest offshore wind farm, which is to be built in the Thames estuary, say its projected cost has risen to £3 billion, against initial estimates in 2003 of £1 billion. The Masdar Initiative, a vehicle funded by the Abu Dhabi Government and specialising in renewable energy, announced on Thursday that it would take a 20 per cent stake in the project.

A £400 million offshore wind energy project in the North Sea hit funding problems when a finance deal arranged by RBS and Fortis was dropped. Eclipse Energy's Ormond scheme is now being financed by Vattenfall, the Swedish utility group, which has agreed to buy Eclipse outright.

The problems have emerged as Ed Miliband, the new Secretary of State for Energy and Climate Change, pledged to cut greenhouse gas emissions by 80 per cent by 2050. The change followed recommendations by a climate change committee chaired by Lord Turner of Ecchinswell to raise the target from 60 per cent.

Separately, it emerged yesterday that the completion of Europe's first pressurised nuclear reactor is to be delayed by three years and the plant is unlikely to start producing electricity until 2012.

The announcement from ArevaSiemens, the French-German consortium that is building the new station in Olkiluoto, Finland, has alarmed the UK energy industry. The reactor technology is of the same type that EDF, the French energy company, has said it wants to use to build four new nuclear reactors in Britain.

Areva-Siemens did not give a reason for the delay, which is the fourth to have been announced so far.

Construction of the $3 billion (£1.7 billion), 1.6 gigawatt European pressurised reactor (EPR) plant began in 2005 but has been fraught with problems. Officials have in the past blamed use of the wrong materials and planning problems.

Olkiluoto 3, as it is known, is the first EPR to be built although another is under construction in France.

Power struggle

- The UK Government has a long-term aim of reducing greenhouse gas emissions by 80 per cent by 2050

- In 2000 the Government set a target of 10 per cent of electricity supply from renewables by 2010

- In 2006 the target was doubled to 20 per cent by 2020

- In 2007 just 5 per cent of Britain's electricity came from renewable sources