U.S. lenders wary of funding new power plants

HOUSTON, April 2 (Reuters) - Lenders on Thursday painted a grim picture for U.S. power-plant developers that seek financing in the tight credit market.

While saying that banks have capital to lend and remain committed to the electric industry, loans will be smaller, more expensive, for shorter terms and take much longer to arrange, said a panel of power industry lenders at the two-day Gulf Coast Power Association conference in The Woodlands,

"Banks are open, but it's a more painful process for issuers now," said Jason Satsky, a director of Credit Suisse.

James Metcalfe, managing director of power and utilities for UBS, said potential projects will be evaluated - first and foremost - by credit rating. Lenders will gravitate toward projects developed by investment-grade companies, he said.

"Only a select few non-investment grade projects are getting capital," Metcalfe said.

Ten- and 20-year loans underwritten by a single lender are a thing of the past, lenders said, as banks will seek partners to lower the amount they need to lend and to share risk.

Projects will need to bring a long-term power purchase contract for 20 years for the output of a new plant even though banks will probably limit the term of any loan to five to seven years, the lenders said.

"There is no appetite for merchant projects," power plants that typically do not have power-purchase agreements, said Richard Randall, managing director for power and project finance for RBS Global Banking.

One serious impediment panel members cited is the loss of liquidity in the market for forward power hedging as banks and other companies have dropped out of hedging activity. Lack of clarity on future power prices makes it difficult for lenders to evaluate a new power plant's prospects.

The potential for renewable power mandates, carbon limits and the return of electric demand growth as the economy recovers "create a huge capital formation need," said Terence Darby, managing partner of Energy Investors Funds Group, a private equity company.

As regional power surpluses decline, "it creates a huge need for capital with no clear way to get it," Darby said.

Lenders want more details to emerge from the U.S. economic stimulus package and the Energy Department's various loan guarantee programs before putting money behind projects based on the incentives.

"There's a lot of enthusiasm about the nuclear energy loan program, but we want to see if it's going to play out as advertised," said Metcalfe.

"We are skeptical of government involvement because of how slow the government works," said Randall.

(Reporting by Eileen O'Grady; Editing by David Gregorio)