TODAY’S STUDY: WHO WILL PAY FOR EUROPE’S OFFSHORE WIND AMBITIONS?
Where's the money coming from? Financing offshore wind farms
November 2013 (European Wind Energy Association)
The long-term stable market and regulatory framework challenge
The major challenge increasingly facing the offshore wind industry is regulatory risk, which can refer to unclear or conflicting political support for offshore wind, uncertainty with grid connection regimes, or lack of a long-term stable market and regulatory framework. It is critical that national governments address this risk, not least by working with the European Commission to agree a binding 2030 renewable energy target at the earliest opportunity.
The funding challenge
The European offshore wind energy industry needs to attract between €90 billion and €123 billion (bn) by 2020 to meet its deployment target of 40 GW.
Should regulatory instability prevent the offshore industry from reaching its 40 GW target by 2020, even a conservative assumption of 25 GW would still require between €50 bn and €69 bn over the next seven years. However, availability of financing now appears less likely to constrain the growth of offshore wind energy than regulatory risk.
Funding is available
Power producers have so far been the main investors in offshore wind using their balance sheets. As the scale of investment grows, new entrants are becoming active in different aspects of project development. Engineering, procurement construction and installation companies (EPCI), wind turbine manufacturers, oil and gas companies and corporate investors are already investing in offshore wind according to their specific strengths and capabilities. Infrastructure funds and institutional investors have already made progress in taking construction risk and enhancing the financing landscape for offshore wind.
Moreover, innovative funding structures are now being used. The role of development banks and Export Credit Agencies (ECAs) has been significant in attracting commercial lenders to the sector. There are now over 30 banks with experience of lending to offshore wind and there are more examples of them lending to projects earlier and taking construction risk.
Despite the challenging funding requirements, both traditional and new investors seem optimistic and willing to continue to invest in offshore wind. According to them, the most important risk factor is not the availability of funding but regulatory instability. Evidently, the high level of uncertainty that comes with changing regulatory frameworks has slowed down offshore wind energy deployment in many European countries, not least in the two largest markets, the UK and Germany. Nevertheless, as long as Europe ensures a stable framework for offshore wind, the required capital can be channelled into the sector. For this to happen, agreement on a binding 2030 renewable energy target at EU level is crucial.
Looking specifically at construction risks, grid availability risk was considered the greatest concern by industry y overall. This is one of the most significant barriers to deployment, particularly in markets where project sponsors are not responsible for grid connection.
• Create a long-term stable and clear market and regulatory framework based in a 2030 binding renewable energy target at EU level
Regulatory risk relating to support mechanisms is considered the most important challenge to offshore wind deployment.
• Develop predictable grid connection regimes, with clear allocation of responsibility and de-risked cost recovery mechanisms
Resolving delays in grid connection and the uncertainty they create for wind farm developers and financiers is fundamental to avoid delays and cost overruns.
• Maintain so-called shallow grid connection charges as best practice for financing electricity infrastructure
Why should offshore wind energy become the first power generation technology to pay for grid connection through deep grid connection regimes? Grid development benefits all producers and consumers and its costs and benefits should be socialised.
• Provide liquidity and credit support
Multilaterals and Export Credit Agencies are successful in attracting new sources of capital. They should be encouraged to invest and provide liquidity to the sector and in structures that facilitate the entry of new sources of capital to the sector
• Engage consumers in an open dialogue on the cost of energy
With an increased focus on the cost of energy bills for consumers, transparent perception of the cost of support to offshore wind energy and its significant benefits, should be addressed.
Plugging the funding gap
A number of funding models are expected to have a role in funding offshore wind projects in the period to 2020. These are shown below, together with recommendations for attracting these forms of capital.
Sources of finance/Key findings
• Power producers continue to play a dominant role in financing offshore wind farms. However pressure on balance sheets since the financial crisis has required new sources of debt and equity investment. Inves- tors have responded through joint venturing, project financing and oth- er innovative solutions.
• While there are clear strategic ration- ales for EPCI, OEM and oil and gas majors to invest in offshore wind, uptake is still limited. In the case of EPCI and OEM, they lack the finan- cial strength to take equity stakes with the exception of conglomerates with investment arms such Siemens. For oil and gas majors offshore wind competes for capital with alternative investments.
• There are notable examples of third party investors increasingly financing offshore wind including pension funds such as PensionDanmark. However such funds will seek to participate alongside other strong investors and may require firm guarantees.
• Infrastructure funds tend to invest in the higher risk construction phase and aim to make returns from exiting projects once they have begun operation and the risk (and returns) are lower. Some struggle to generate sufficient returns from offshore wind, or are not comfortable with the risk profile compared to other infrastructure classes. A number of larger funds such as Marguerite are nevertheless attracted by the large investment in offshore wind.
• Development banks and ECAs have played a crucial role in attracting a number of lenders to the sector. There are now more than 30 commercial banks with experience of lending to offshore wind and increasingly banks are lending to projects earlier and taking construction risk. Innovation of project and contractual structures facilitate this investment.
Contracting and risks/Key findings
Among construction risks, grid availabilability was the greatest concern to the indus- try. It is seen as one of the most significant barriers to deployment, particularly in markets where project sponsors are not responsible for grid connection.
The contracting structure and credit quality of suppliers and contractors are also important risks and the sector has suffered from a large number of bankruptcies which have contributed to project delays. EPCI wraps are frequently dis- cussed as a solution that crucially cov- ers interface risks. However, the dependency on one contractor and benefits of multi-contracting such as cost savings along with the flexibility of separate par- ties able to manage risks within their core competencies, prevents this from becoming the norm.
In terms of operating risks, regulatory risk was seen as the most important, highlighting the damage caused by sudden and at times retroactive adjustments to support mechanisms in European countries. Issues with performance have affected a number of projects and the ability of warranties to cover these components is still a major concern. Contingency funds can be used as a way of managing this…
Plugging the funding gap…