HOW TO PAY FOR OCEAN WIND

Non-recourse finance set to increase in offshore wind sector; As more offshore wind projects get built, non-recourse financing seems to be the way forward.
Alison Ebbage, 16 February 2011 (Wind Energy Update)

"…Non-recourse funding for offshore projects stands at between 10 and 20 per cent, compared to 60 per cent for onshore sites, according to Jerome Guillet, managing director at Green Giraffe Energy Bankers…[E]stimates show that in Europe 3-4 GW will be built on a yearly basis…[T]hat is some €15bn of capital, of which €10bn needs to come in the form of senior debt or guarantees. Because investment costs of individual projects can go from €500million to €1.5billion, traditional corporate financiers and projects’ parent utilities companies may struggle to provide finance.

"Non-recourse finance thus seems like an ideal alternative because it is based on the near certainty of the lender recouping the loan. Several major offshore wind projects…have already been built on non-recourse finance deals, providing a blueprint for the future…[P]artners can be multilaterals, commercial banks and the utilities…[F]or the lender the attraction is a watertight project that…will bring the [ROI]…"

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"…[N]on-recourse finance works on a low margin and fixed return basis with the loan limited to what has been contracted right at the start and no liability for any cost overruns. As a consequence lenders like to be very involved in negotiations, even at the development stage, and require permits, construction, and maintenance contracts and the like to be in place and robust before they will lend…[D]evelopment costs, between four and seven per cent…are down to the sponsor…The construction period takes between one and a half to two years and risks are mitigated by strong BoP…turbine supply contracts…interface agreements…[and] management…

"But in-depth involvement by non-recourse participants can be difficult…[I]n the UK… utilities and banks have had very different approaches to the contracting process…Banks are willing to lend only if the project is seen as low-risk…[I]n today’s economic climate lenders are unwilling to take big risks especially on the large-scale offshore projects. This can make non-recourse structures look like the best and sometimes only option."

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"But as the number of projects increases and confidence returns to the broader marketplace, the number of deals and participants in the market will increase…[T]he amount of lenders will also increase…[C]urrently only a few players such as Dexia and Rabobank can be said to be very involved in this market with another 15 to 20 lending small amounts. The more potential participants, the faster the market will develop - especially if deals are put together by a smaller number of players loaning a greater amount, making coordination far easier…

"Markets that have favourable regulatory regimes will benefit most. Currently Germany, the UK and Belgium appeal most to lenders as all have regulation in place to support offshore windfarm development as well as subsidies such as feed in tariffs (FiTs) or Renewable Obligation Certificates (ROCs), which offer a guaranteed output price and thus reduce risk further for lenders…[But] the regulatory regime to develop offshore wind is the key as it guarantees stability and industry longevity…"