As governments pledge their commitment to greener energy sources and G7 member nations call for legally binding targets for low-carbon emissions, renewable energy is set to boom. Undoubtedly, the offshore wind sector is well-placed to make a sizeable contribution to any low-carbon transformation – and has made significant strides forward over the past few years.
In an effort to meet their targets for renewable energy, governments are considering larger windfarms that are further offshore in more exposed parts of the ocean. As project ambitions grow so do construction risks, making the securing of necessary capital more challenging. Yet regardless of complexity, well-structured projects should remain competitive and attractive to investors – ultimately allowing them to get off the ground.
DEVELOPING A STRONG RISK PROFILE
Project Gemini – last year's standout transaction – is a case in point of how a pre-construction project can be made bankable and therefore attractive to investors. Despite its size and challenging bank funding conditions, it obtained equity of €500 million from four investors – including Siemens Financial Services (SFS) – and then was able to secure the rest of the €2.8 billion budget from subordinated loans, loans from banks, export development agencies and credit insurance companies.
The financing ultimately relied on the comprehensive contracts in place to ensure risk transfer – and security – for both equity and debt providers. Despite the inevitable involvement of multiple suppliers, only two – Siemens and Van Oord – were responsible for construction. As new investors such as pension funds and insurers enter the offshore wind arena, a simplified interface and reduced risk profile will be vital – and we are already executing extended-scope projects accordingly. Certainly, in the case of Gemini the dual-contact structure dramatically reduced the risk of delays that can often occur when there are multiple interfaces between contractors.
Now, as capital demands increase in line with the size of new projects, multi-source financing such as this is set to become even more important. A more recent example is the €1.9 billion Veja Mate project. Located off the north coast of Germany, Veja Mate will be one of the world’s largest wind farms once completed – producing around 1.6 terawatt hours of electricity per year.
In this case, swift financial close was essential in order that the project stayed on track to be operational by 2018 to benefit from the higher feed-in tariff, meaning finances had to be in place for construction to begin promptly. Multi-source financing was critical in expediting this process – with investors reassured by a well-structured project with stable returns, benefitting from a robust regulatory framework. This reassurance was aided by having a large number of investors, including Highland Group Holdings Limited, Copenhagen Infrastructure II and Siemens Financial Services, which together brought complementary technical knowledge to the table.
REFINANCING AT THE OPERATIONAL STAGE
Undoubtedly, projects that have been successfully managed through the early development and construction stages can be highly attractive investments – particularly to institutional investors seeking high yield and long-term returns.
Looking further down the project lifecycle, offshore wind developers can capitalise on this appetite by refinancing assets at the operational stage. This is a tactic that has already proven lucrative. For instance, when OFTO TenneT, a European electricity transmission system operator, issued a €1 billion dual-tranche green bond to refinance three offshore wind transmission projects in Germany, the response was overwhelming – with two subscribers for every bond on offer. TenneT’s example illustrates the growing appetite for offshore wind projects and for innovative bond financing.
Certainly, offshore wind has made considerable progress over the past few years. In order for this trend to continue, however, the sector must nurture the right conditions for investment. This should be done by crafting well-structured projects, backed by industry and financing expertise. Such building blocks are essential to help bridge the gap between investor appetite and eventual commitment – and between potential and success.