Integration of the Banking Sector into the Offshore Wind Industry a report by Alina Bakhareva Research Manager, Renewable Energy, Frost & Sullivan
With the offshore wind industry stepping out of its cradle and gaining momentum as the next growth engine of the wind industry in Europe, some teething problems are inevitable. There are a number of challenges the offshore industry has to overcome to mirror the remarkable growth of its older cousin – onshore wind. As depicted in Figure 1, the major challenges include:
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• •
enabling the offshore wind supply chain in order to prevent a shortage of components and large-capacity wind turbines from capping the industry’s growth;
development of grids and offshore supergrids; making the application process easier and more straightforward;
• developing infrastructure, such as ports, installation vessels, etc; and •
lowering the offshore industry risk profile in order to attract financial investors into the sector.
A significant effort is being made by wind turbine manufacturers, developers and governments at different levels to address these challenges. Despite this, a buy-in from the financial community is desperately needed in order to bridge a gap in financing that could adversely affect the offshore wind industry’s future pace of development.
Utilities – Early Pioneers in Offshore Wind Development Historically, most of the existing offshore wind farms have been financed off balance sheet by utilities. This was mainly due to a nascent stage of the industry manifesting in:
• •
• •
the high cost of construction;
uncertainties about capital and operation and maintenance (O&M) costs;
technology and construction risks; and delays in the construction process.
All of these factors delay the development of the revenue-generation phase. Such high front-loaded risks made it challenging for independent developers to access project finance, leaving utilities as the only players in the offshore wind market.
Utilities are facing increased pressure on their balance sheets, however, with multiple priorities for conventional and renewable power- generation capacities, development and grid upgrades. For these reasons, utilities will not be able to channel enough capital to sustain offshore wind industry growth on their own.
A significant pipeline of offshore wind projects – either agreed to or in the consenting phase of proposals – will have to be supported by an accelerated involvement of the financial community in order to turn plans into reality and contribute to the EU renewable energy targets.
© TOUCH BRIEFINGS 2010
Financial Crisis – Additional Strain on Financing for Offshore Wind
The financial crisis has exacerbated the scarcity of finance for the offshore wind industry in two specific ways. First, until recently a limited number of banks have had experience of investing in the offshore wind sector. While risks associated with the industry are well understood and accepted by those few banks with previous exposure to and experience of the offshore wind industry, the vast majority remain very cautious. They see the complexity of offshore wind as a huge challenge. With the onslaught of the crisis, many banks initially reduced their risk appetites and then chose to concentrate on preferred clients and well-known sectors. As offshore wind is not seen as one of the strategic industries, few banks are willing to consider deals, even if a large existing client is involved.
Second, the reluctance of banks to undertake syndicated loans has had a bearing on all large projects. Offshore wind, requiring significant capital (in the range of at least a few hundred thousand euros), is no exception. As banks are unable to syndicate the risk, a large number of parties have to be involved from the beginning, making the negotiation process complex and prone to delays.
The utility-led offshore wind projects were little affected by the crisis as utilities were able to continue financing their projects off their balance sheets. However, independent project developers have been severely hit by the lack of available project finance. The limited number of project-financed offshore wind farms is acting as a further constraint for involvement in the sector by commercial banks. As a result of these factors, the uptake in offshore wind installed capacity remains curtailed by a dire lack of financial backing from a wider range of investors.
Banking Sector – Concerns and Fears
With only four offshore wind farms project-financed until the end of 2009 (see Table 1) and London Array offshore wind farm getting a loan from the European Investment Bank (EIB) in 2010, the banking
Alina Bakhareva is a Research Manager at Frost & Sullivan. Her role is to direct and manage all activities within the renewable energy market’s coverage and co-ordinate a team of research analysts. She has considerable experience working on consulting projects analysing energy and powergen related markets. Ms Bakhareva’s expertise lies in conducting research in support of strategy development and market due diligence projects, and has considerable experience in
financial modelling for renewable energy markets. She was previously a senior consultant within Deloitte’s Energy practice, and worked at one of the leading Eastern European steel manufacturers where she was responsible for co-managing strategy development projects.
E:
alina.bakhareva@
frost.com;
john.raspin@frost.com
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