Interview by Rikki Stancich

In its recent report "Offshore Wind in Europe 2010”, KPMG highlighted the findings of a survey of European offshore wind developers, banks and other market participants. Among the key findings, securing funding and low returns on investment emerged as major issues for players in the European offshore wind sector.

According to the results, the financial crisis has led to a high-risk premium for offshore wind projects, considerably restricting the financing options available to companies. The bottom line is that recovery in the financial markets is crucial if investors are to move forward on projects currently in the pipeline. However, just over a third of respondents say they do not expect normalisation of financial markets to take place until at least 2012.

The report also reveals that commercial lenders’ credit committees are not willing to accept the high construction and technology risks associated with offshore wind. Unless projects have robust support from sponsors or other external guarantors, funding will simply not be made available.   

In terms of sector growth, despite its limited domestic supply chain, the UK is now the global leader in offshore wind with around half of Europe's installed offshore wind capacity (as of May 2010). This is due to the fact that the UK’s market price-based compensation scheme is viewed as the most financially attractive within Europe, according to the report findings. Elsewhere, since 2007, growth has taken place almost exclusively in Denmark and the Netherlands.

Wind Energy Update speaks to Annette Schmitt, who conducted the survey, to learn more about the challenges facing the European offshore wind market and how Germany’s market in particular, is shaping up.

Wind Energy Update: The report suggests there will be bottleneck of investment as developers compete for limited funding. How will this bottleneck likely be resolved? 

Annette Schmitt: In the wake of the financial crisis lenders have been quite reluctant to finance offshore wind, both from a risk and a liquidity perspective. The recent closing of phase 2 of the "Thornton Bank" project in Belgium was only possible because public funding institutions like the EIB and export credit agencies such as Danish EKF and German Euler Hermes. Liquidity and risk appetite appears to have returned for smaller projects, as evidenced by the closing of the 200MW Borkum West project shortly before Christmas. 

In order to address the limited risk appetite and liquidity the German government announced a € 5bn public funding support program which will be administered by KfW. The detailed terms are still being worked out, however the program should be accessible as of this spring. 

Wind Energy Update: What key factors erode offshore wind farms' profitability and what initiatives are underway in Germany to address these?

Annette Schmitt: Offshore wind in Germany benefits from a long term feed-in tariff regime. As an incentive for a speedy realisation of the first projects, projects receive a so-called sprinter bonus of ct 2.0 / kWh provided that they start generating electricity before end 2015.

The offshore wind industry argues for an extension of the sprinter bonus as they claim that projects will not be commercially viable with a lower FIT. Some market participants also propose to accelerate the FIT, i.e. to receive a higher FIT for a shorter period of time to reduce amortisation times.

The German government is currently reviewing the overall FIT regimes for all renewable energy sources and is informally discussing the offshore wind-related proposals with industry representatives.

Wind Energy Update: To what extent have operating costs been under-estimated and how will this affect investor confidence going forward?

Annette Schmitt: With the first 60MW offshore wind project operational for one year now it is too early to comment on operating costs. In our view capital expenditure is still the key profitability driver on which investors focus.

Wind Energy Update: How do Germany and the UK's offshore wind markets compare in terms of supply-chain readiness?

Annette Schmitt: In our view the offshore wind market is truly European - utilities and developers source major components from suppliers all over Europe. Germany historically is the home to the three turbine suppliers who have dedicated 5MW offshore wind turbines, Areva Wind (formerly Multibrid), REpower and Bard.

Wind Energy Update: Germany has set a target of 10GW of offshore wind by 2020. What main challenges does Germany face in meeting this target?

Annette Schmitt: Offshore wind parks in Germany are located in deep water and at some distance from the shore. There is no experience with such conditions in any other of the European offshore wind markets such as the UK, Denmark, the Netherlands or Belgium.

Hence investors and lenders are more cautious and demand higher returns and securities for German offshore wind projects compared to projects in less demanding conditions and more established markets.

To date the track record and experience with offshore wind in Germany is still quite limited: only one project, "alpha ventus" has been completed and has faced massive problems with the gearboxes of 6 of the 12 turbines; the first commercial offshore wind park "Bard Offshore 1" in the German North Sea is currently under construction and encountering heavy delays.

On the positive side EnBW recently completed its first 50 MW offshore wind project in the Baltic Sea and is preparing for the next project "EnBW Baltic 2". And Trianel, a group of local utilities, was able to achieve financial close for the 200MW phase 1 of the "Borkum West" project in December 2010. International utilities such as RWE and Vattenfall have taken final investment decisions for their first German offshore wind projects "Nordsee Ost" and "DanTysk".

To respond to this article, please write to the editor:

Rikki Stancich: rstancich@gmail.com