By Alison Ebbage

The potential for non-recourse financing for offshore wind farm projects is huge. 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. 

And estimates show that in Europe 3-4 GW will be built on a yearly basis in coming years. In finance terms, that 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 like Belwind, Gode Wind II and Glid have already been built on non-recourse finance deals, providing a blueprint for the future. Most recently the C-power deal, which went through in November 2010, raised €126m in financing.

Marc  Schmitz, senior vice president, Rabobank International says: “Non-recourse finance partners can be multilaterals, commercial banks and the utilities companies themselves and for the lender the attraction is a watertight project that, if functioning normally, will bring the return on the investment.”

Playing it safe

Indeed non-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. 

Schmitz explains: “The development costs, between four and seven per cent of total investment are down to the sponsor. It is only when all the contracts (Balance of Plant (BoP), Engineering, Procurement and Construction (EPC), and Operator and Maintainer (O&M), contracts) and permits are in place that the project can be financed on a non-recourse basis. The construction period takes between one and a half to two years and risks are mitigated by strong BoP and turbine supply contracts combined with strong interface agreements. In addition strong management is a requirement for a successful project.”

But in-depth involvement by non-recourse participants can be difficult to stomach for utilities companies, especially if they are used to having more implicit-style relationships with suppliers and constructors. This has especially been the case in the UK where utilities and banks have had very different approaches to the contracting process. Explicit, bankable contracts however, negate construction risk even if they are time consuming and intricate to produce. Another upside is that projects and schedules tend to operate to budget and to time.

Guillet comments: “Banks are willing to lend only if the project is seen as low-risk. So for example, if only 90 per cent production can be guaranteed then a non recourse deal would cover only that 90 per cent; the rest would need to be funded by other investors. The whole deal is based on assumptions of what is likely to happen if the project functions normally.”

Market stability crucial

And in 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.

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. Current and ongoing deals include: Eldepasco up to 330MW, in Belgium, Meerwind, up to 400MW in Germany and Gode Wind 2, 252MW also in Germany.

And the amount of lenders will also increase. Indeed currently 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. The C-power deal, for example involved 10 financial institutions.

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 Guillet warns that although the subsidies do form part of the attraction, the regulatory regime to develop offshore wind is the key as it guarantees stability and industry longevity. “The banks are most interested in a steady regime and certainty … even short term instability caused by, for example, a change in the subsidy mechanism – even if for the long term good - might not be viewed favourably from a lending viewpoint,” he says.

To respond to this article, please write to: Alison Ebbage

Or write to the editor: Rikki Stancich