Frost & Sullivan recently predicted an increasing involvement of Europe’s banking sector in offshore wind project financing. WindEnergyUpdate speaks to industry analyst Gouri Kumar to determine whether new finance options may soon be available to wind energy project developers.

By Rikki Stancich in Paris

Market analysis and consulting firm Frost & Sullivan recently predicted that the size, potential and opportunity presented by offshore wind energy projects, combined with a reduction in perceived risk, would soon prove irresistible to Europe’s banking sector.

But analyst Gouri Kumar cautions that the UK’s ambitious plan to have installed 29GW of offshore wind energy capacity by 2020 may be thwarted by an immature supply chain.

WindEnergyUpdate’s Rikki Stancich speaks to Gouri Kumar to find out what kind of investment trends are emerging; how investment risks have been reduced; and what needs to happen to prevent the UK falling short of its 29GW target.

WindEnergyUpdate: What evidence is there that banks are showing greater interest in financing offshore wind projects?

Gouri Kumar: I wouldn’t say there is greater interest, per se. It’s relative to the type of installation - with onshore wind there has always been interest from many banks in terms of project finance; with offshore wind, there has always been a greater degree of wariness among banks due to the perceived risk and capital requirements. Therefore, there has been less participation from banks.

It is difficult for individual banks to finance huge projects, mainly due to the risk and the amount of money involved, and due to the nature of the sector, it has always been a select few private banks that have shown interest previously

But more recently, we are seeing a portfolio of banks as well as multilateral organizations and the larger development banks such as the European Investment Bank financing wind projects, as was the case with the Belwind project. The EIB took on the large chunk of debt, with the remainder spread across 5-6 other banks.

The Centrica deal last year was also a boost for the sector. Centrica had expressed in early 2009 that it was not happy with the number of ROCs awarded to offshore wind projects in the UK. The financial crisis made it difficult to finance projects.

But at the end of the year it struck a private equity deal with a US private equity investor, TCW. This is very new – to have US investors finance UK projects. It’s a one-off example, but it could be the beginning of a trend.

WindEnergyUpdate: In a recent press release, you mentioned that banks are coming up with innovative approaches to financing offshore wind projects. What kind of financing options from banks are likely to become available?

Gouri Kumar: Spreading risk across multiple banks. There is a lot of interest coming from smaller, commercial banks involved in the onshore wind energy market.

There could be a trend for more refinancing deals , where developers sell-off a portion of their onshore portfolio to free-up finance for offshore development, as was the case with Centrica.

Investors will mainly be large and small banks. When it comes to private equity investors, at the end of the day they have minimum and maximum investment thresholds that must be observed. Additionally, they still view financing offshore wind energy projects with caution.

WindEnergyUpdate: Are any other financing trends emerging?

Gouri Kumar: In light of the financial crisis, everybody assumed that we would not see any interesting deals and that a lot of investors would be backing out of projects.

In reality, we saw some interesting deals take place in the second-half of 2009 and this trend is likely to continue into 2010.

WindEnergyUpdate: To what extent have perceived risks been reduced and in what areas?

Gouri Kumar: At the end of the day, offshore wind relies on government support. In the UK, towards the end of 2008, the support structure was beginning to look shaky; the industry had stated that if the number of ROCs didn’t increase, projects would be abandoned.

The government responded favourably  - an action that gave out strong support signals. This has reduced risk enormously – uncertainty is a huge risk when it comes to investment.

Another factor that has reduced risk is that more turbine manufacturers are coming onto the market. Previously, there were only a couple  of manufacturers, which meant that there was simply not enough capacity.

A lot of new manufacturers have come onto the market, such as REpower, Bard Engineering, Multibrid and Darwind. GE has just bought ScanWind and is planning to re-enter the market, one that it abandoned 4-5 years ago. There is, Enercon and Gamesa that might enter the market in the future.

When big manufacturers view a market as being attractive and begin to invest heavily, the supply chain risk is reduced enormously.

The fact is, the UK’s target of 29GWof offshore wind cannot be achieved without the required capacity. A few years ago, onshore turbines were being re-jigged and put into the sea. It quickly became obvious that this approach was flawed.  

Now, we have the likes of REpower, Bard and Clipper working on 5-10 MW machines designed to operate in offshore conditions.

There are also advancements in offshore foundations. Previously, monopiles and tripiles restricted wind arrays to shallow waters. Now, jacket platforms allow for deeper water penetration and we even have the likes of StatoilHydro working on floating turbines in deeper waters.

WindEnergyUpdate: How is this reduced risk effecting financing availability and options?

Gouri Kumar: I think it is definitely changing the mentality of investors. The bad publicity linked to the early offshore wind attempts was not encouraging for investors.

Now, with technology gains and proven technology, investors are more confident in the market.

Also, some countries have no other option but to go offshore, so a combination of having no real choice and having proven technology has instilled a greater degree of confidence in investors.

Banks scrutinize projects on the basis of cash flow, given that a lot of  projects are beginning to  be funded through non-recourse finance.

But while the risk for lenders is being reduced, it is unlikely that the debt-equity ratio will be reduced any time soon.

Even for onshore wind projects, which are far less risky projects than offshore projects, the debt-equity ratio hasn’t changed with the financial crisis.

WindEnergyUpdate: Frost & Sullivans’ forecast for offshore wind (18.8GW by 2016) seems conservative, in light of the fact that the UK aims to install 29GW by 2020. What is the reason for this?

Gouri Kumar: The reason we forecast conservatively is because we don’t anticipate manufacturing being ramped up sufficiently to satisfy demand.

In the Crown Estate’s first and second rounds, we saw some wind farm projects falling by the wayside or reduced from original capacity targets.

Many Round 3 projects may prove to be similarly over-ambitious. Also, the projects will start construction only by 2015 which means they don’t have much time and delays that are very common in offshore project construction can dampen plans.

Unless manufacturing is really ramped up, the 29GW target will not be met. Currently there are bottlenecks with suppliers and sub- suppliers, there are insufficient port facilities and there is a shortage of vessels.

If these supply chain issues are resolved by 2015, then we are in there with a fighting chance. But in reality, no, I don’t think the supply chain issues will be resolved in time.

When it comes to wind turbine manufacturers, there has always been more concentration on onshore wind than on offshore wind, so I don’t see how, in the next five years,  turbine suppliers can ramp up its capacity to meet this huge demand for offshore turbines.