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Money Talks: New markets require a customised approach

With more than 58GW of newly installed capacity in 2015, according to Windpower Monthly, the worldwide wind market is continuing its boom.

We also observe an increasing focus on new onshore wind markets mostly outside of Europe, creating new opportunities for turbine suppliers, developers, investors and financiers.

This positive trend is, in general, being accompanied by a rising interest of the banking market in providing attractive financings.

The overall shift from fixed feed-in tariffs or similar remuneration schemes to auction-based systems in many mature onshore and offshore wind markets has gained further momentum.

Banks are comfortable in financing bidders under auction schemes because they lead to a lower levelised cost of energy (LCOE), which helps close the gap to market prices. Moreover, 2015 has shown a further rise in offshore wind installations in Europe.

In Germany alone, more than 2.3GW of new offshore capacity was installed and grid-connected.

Offshore wind has become an attractive subsector in renewable-energy project finance, with a number of leading banks typically structuring, arranging and underwriting large-scale transactions.

KfW IPEX-Bank has played a leading role from the beginning, and we are convinced that banks in this sector have to adapt the specific financing approach to address offshore wind's specific risk profile, which is significantly different from that of onshore wind.

It is quite obvious that construction risk is much higher than onshore, and no one has experience of the new offshore technology much beyond ten years. But the wind yield seems to be more predictable offshore, which we see in our wind portfolio.

We conclude that, in comparison with onshore wind, offshore wind project sponsors should take a higher share of the construction risk (for example, via a contingent equity ratio that is significantly above the overall equity ratio).

At the same time, we would, in principle, see some potential for a less conservative debt sizing of well-structured offshore wind financings compared with previous years.

But it may also turn out not be a challenge from a bankability perspective.

In addition to the country-specific political and regulatory environment, the project quality makes the difference in new wind markets, just as it does in mature markets. And the capabilities and commitment of the main project parties are equally key to success.

When entering new markets with limited wind data, we pay particular attention to the wind resource, which is the most important risk for an onshore wind farm.

We normally expect two independent wind assessments to be provided by renowned wind consultants. A proper wind measurement campaign is a crucial precondition for bankable wind assessments. Using the MEASNET guidelines - which harmonise and ensure high-quality wind measurements — may trigger additional costs and time to complete the campaign, but it will pay off in terms of better financing conditions.

Export credit agencies

Last year, we completed about a dozen financings (partially in local currency) in new wind markets, such as Chile, Uruguay, South Africa, Lithuania and Montenegro. They were made possible thanks to the support of EKF and Euler Hermes export credit agencies (ECAs), experienced in the wind sector.

Not only were they indispensable to cover the higher political and commercial risks, their early involvement was critical in opening new markets suitable for the respective export industry in Germany and Denmark.

Most of the transactions in these countries were structured with ECA support on a project-finance basis, enabling us to offer the sponsors debt-sizing criteria and terms and conditions similar to those in more established markets and allowed, in particular, loans of up to 18 years — the longest permissible under the OECD consensus.

In view of increasing local-content requirements in many markets, and the pressure on the LCOE due to the auction systems in most of the emerging countries, exporters and banks will need to continue their dialogue with the ECAs on optimising their cover on a transaction basis.

With the unbroken trend towards emerging countries in the wind business, the respective ECAs will play a decisive role for the competitiveness of their exporters.

Innovation, customised solutions, deep-sector knowledge and fast-track execution will therefore be key for ECAs to support wind turbine manufacturers to capture those fast growing markets.

Looking ahead, based on our long sector experience, we feel confident in providing customised finance solutions for a more complex market environment in existing as well as in new wind markets, enabling us to make this year another successful wind-energy year.

Peter Schafer is team head for wind power at KfW IPEX-Bank

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