Deutsche Bank lays out offshore finance options

EUROPE: Private equity will have to play an increasingly central role in financing the UK offshore wind industry if it is to meet its 18GW capacity target for 2020, according to Deutsche Asset Management, part of Deutsche Bank.

In addition, Deutsche Bank argues that the UK's new Green Investment Bank (GIB) and the European Investment Bank (EIB) will need to support offshore developers, a view echoed by Ernst & Young.

A Deutsche Bank report, UK Offshore Wind: Opportunity, Costs & Financing, concludes that even if offshore costs fall developers will face significant challenges to attract the levels of finance necessary for the preconstruction and construction phases, when risks are highest. Historically, utilities have financed the construction and operational phases of offshore wind projects via their balance sheets, but the scale of capital now required necessitates additional sources of debt and equity, with private-equity finance an obvious option.

A key role is foreseen by Deutsche Bank for the GIB, providing debt and equity at the construction and operational stages of projects. It also envisages a debt-financing role for the EIB. "We still expect that commercial banks will act as private sources of debt finance at both the construction and operational phases, and utilities as providers of construction debt and equity," says the report. "Pension funds and insurance companies will play an increasing role in the operational stage of debt-and-equity finance."

Current costs for UK Round 3 offshore projects of £3 million/MW (EUR3.6 million/MW) will need to come down to £2.3 million/MW if the overall costs of delivering 18GW are to be brought within the anticipated spending limit of £39 billion, says Deutsche Bank. Capital-expenditure costs for 18GW stand at £54 billion.

The need to reduce costs and raise money from new sources was also emphasised in the November Renewable Energy Country Attractiveness Indices report from Ernst & Young. Referring to gradual deterioration in the credit ratings of European utilities, it asks where the investment needed for offshore wind will come from given the anticipated impacts of the incoming Basel III banking regulations, which will require European banks to increase their capital ratios. This is expected to decrease liquidity and so reduce the amount of money banks will lend. Ernst &Young expects Basel III to mean fewer long-term loans, fewer and more expensive credit facilities and letters of credit, and higher loan charges.

Prioritising projects

Ernst & Young asserts that structured financing for offshore wind projects is unlikely to come together without "material credit enhancement from the European Investment Bank or the Green Investment Bank". It also warns that only the best projects may be built. "In the next five years sponsors will allocate balance-sheet and project financing to their best - that is, most technically and financially feasible - projects. This will leave an overhang of consented but unbuilt megawatts, potentially waiting for nothing more than affordable capital and an indusrialised version of the industry we know today."

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