Financing offshore projects in a post-subsidy world

Developers should exploit multiple revenue streams as offshore wind increasingly participates in a merchant environment, panellists and industry experts agreed at WindEurope Offshore 2019 in Copenhagen.

Talking money: Liv Lønnum, Alfred Hoffmann, Alessandro Izzo, Ed Northam, Mary Quaney, Stéphane Dubos and Christina Sørensen (from left)
Talking money: Liv Lønnum, Alfred Hoffmann, Alessandro Izzo, Ed Northam, Mary Quaney, Stéphane Dubos and Christina Sørensen (from left)

These could include power purchase agreements (PPAs), hydrogen or ammonia production, certificate trading and capacity and ancillary services, delegates suggested.

Offshore wind farms have typically relied on income from long-term power contracts secured at auction. Technological advances, improved practices, and lower material costs and interest rates have enabled cost reductions, driving offshore wind’s competitiveness in government auctions and helping the sector grow.

However, zero-subsidy offshore wind "will not be a universal phenomenon", DNV GL’s head of offshore projects, Simon Cox, wrote in the certification body’s Offshore Wind: The Power to Progress report, which was released at the conference.

Changing political landscape

In established markets, developers cannot rely on receiving continued support for a technology that has rapidly reduced its costs, according to an executive for one of offshore wind’s biggest investors.

"While some sort of continued support would be helpful, anything that looks or feels like a subsidy will increasingly be politically unsustainable," Ed Northam, European head of Macquarie’s Green Investment Group, told the panel, discussing how to financing the expansion of offshore wind.

"It all points to a PPA-driven strategy being key."

Northam concluded: "We need a grown-up conversation about the amount of risk exposure we are comfortable with."

Now that the offshore wind sector has proven it can deliver on time and on budget European governments are looking to reduce subsidies, Cox said.

However, zero-subsidy projects — which have already been contracted in the Netherlands and Germany — will only be viable where there are good wind resources and where projects can be built, developed and operated cheaply, he added.

Cost of capital

Hans Cleijne, principal consultant for wind energy at DNV GL, said offshore wind had started with a lower financial but higher technological risk, but that relationship

has reversed as the sector has become more established and the technology proven.

Above all, Cox added, government subsidies to date had provided the offshore wind sector with revenue stability.

Mainstream Renewable Power’s chief financial officer, Mary Quaney, told delegates that it was important to retain a lower cost of capital — previously achieved by fixed support schemes with long-term power deals — in order to keep levelised costs down in a merchant environment.

Revenue stability is crucial to reassuring investors and providing the financial community with the confidence to back offshore wind projects, she added.

"[Having] a bankable offtake mechanism can really drive down the cost of capital," Quaney said. "Attracting deep pools of capital and liquidity is key to lowering the cost of capital, which means lower-cost energy."

However, long-term price stability is a concern, warned Stephane Dubos, executive director for power and renewables at investment bank Natixis. Bilateral contracting between project operators and offtakers could guarantee revenues, but there should be flexibility to replace offtakers that pull out of deals, he added.

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