Offshore wind power project financing model is ‘disrupted’

The move to merchant project financing and the involvement of big oil is spurring radical change, according to offshore wind experts

A new era for offshore wind investment? panellists spoke about disruption to project financing in the sector
A new era for offshore wind investment? panellists spoke about disruption to project financing in the sector

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Offshore wind power project financing has long been static, but is now undergoing a period of rapid change, said panelists at RenewableUK’s Global Offshore Wind 2021 conference this week. 

A few years ago, subsidies enabbled offshore wind developers to be “left in peace, decoupled from energy markets largely,” said Lisa McDermott, an executive director for renewables project financing at ABN Amro bank. “Now the model is disrupted everywhere you look.”

Subsidy-free

One main driver is the trend towards lower or zero subsidies and the advent of merchant project financing. 

But one question will be how the market adapts to the subsidy-free model and its impact on liquidity. Not all lenders have developed a strategy, said McDermott, and there has been a thinning out of participants compared with the liquidity available for subsidised deals – a “big concern” for the build-out of offshore wind power.

One problem is getting a stable revenue structure to support enough gearing (debt-to-equity ratio) in a project. One option is a power purchase agreement (PPA), and that in itself is not easy given the volumes involved. 

There is price risk exposure — relying on a price curve for a long-term project financing is “not a very easy task”, said McDermott, citing today’s volatile UK energy market. She sees lenders adapting to the new landscape, but said there is “a very long way to go” before liquidity matches the previous ten years.

A key element for developers and for project financing is having a predictable legal and policy framework, said panelists. “Europe is very good at stable policy,” said McDermott, and added that this can build liquidity.   

Big oil

Another significant change in offshore wind power project financing is the increasing involvement of major oil and gas companies as the industry enters “a new era in terms of scale”, said Ralph Ibendahl, a managing director of renewables at Royal Bank of Canada. 

He sees majors such as Eni, Total, Equinor and BP having “global ambition” in offshore wind and said that they are “a force to be reckoned with”. Total has 5GW of renewables capacity but is targeting 25GW by 2025, BP is seeking 50GW by 2030, from 3.3GW in 2020, while Eni is aiming for 60GW by 2050. Shell already has 6GW in operation or under development.

Ibendahl said oil majors’ participation will boost competition and drive down costs, adding different skill sets such as commodity trading. He sees this as boosting co-operation and helping in consortium financing.

Equinor Renewables’ head of policy, Anders Ystad, said majors’ financial and commodity trading skills are complemented by the ability to take on multiple projects at the same time. They also have the financial muscle to carry projects on their own balance sheets, reducing or avoiding the need for project financing. He said major involvement could lead to larger projects and impact “partner constellations”.

The involvement of big oil will have benefits and challenges, said SSE Renewables bid director, Michelle Gallagher. She sees majors spurring greater choice and innovation, but notes that offshore wind is very specific and has its own challenges — oil companies will face a steep learning curve. 

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