Green Giraffe's Jérôme Guillet on offshore wind

This Wind Watch has been written by Jérôme Guillet, managing director of renewable energy financial advisor Green Giraffe.

There is much to be positive about as we head to Copenhagen this week for EWEA Offshore.

In the recent auctions for long-term purchase contracts for offshore wind, winning bidders came out with prices far lower than many

expected: £114-£119/MWh for the UK's Contracts for Difference(CfDs) and the equivalent of £75/MWh for Denmark's Horns Rev 3.

This is good news, but there is even better: the current combination of technical progress, stable regulatory frameworks and favourable funding conditions should ensure continued downward pressure on costs – and increasingly low bids under competitive auctions.

On the technical side, the two drivers are the size of the turbines now on the market (in the 6MW-8MW range), allowing for economies on the foundations and installation; and the increased competition one can see following the return of Vestas with a credible offer – and balance sheet – as well as the continued competitive presence of Senvion and Alstom. This has certainly concentrated minds at Siemens. Project developers have never had so many compelling offers to choose from, which ensures downward pressure on prices.

On the regulatory side, one can argue that things have never been so simple and transparent as today. Several markets (the UK, Germany, the Netherlands, Denmark and Belgium) have converged on CfDs or similar mechanisms that ensure long-term price stability for projects and allow them to be financed on attractive terms.

But more importantly, there is now good visibility on the pipeline across most North European countries, with de facto rationing explicitly imposed for the next several years, be it through the grid connection as in Germany, the CfD ‘pot’ in the UK, or a pre-announced volume of auctions like in the Netherlands or France.

While this rationing may be frustrating to a few developers who were hoping to go faster, this actually guarantees that there will be 3GW, or a little more, built in Europe each year for a number of years. This allows the supply chain to invest with confidence in ad hoc industrial facilities – as shown by Siemens in the UK – and will similarly help lower prices as manufacturers can better match their plans to the needs of the industry and achieve economies of scale.

Finally, the financing markets are also fully able to support the requisite level of investment, and their increasing depth is offering attractive perspectives to lower the overall cost of capital and thus the long term cost per MWh.

With 8GW now operational, the secondary market for assets is increasingly liquid and competitive, with many long-term investors (pension funds and the like) now comfortable with the relatively low operating risk and happy with the long-term revenue stream offered by offshore wind farms.

This allows for capital to be recycled on attractive terms by the investors willing to fund the construction phase, and this ‘exit’ can increasingly be taken into account at the point of investment prior to construction. This means that IRR requirements for equity can now be a blend of a few years of more expensive construction equity and many years of cheaper long-term equity.

In parallel, the project finance market is able to finance construction risk cheaply: with current low long-term interest rates, 15+ year debt is available at 4% or even less, and volumes are definitely available for the expected pipeline of projects, with 30 or more banks now comfortable with the risk and many increasingly willing to offer large (€100m or more) tickets or even underwritings. With typical debt:equity ratios at 70:30, the overall cost of capital can be quite low, and it would be natural for such leverage to grow as the industry shows it can build more projects on time and on budget.

With all these factors put together, the goal of £100/MWh, or even €100/MWh, is a realistic medium-term target.

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