In 1991, the first offshore wind turbines were built in front of the Danish town Vindeby. It then took ten years to build a first commercial-size project, and five more years before private banks were able to take construction risk on a non-recourse basis, financing the Q7 project in the Netherlands.
That first 'project finance' milestone in the offshore wind industry, which is now mobilising €1bn a month from senior lenders, was only made possible by a combination of factors: in-depth due diligence of the technology; protective contractual structure; strong insurance coverage and contingency planning; tailor-made financial structure; and a specific focus on interface risks.
The floating offshore wind sector is following a similar route, with the first prototypes installed 10 years ago, pilot wind farms now under construction, commercial wind farms under development and an extraordinary potential of multi-gigawatt yearly installation post-2030.
The trajectory of floating wind
First, are we sure the pioneering expansion of floating offshore wind is all that new? Floating platforms have been used in the oil and gas sector for decades and applying them to a mature offshore wind sector could be seen as part of the natural incremental innovation of the industry.
After all, lenders have closed billion-euro scale financings for offshore wind projects using - for most of them - a combination of brand new turbine models with only a few prototypes in the water, massive vessels just out of the docks, XXL monopiles 20% larger than the immediate previous generation, and/or new installation methods.
Although it is undeniable that its proximity to the fixed offshore wind sector will ease the learning curve, it is clear that the finance community currently considers floating technology as more than a simple evolution within an established sector. Structuring a project to raise non-recourse debt for the first floating offshore wind projects therefore needs to be done in a way that makes banks comfortable to unlock a whole new sector in the face of 'unknown unknowns'.
This means that, in addition to the usual bank requirements for offshore wind, developers must carefully consider the following structuring features:
- General – keep it simple: Raising project finance for the first floating projects is a major ask and projects need to balance the novelty with an otherwise robust proposal: strong sponsors, experienced supply chain, low country sovereign risk, skilled project team and proven technology for the turbine, and limited or no revenue risk.
- Technical – pick a proven technology: The lenders will favour the most proven technologies with prototypes already in the water, developed by solid counterparties. Despite IP concerns, a particular focus will be put on the transparency provided to the lenders’ technical advisor towards the review of the technology. Developers and technology providers should be ready to provide data from the existing prototypes. This will apply to all aspects of technology novelty (mooring, dynamic cables, potentially vessels) and not just to the floating foundation.
- Contractual – target a healthy structure without loopholes: Contracts will have to be particularly protective including:
- A limited number of construction contracts (between two and six) are preferred.
- Full-scope, fixed-price and long-term O&M contracts must be in place from financial close.
- Terms and levels of liquidated damages and guarantees need to be high.
- The interface risk will be scrutinised, with a focus on any gap remaining between the foundation and turbine contracts.
- The commitment of the floating manufacturer to ensure valid production conditions for the turbine (inclination etc.) will be specifically scrutinised.
- Financial – find the optimum: The overall structure should not be too aggressive. Ample contingency budgets will be required to cater for cost overruns, or higher-than-expected O&M costs, as well as standard reserve accounts and debt sizing ratios on the conservative side.
- Insurance – don’t forget the other risk takers: Despite a risk analysis similar to what is done by the lenders, the insurance market is largely independent, yet essential. A few very specialised insurance advisors that have played a major role to make offshore wind insurable can now educate insurance parties to floating, and project developers should involve them without delay.
On the lenders' side the European Investment Bank, a couple of export credit agencies and a handful of commercial banks have already received narrow credit committee approvals to lend to the right floating asset. Some projects will not reach the 'bankability' trigger. Other projects with a structure in line with the recommendations above will attract these lenders and others. Those will be financed under terms that will remain fairly attractive: long term tenor, 60-70% debt-to-equity ratio, circa 2% margin.
The future of floating is bright, and one may fear that the imbalance between this limited funding currently available for the very best projects and the tens of gigawatts to be financed would lead to a bottleneck.
On the contrary, we believe that the initial pool of lenders will expand in parallel with the development of the sector, as the feedback from the first transactions will filter unfounded worries from the real challenges.
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