attracting and maintaining institutional investment: offshore wind

Natural Power Consultants LTD Eversheds, Institutional Investor workshop 2nd July 2012

Tuesday, July 03, 2012 2

TABLE OF CONTENTS

1. Natural Power Consultants

2. Capex comparative analysis

3. Offshore WTG technology

4. Foundations

5. Cables

6. Installation


Renewable energy consultancy, management services and product innovation. Onshore wind, Offshore wind, Wave & Tidal and Biomass energy Founded in 1996 300 Employees 14 Offices 7 Countries

• Energy yield analysis and technical risk reduction

• Project design, ecology surveys, EIA and permitting management

• Construction, ground surveys and contracts management

• Operational A&M and performance analysis

• 360o project due diligence

• Owner and Lender’s Engineering & Technical Advisors

NATURAL POWER CONSULTANTS


CAPEX COMPARATIVE ANALYSIS1

2.76

3.05 3.40 3.46 3.42 3.30

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

2006 2007 2008 2009 2010 2011

M£/MW

Natural Power data base of 49 OWF, in 7 European countries

1. Capital expenditures have been collected from our confidential data base, reinforced with trade journals, company websites, public data bases and academic and government reports

• From 2006 to 2009 Capex (M£/MW) has grown, the increase has been

driven by cables and foundations costs, in 2010 Capex started to come down • Key factors: distance from the shore, supply bottlenecks, raw materials, installation costs, cable routes


OFFSHORE WIND TURBINE TECHNOLOGY

After 3-4 MW before 2009, the technology is being oriented to 5-6 MW turbines

Suppliers are now working on: Reducing the weight with less components (DD or semi-integrated solutions), in order to ease foundation design,

installation and maintenance Larger diameters (150-164 m) with same power output

Blades : Diameter is increasing from ac. 90 m (2009 ) to 164 m (2015) Higher bending moment due to larger rotor affects design of the substructure Blades suppliers are now mostly in-house (Siemens, Vestas, Repower, Areva)

Generator technology : Power output from 3-4 MW (2009) to 5-6 MW (2012-2014) Smooth transition from DFIG to DD generators (head mass reduction/power output management) Gearboxes tend to be removed to reduce maintenance and failures Use of permanent magnets leads to high risks on Neodymium supply chain


Market shares – Turbines suppliers % MW installed to date – source EWEA January 2012

Number of suppliers for the 6 MW+ will increase Areva, REpower are the only leaders with 5-6 MW

WTGs but with still a low track record Historical suppliers have delayed their entrance in this category: Siemens 6 MW focuses on a DD technology, diameters 120 -154m and 50% fewer parts than comparable geared WTG; serial production targeted for Q1 2015, Vestas V164-7.0 MW prototype has been postponed, the first turbine is scheduled for installation in 2013, with series production starting from 2015 New entrants in Europe (Alstom “pure torque” DD 6MW Halliade 150, Gamesa G128-5.0 MW) will be in competition with Asian suppliers (Golwind, Sinovel) Before new entrants will start to produce, the offshore WTG industry will remain a bottleneck in the supply chain

WTG SUPPLY AND INSTALLATION


Monopiles is the most installed typology of foundation Wind farms currently under construction show the same trend: monopiles maintaining an over 60% share Jackets and Tripods show similar shares (20% and 18% respectively) Currently, no gravity based foundations have been identified in the under construction pipeline. This structure is generally used in wind farms close to shore

Market shares – Foundations installed in 2011 % MW installed – source EWEA January 2012

OFFSHORE FOUNDATION


MONOPILES’ ISSUES

• Monopolie made for: soft seabed, up to medium water depth, up to medium WTG weight (e.g. the actual monopile designed to support 6.0MW WTG vary from 6.5m to 7m in diameter) • Grouted connection: 65% of all the monopile installed in UK is facing problems subjected to a complex state of stress • Installation (mechanical hammer vs drilling): insufficient wind industry experience to guarantee required pile verticality of <0.25° (bolted flange requirement) during driving operations. •Few players represent a bottle neck in the supply chain


FOUNDATIONS: NEW TRENDS

Emphasis on cost of fabrication: • use of materials • pre-assembled manufacturing process

Jacket Gravity Base

Emphasis on: • noise emission to avoid limitation during installation • transportation


OFFSHORE CABLE TECHNOLOGY

Copper price 2009 -2012

Main issues: • Cable Laying: regulation, and natural condition (e.g. salt

marsh) • Supply chain bottlenecks: reluctant cable makers to scale up manufacturing capacity • Scarcity of skilled personnel

0.53

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

0 50 100 150 200 250

Co

st in

M£

/Km

Ex Cable lenght in Km

Ex Cable Supply

Market Players

Market Average

0.20

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0 50 100 150 200

Co

st in

M£

/Km

Array Cables Lenght in Km

Array Cable Supply

Market Players

Market Average


INSTALLATION

Latest trends: • Players are developing vessels (e.g. Nordic Yards), which

can install every type of foundations, towers, nacelles and turbines as a single unit • In order to reduce installation time and costs, the vessels are designed to deploy the whole wind turbine in an upright position


INSTALLATION RATE

Main observations: • No trend, scattered results

• Main drivers: weather and sea conditions, water depths, integration of services, cost reduction, crane capacity

5.7 4.8

0

2

4

6

8

10

0 50 100

Inst

. Rat

e (

day

s/W

TG)

N. of WTG

Offshore Wind Farm WTG Installation Rate

1 vessel

2 vessels

Average 1vessel

Average 2vessel

4.44

2.75

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

0 50 100

Inst

. Rat

e (

day

s/fo

un

dat

ion

)

N. of foundations

Offshore Wind Farm Foundation Installation Rate

1 vessel

2 vessels

AverageMopopile 1vessel

AverageMopopile 2vessels


THANK YOU FOR YOUR ATTENTION

Offshore Wind in UK –Funding Round 3June 27, 2012

2

Agenda

Funding requirement in UK

Conditions for investment

Funding sources

Utilities and other investors

Investor models

Conclusions

3

Siemens is market leader in offshore turbines with 2.5 GW installed, of which nearly 1 GW in UK

Lynn / Inner Dowsing, UK→ 54 x SWT-3.6-107 (2008)

Rhyl Flats, UK→ 25 x SWT-3.6-107 (2009)

Burbo Banks, UK→ 25 x SWT-3.6-107 (2007)

Frederikshavn, DK→ 1 x SWT-2.3-82 (2003)

Rødsand/Nysted, DK→ 72 x SWT-2.3-82 (2003)

Vindeby, DK→ 11 x 0.45 MW (1991)

Middelgrunden, DK→ 20 x SWT-2.0-76 (2000)

Samsø, DK→ 10 x SWT-2.3-82 (2002)

Rønland, DK→ 4 x SWT-2.3-93 (2002)

Horns Rev II, DK→ 91 x SWT-2.3-92 (2009)

Gunfleet Sands, UK→ 48 x SWT-3.6-107 (2009)

Hywind, NO→ 1 x SWT-2.3-82 (2009)

Lillgrund, SE→ 48 x SWT-2.3-93 (2007)

Rødsand II, DK→ 90 x SWT-2.3-93 (2010)

Pori, FIN→ 1 x SWT-2.3-101 (2010)

Source: SWP

Baltic I, DE→ 21 x SWT-2.3-93 (2010)

Walney, UK→ 51 x SWT-3.6-107→ 51 x SWT-3.6-120

4

Borkum Riffgat, DE→ 30 x SWT-3.6-107

Many projects to come, some with Siemens equity

London Array, UK→ 175 SWT-3.6-120

Sheringham Shoal, UK→ 88 x SWT-3.6-107

Greater Gabbard, UK → 140 x SWT-3.6-107

Lincs, UK→69 x SWT-3.6-120→25% Siemens Project Ventures (Centrica 50%, Dong 25%)

Gwynt Y Mor, UK→160 x SWT-3.6-107→10% Siemens Wind Power (RWE 60%, SWM 30%)

Baltic 2, DE→ 80 x SWT-3.6-120

Anholt, DK→ 111 x SWT-3.6-120

Dan-Tysk, DE→ 80 x SWT-3.6-107

Borkum Riffgrund 1, DE→ 77 x SWT-3.6-120

Source: SWP

Rudong Intertidal, CHN → 21 x SWT-2.3-101

West of Duddon Sands, UK→ 108 x SWT-3.6-120

Teesside, UK→ 27 x SWT-2.3-93

Meerwind Sud Ost, DE→ 80 x SWT-3.6-120

Note: SPV also own 50% of Smart Wind consortium with Mainstream Renewables, developing UK Round 3 Hornsea zone (4 GW). First GW being developed with Dong.

5

Offshore Wind Roadmap and Funding Requirement

18 GW by 2020 under DECC Roadmap

£8-10bn annual funding required

Based on £3m/MW capex, straight line roll out from 2015, excludes OFTOs and capital recycling

Depends on build out which should generate economies of scale to lower construction costs

Source: DECC UK Renewable Energy Roadmap July 2011

6

Conditions for investment

Utilities cannot finance construction of Round 3 on their own and need to tap new investors and banking market

Conditions for entry of new capital

Revenue certainty (FITs, ROCs) Regulatory certainty (EMR, OFTOs) Profitability & risk adjusted returns Visibility on long-term market growth De-risking projects Stable macroeconomic climate

7

Funding Sources in Offshore Wind Development CyclePr

ojec

t ris

k

Development (c. 48+ months, c£10-50m)

Pre-construction (c.24+ months c.£50-

200m)Construction

(c. 24+ months, c£1Bn)

Point in time – decreasing risk and required return over project life cycle

Operation(c. 20+ years)

• Site search• Feasibility study• Environmental studies• Licenses (production / installation)• Permits• Land lease• Commitment to grid

• Turbine order• Balance of plant

(BOP) Long-leaditems

• Design• Met mast• Geotech• Grid connection

• Civil construction• BOP• Turbine• Grid connection

• O&M + Warranty• Zero emission cash

Debt Capital Markets, Utility Bonds, Govt Sponsored Bonds

Project Finance with Sponsors, Multilateral & ECA supportNot availableSenior debt

Utilities, Infrastructure Funds, Direct Financial Investors, Public

Equity Markets

Utilities, Oil & Gas Cos, Private Equity,

Contractors

Utilities, Venture Capital, DeveloperEquity

OperationPre-construction / ConstructionDevelopmentFunding source

8

Utility Investors

UK projects have historically been developed by utilities in contrast to Continental Europe where independent developers are more prevalent

UK projects have generally been financed by utilities on balance sheet unlike Continental Europe where limited recourse project finance is more common. Utilities don’t like project finance as it is expensive and often treated as on balance sheet by rating agencies

Utilities have to find alternative funding sources if they want to maintain ratings & preserve dividends. They are forming partnerships with other utilities and new types of investors to share funding and risks

We estimate of total annual capex of 10 largest European utilities of €40bn about €10bn could go to offshore wind with maybe half of this allocated to UK

9

R3 Funding Sources

Majority of funding from utility balance sheets unlevered

Balance from limited recourse equity (40%) and debt (60%)

More utility funding available → more other funding likely to be available

Additional funding from capital recycled from operational projects not shown

High case – 75% total offshore wind budget allocated by European utilities to UK ; £1.4bn l/r equity; £2.1bn l/r debt

Base case – 50%; £1bn l/r equity, £1.5bn l/r debt

Low case – 30%, £0.6bn l/r equity; £0.9bn l/r debt

0

2.000

4.000

6.000

8.000

10.000

12.000

High case Base case Low case

£m

illion

per

yea

r

Utility balance sheet

Ltd recourse equity

Ltd recourse debt

Estimated annual constructioncosts of £8-10bn

Source: Siemens

10

Other Investors

• Financial/private investors•Private equity / infra funds – SPV / Blackstone / Ampere / Marguerite / Ventizz

•Private investors – Colruyt / Kirkbi Group / Oticon Foundation

•Pension funds – Pension Danmark / PKA / PGGM

•Japanese trading houses – Marubeni

•Sovereign wealth funds – Masdar

• Strategic investors• Oil & gas companies – Statoil / Repsol

• EPC companies – Fluor / Strabag / Hochtief

• Financial/private investors generally have limited appetite for construction or development risk but there are exceptions:

• Masdar / SPV / Blackstone / Colruyt / Marguerite / Ventizz

• EPC companies often take development risk and then sell permitted project before construction

11

Co-Funding Model

Costs shared but project risks stay with utility

Sale of minority stakes to private investors Operating assets

Assets in construction with EPC wrap

De-risking Opex

PPA

Bridge financing

Stakes sold for premium due to risks assumed by utility

Investments stay on balance sheet of utility

Examples: various deals involving Dong

12

Limited Recourse Model – Project Finance

Limited recourse financing by investors

Banks take construction risk Common in Germany and Benelux, but not in UK

Lincs is first UK PF deal with construction risk

Banks requirements Higher pricing

Significant contingency

Debt reserve accounts

Lower gearing and high coverage ratios

Support from multilaterals/development banks and ECAs

Examples: Lincs (Centrica/Dong/SPV); Meerwind (Blackstone)

13

Limited Recourse Model – Minority Stakes

Limited recourse financing of acquisition of minority stakes by investors

Banks do not take construction risk

Same guarantees as under Co-Funding model

Issues for banks Limited step-in rights

No direct security over operating assets/contracts

Change of control

More equity required

Support from multilaterals/development banks and ECAs

Example: Gunfleet Sands (Marubeni)

14

Conclusions

Utilities will play lead role in funding Round 3, but balance sheet pressure means they will not be able to do this alone

Utilities are setting up JVs with other utilities & investors to share funding & risks. Dong leading way bringing in new investors

New investors will require revenue and regulatory certainty, improved profitability, project de-risking & stable macroeconomic conditions

Most financial investors currently have limited appetite for construction risk, but there are exceptions

Limited recourse lending by commercial banks and public financing institutions will be critical, both at the project level and the financing of minority stakes in projects

Peter WestonGlobal Head of Finance & InvestmentSiemens Wind Power+44 7808 824 [email protected]

Thank you

Global Wind Power Finance & investment CongressJune 26-27, 2012, London

Morgan Stanley

Institutional Investors Workshop

July 2, 2012

2

Renewables

Natural Resources

Morgan Stanley Project Finance Transactions

Power

$900 MM

Pre-Export Credit

Facility October 2009

EGPC

$240 MM

Debt

Financing June 2011

$1 Bn

Receivables

Monetization December 2010

EGPC

$240 MM

Acquisition

Financing June 2007

$378 MM

FSA Monetization July 2005

EGPC

$1.55 Bn

FSA Monetization February 2006

EGPC

$117.5 MM

Construction

Financing July 2009

$200 MM

Loraine Wind

Project

Wind Equity

Investment February 2010

10-Year

Commodity Offtake

Provider July 2009

$319 MM

Construction

Financing December 2011

10-Year

Commodity Offtake

Provider December 2011

$132 MM

Construction

Financing

August 2008

$466 MM

Arlington Valley

Solar Energy II

Construction / Term

Financing

January 2012

Infrastructure

$300 MM

FPSO

Financing November 2011

$750 MM

Drillship

Financing March 2012

$1Bn

Railroad Financing December 2005

$1Bn

HANGZOU RING

ROAD

Toll Road Financing December 2005

$1.3 Bn

Construction

Financing

March 2010

$600 MM

Infrastructure


$100 MM

Railway

Financing October 2007

$494 MM

Lease Securitization April 2007

$213 MM

Toll Road Financing August 2006

$162 MM

Toll Road Financing February 2006

$950 MM

Acquisition

Financing September 2005

$950 MM

Debt

Refinancing September 2005

$11 Bn

Construction

Refinancing June 2006

$740 MM

MACH Gen

Debt

Refinancing February 2007

$740 MM

Construction

Financing May 2008

$45 Bn

Acquisition

Financing February 2007

$1.65 Bn

Acquisition

Financing March 2006

Approx. $300 MM

West Deptford

Project

Construction/Term


$290 MM

Canadian Hills

Wind Project

Construction

Financing

March 2012

Financing Sources For Greenfield Offshore Wind

• Q: Do you believe that

Multilateral agencies will

provide an aggregate value

of €22Bn in capital over the

next 8 years?

Past Projects and Projections

3

Past Projects and Projections: Bloomberg New Energy Finance

1.2

6.1

3.9

2.1

3.23.1

2.82.5

2.1

1.6

0.7

1.3

1.3

1.7

1.9

2.3

2.6

1.0

1.3 4.0

1.8

2.0

2.0

2.1

0.4

0.4

0.5

0.4 1.0

3.23.2

2.73.9

5.27.1

9.0

0.7 1.2

3.53.2

2.2 2.6 2.8 3.1 3.8

0.9

0.3

2.1

0.3

0.3

0.10.4

0.4

0.4

0.4

0.4

0.2 0.4

0.10.3

0.5

0.7

0.9

0.10.1

0.2

0.1

0.1

0.1

0.1

0.1

0.3

0.3

0.3

0.3

0.3

0.3

0%

20%

40%

60%

80%

100%

2012 2013 2014 2015 2016 2017 2018 2019 2020

Equity-Primary Utility Equity-Secondary Utility Equity-Developer Equity-IPP Equity-Institutional Investor

Equity-WTG Equity-Private Equity Debt-Commercial Debt-Multilateral

5.6 10.2 13.8 14.2 12.3 14.4 16.1 18.6 21.3

Annual Investment in Offshore Wind By Year of Commissioning and Investor Type; 2012–2015 by Existing Commitments and 2016–2020 Forecast

€ Bn

Sources Bloomberg New Energy Finance; Rabobank

2012-2020

Country € Bn

Germany 39.2

UK 38.6

France 18.8

Belgium 6.6

Denmark 3.9

Netherlands 3.5

Rest of EU 16.3

Total 126.9

Annual Investment

Sources Bloomberg New Energy Finance; Rabobank

Banks Project Finance Participation Glass Half Empty Or Full?

4

• Q: Do you believe that

commercial banks will

provide an aggregate value

of €35Bn in capital over the

next 8 years?

– Average of ~€4.5Bn per

year

• Approximately 70% of bank

lenders into the offshore

wind sector have only

participated in 2 transactions

• Alternatively, could argue

that banks with 2+

transactions makes ‘a

knowledgeable market’

– 16 banks

• Even assuming

‘knowledgeable market’

doubles to 32 banks, a

€4.5Bn average capital

requirement would require an

average ticket size of

approximately €140MM per

bank

– Concentration concerns?

“Our discussions with industry participants suggest there are around 15-20 commercial lending

banks currently active in offshore wind financing, and that there is appetite to fund €2-2.5Bn of

projects per year”

Morgan Stanley Equity Research

1

1

12

7

4

1

1

1

0 2 4 6 8 10 12

1

2

3

4

5

6

7

8

Banks in Project Finance Offshore Wind Transactions

Number of Transactions

12

19

23

24

25

26

27

28

Institutional Investors as Debt Capital Providers

5

• Pension funds have played a

role in investing in the equity

of offshore wind projects

• Given the scale of the

anticipated build out, expect

that the institutional debt

capital markets will play

some role

– Likely only when

operational

• Renewable sector: interest by institutional debt investors in European renewable sector is increasing,

however it is still early stages

– Several funds have dedicated pools of capital for infrastructure investment, which includes

renewables

– Judgment based upon limited transaction flow and unhelpful precedents (i.e. Breeze) and stability of

regulatory regimes

• Favourable markets: offshore wind predominately located in “core” Northern European markets

Investor Concerns – Not Unsurprising

• Business model - Future incentive / regulatory support risk

• Technology risk: evolving so why invest now?

• Resource risk

– Weather risk (“black swan” winter storm damaging turbines)

How / When To Invest?

• Unlikely that institutional investors would be willing to take construction risk of an early stage

technology without sufficient guarantees or a wrap from an independent party

– Renewable wind power not currently permitted under EU/EIB Project Bond Initiative

– Investment grade?

• Initially, expect that construction financing will be provided by banks with a potential bond takeout

post-construction

• In line with broader European PF bank market, which we expect will morph towards a more formal

mini-perm structure

6

Current Developer / ‘IPP’ Model

Asset

Sponsor(s)

Future Utility Model?

Utility

3rd Party Equity

Investors

• No “On” vs. “Off” balance sheet considerations

• Rating agencies (or public ratings) not necessary

• Continued appetite of the ECAs / commercial

banks critical for this funding approach

• Depending on equity investor / structure, debt

consolidation could be relevant to Utilities

• As Utilities expand their offshore wind portfolios,

additional debt burden puts pressure on balance

sheets and ratings

–While selling down an equity stake recycles

capital to allow for further development, it may

not reduce the Utility’s debt burden

Equity

Debt

Equity/Cash Export Credit

Agencies Debt

Offshore Wind Financing Strategies

Equity (50% +/-)

Asset

Equity (50% +/-)

Debt

Commercial Banks

IssuerCo

7

Banks / Institutional

Investors

Debt Proceeds

Security

Utility 2

Asset

Utility 3

Asset

Utility 2

[X]% [X]%

Utility 1 Other Utility 3

[X]% [X]%

FiT

Utility 2

Utility 1

Other

Utility 3

FiT

FiT

FiT

Utility 1

Asset

Industry Wide Financing Solution? Legal / Ownership Likely to Pose Problems


2 July 2012

Ryan Trow

Forewind

• Forewind is a consortium comprising four leading international energy companies: RWE, SSE, Statoil, and Statkraft.

• The consortium members joined forces to bid for the Dogger Bank Zone Development Agreement as part of The Crown Estate’s third licence round for UK offshore wind farms (Round 3) in 2010.

• Forewind combines extensive experience of international offshore project delivery and renewables development, construction, asset management and operations, with UK utility expertise spanning the complete electricity value chain.

• Together as Forewind we have the experience and expertise to deliver the extraordinary challenges facing Round 3 developers.

• Forewind is committed to securing all the necessary consents required for the construction and development of Dogger Bank, the first of which is anticipated around 2015.

• The Crown Estate is Forewind’s partner in the development of Dogger Bank.

2

Forewind Overall Strategy

Dogger Bank key facts:

• Capacity: Agreed target 9 GW,

with the potential for c.13 GW.

• Area: 8660km2 ; equivalent to size

of North Yorkshire.

• Distance: 125-290 km from shore.

• Depth: 18-63 m; c.4 GW in <30m

water depth, c.8 GW in <35m

water depth; shallow compared

with other Round 3 zones.

• Wind: High wind speeds of

>10 m/s average wind speed

across the zone.

• History: A "dogger“ was a type of

Dutch fishing boat that commonly

worked in the North Sea in the

seventeenth century.

Middlesbrough

Hull

• Forewind’s mission is to deliver development consents for safe, viable offshore wind capacity

• Priority to secure & consent early projects to build momentum & confidence in Forewind for the full zone potential

• We aim to deliver low LCOE projects that maximise value in the Dogger Bank development option

3

Unincorporated Joint Venture

SPV SPV SPV SPV

Funding & guarantees

UJV

• UJV owns assets

• Bizco has legal

personality for

licences and land

agreements etc.

Structure repeated for each 1GW project

4

SPV SPV SPV SPV

Operator

Bizco +

Eight or more individual Projects

First 6 Projects have signed grid agreements

5

Connection point Connection date

P1 – Creyke Beck Yorkshire Apr 2016

P2 – Lackenby Teesside Apr 2017

P3 – Lackenby Teesside Apr 2018

P4 – Creyke Beck Yorkshire Apr 2019

P5 – Tod Point Teesside Apr 2019

P6 – Tod Point Teesside Apr 2020

• Each Project will have

• Around 200 turbines with a cumulative capacity of about 1.2GW

• AC collector transmission substations

• HVDC transmission offshore platform and equivalent onshore station

• Approx. 200km * 2 of transmission cables to connect to shore

• Each project will cost £3bn to £4bn to construct. About £30bn needed in total

• Forewind has accepted grid agreements for first 6 projects in anticipation of an appropriate regulatory environment evolving

Post Consent Risk:

6

• Regulatory risk – current uncertainties include EMR and transmission charging. What regulatory risks will there be when finance is needed?

• Political risk – how much offshore wind is wanted and when?

• Supply chain risk – For example, current global cable manufacturing capability cannot supply Dogger Bank’s current programme. Many other examples of supply chain pinch points

• Finance:

• If pre-construction finance only comes from offshore wind farm developers it will take a long time to recycle funds and slow down overall deployment of offshore wind

• Availability of post construction finance will impact on ability to recycle funds

• Utilities may not want to take on £4bn construction projects on their own. Also, they may not have the capacity and strategic interest in being a non-operating investor


2 July 2012

Ryan Trow