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Financing Offshore Wind – Deeper Water Different ModelsFive market leaders discuss the �developing�landscape�of�project�finance

The 6th Offshore Wind Series: Procurement & Construction Summit4-5 November 2014 // Hamburg // Germany

Five industry experts from E.ON, Mainstream Renewable Power, Typhoon Offshore, Green Investment Bank and Augusta & Co discuss their views of financing offshore wind.

This Q&A includes commentary on:

ff Whether the need to attract investors has affected contract-ing over the last 12 months

ff What financial models are needed for future development

ff To what extent do major contractors have a part to play in the future of financing offshore wind

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Financing Offshore Wind – Deeper Water Different ModelsFive market leaders discuss the developing landscape of project finance

The 6th Offshore Wind Series: Procurement & Construction Summit

4-5 November 2014, Hamburg, Germany

Develop and manage optimized cost reduction strategies for the procurement, construction and connection of profitable offshore wind projects


The offshore wind market has come a long way since its incep-tion some 15 year ago. Initially financing was mostly done all on balance sheet, with the big utilities trying to manage

projects themselves. Since the world crash in 2008 financing has evolved somewhat with project financing involving both banks plus equity and other sponsors making gains. Over the last 12 months in particular contracting structures have been evolving to encourage more efficient financing and risk allocation in projects. In addition pension funds are now looking for some involvement. The offshore wind market suits them because they are not looking for instant returns and are instead happy to capture up to 12 per cent a few years after their initial investment. In addition some differentiation can be made between investors who like the fixed, long-term price that should be possible with CfDs -typically the infrastructure fund type investor- and those who prefer the upside possibilities that go with ROCs - preferred by the less risk averse investors like stra-tegics. However a gap still remains in equity development capital and this is the final piece of the financing puzzle. As more projects come successfully to fruition and greater comfort levels are achieved throughout the industry, this should resolve itself.

Below leading industry figures discuss financing the offshore wind market, how it is changing and evolving and what changes may be needed to continue to attract good levels of finance.








Michael Lewis COO – E.ON Climate and Renewables

Michael Lewis is COO Wind Power at E.ON Climate & Renewables. He has worked in the energy industry for twenty years. Michael has a degree in Engineering and an MSc in Pollution and Environmental Control from the University of Manchester. He is a chartered Mechanical Engineer.

Having joined Powergen in 1993, he originally worked in various technical and environmental roles, before moving into corpo-rate strategy and development. Following E.ON’s acquisition of Powergen, Michael moved to E.ON’s headquarters in Düsseldorf as Vice President Corporate Development.

In 2007 he was appointed as Managing Director for Europe on the Board of E.ON Climate & Renewables, where he is now COO responsible for global wind power development, construction and operations.

ATTrAcTing The righT invesTOrs fOr An OffshOre Wind prOjecT hAs never been sO impOrTAnT. hOW hAve yOu SEEN THiS AffECT CONTRACTiNG OvER THE LAST 12 MONTHS?

It’s really important to understand that each partner has their own way of doing things and their own preferences. From our perspec-tive as a developer we need to make sure that we attract the right quality of partner willing to take a long-term perspective and that their financing capability, willingness to share risks, and willingness to stay on course with our projects is solid. Our job is to bring tech-nical expertise to the table and to build on our unique capabilities and track record of bringing projects in on time and on budget. Partners need to share our view on how that can best be achieved and obviously both sides need to work in a transparent and commu-nicative way so that there are no surprises and each partners is has confidence in the others’ capabilities. For example, when a project hits problems, and quick solutions are required, the partners need to be able to reach decisions quickly – without the right level of trust and mutual respect this would be impossible. Collaboration and communication hold the key to success. If a supplier or contractor has a problem, be it technical, logistical whatever, that can impact








the overall project schedule, we need to know as soon as possible to enable us to work with them to find a solution. We like to be seen as transparent and cooperative, and we would like our partners to be the same.

nOW bAlAnce sheeT finAncing is mOre difficulT, dO yOu believe OffshOre Wind develOpers And OperATOrs need neW finAnciAl mOdels? if yes, Why And WhAT is required?

In the past we financed everything on balance sheet, but the sheer scale of the investment required means that alternative models need to come into play both to share the risks and to bring new sources of finance into the market. In the light of current capital market condi-tions such offshore assets offer very attractive returns and steady cash flows over the investment period.

Something we already now do is to sell down shares in existing assets once they are operational and then recycle the capital. For example, we have recently sold an 80% share of our 207MW Rødsand project in Denmark, where we continue to provide O&M services. This model not only provides investors with security of an asset with proven operational performance but also the security of having a strong equity partner with O&M capabilities.

We are also looking to bring investors in at the pre-construction phase for new projects, with partners who are willing to share construction risk. This will be a different universe of investors from those who invest in operational assets only, and typically they will target higher returns and will have a more sophisticated understand-ing of the risks. We would expect this to become the industry norm over the coming years.

WhAT cAn prOjecT develOpers And Their mAjOr suppli-ers dO TO ensure prOjecTs in The prOcuremenT sTAge ATTrAcT lenders And reAch finAnciAl clOse?

Any financing model has to be backed by a credible lead partner or consortium of partners. Without that there is no way to be sure that a project can be delivered on time and on budget, and new investors to the sector are going to be naturally nervous about committing. To satisfy their needs a detailed project execution plan, that includes








a clear view of the methods and risks in all of the individual work packages such as foundation installation, cable installation, turbine installation, vessels and logistics, etc is absolutely critical. Similarly, a detailed study of the critical project risks, their impact on the sched-ule, and risk mitigation measures is also a pre-requisite. Suppliers as well as developers need to be involved in analysing and mitigating these risks.

is The bAnkAbiliTy Of A prOjecT The sOle cOncern Of develOpers And OperATOrs Or is There A pArT ThAT mAjOr cOnTrAcTOrs cAn plAy in ObTAining A mOre secure finAnciAl fuTure fOr OffshOre Wind?

It is in the interests of all industry players – whether developers, operators or suppliers that the offshore wind industry thrives. This means that major suppliers and contractors do have a critical role in ensuring that the industry remains attractive for financial investors. There are two key roles that they can play. First, they need to ensure that they invest in new technology and innovation and production capacity to ensure that the industry continues to lower costs while at the same time improving quality. The industry has come a long way in reducing costs over the last few years and we need to see this trend continue. Second, they need to be proactive and engaged as project partners and take a role in working with developers to iden-tify and flexibly manage risks and issues as they arise rather than working solely in their own narrow short term commercial interest. This is indeed what the best suppliers already do.








fintan Whelan co-founder & corporate finance director, mainstream renewable power

Fintan co-founded Mainstream Renewable Power in February 2008. He is Corporate Finance Director where his role includes creating a direct opportunity for investors seeking exposure to the construction and long-term operations phases of Mainstream’s three offshore wind projects in the North Sea totalling over 7.5GW.


Appetite has not disappeared but utility capacity has reduced given their difficulties. In addition the UK government’s ambitions for offshore wind are reduced up to 2020, restricted by the levy control framework. So there has been a shakeout of projects with the weaker ones being mothballed.

Utilities are, however, looking for funding partners for the projects they are still going ahead with. This means they are fishing in the same waters that we have already been in all along, so some level-ling of the playing field there.

What we do see is a splitting of interest between investors who like the fixed, long-term price that should be possible with CfDs -typi-cally the infrastructure fund type investor- and those who prefer the upside possibilities that go with ROCs - preferred by the less risk averse investors like strategics.

On the contracting side of things, meanwhile, we have started to see increased interaction between contractors and the equity consortium with some contractors now also sitting on the equity side too. This model is not unusual elsewhere with infrastructure projects but has not, so far, been widely used in offshore wind. Notable examples of this are Siemens and Van Oord in the Gemini project in Holland. We have seen this elsewhere also. This is good alignment of interests with financial investors in the consortium, though not everyone likes the potential for conflicts of interest.








Overall though the most comforting criteria for project finance is a combination that has been proven to work previously and where a successful path has already been mapped out. Common sense says that a successful previous pathway can be replicated and tweaked where required and with such large amounts of money involved then a model with previous success has inherent appeal.

nOW bAlAnce sheeT finAncing is A Thing Of The pAsT, dO yOu believe OffshOre Wind develOpers And OperATOrs need neW finAnciAl mOdels? if yes, Why And WhAT is required?

Balance sheet financing has been the traditional model used in the UK but in fact elsewhere the project finance model has more commonly been used. Project finance is a well-established model that fits comfortably into the offshore wind space, flexible enough to bend to the needs of any project. Part of the tweaking may involve using mezzanine finance and that is a consideration if the equity consortium might usefully be reduced in number in order to reduce complexity - not just about improving equity returns. With scale, forming equity and debt clubs brings potentially such complexity and it is an important aspect to manage carefully.


The essential thing to remember when attracting finance is that lend-ers want their money back plus interest. Accordingly developers and suppliers need to ensure that they have a strong proposition with a strong probability that their project will have a successful outcome within the time allocated. This means that the kit needs to be fit for purpose and that the timescales and procurement process is real-istic. More than anything that all the players have a long-term track record and are reliable and realistic in their approach. This all needs to be backed up contractually.

The new Siemens 6mw turbine, for example, can be effectively brought to market without a long-term track record because not just the Siemens name is behind it and all that stands for, but contractual terms can be strengthened to address the residual perceived risks. Other manufacturers with new turbines if they are not as strong in








their own right can get product warranty insurance from strong-ly-rated insurers. This is a cross over from the solar industry.

These approaches mean the industry can still evolve and improve while keeping the funding available. As track record builds contrac-tual terms change to cover real risks rather than the perceived ones.

TO WhAT exTenT cAn cOllAbOrATiOn beTWeen finAn-ciAl, prOcuremenT And cOnsTrucTiOn TeAms WiThin develOpers And OperATOrs reduce bAnkAbiliTy cOncerns And ensure lenders sTAy invesTed in A PROjECT?

Coordination is really very important. There is no point in pursuing technically exciting options if the resulting project cannot be banked. It is all about trade-offs, sometimes technical like not choosing the very latest product but going for one with more track record. Other times it can be contractual with certain forms and terms being abso-lutely necessary for lenders. But mostly it is about the various teams knowing what normal project finance criteria are so they can be used as filters early on in a process to deliver bank ability at the end. This awareness needs to reside across the many disciplines in a devel-oper not just with the finance people.

Of course bank ability develops too in response to positive expe-rience on previous projects, so it is capable of being flexed on the edges and that is where tension is located. Some banks move faster than others.


Once a project reaches a certain stage then it goes on a company’s financial forecast; it becomes real, it’s happening and so everyone has something to lose. Another facet is that poor performance on one project carries reputational risk. In an industry reliant on track record and reliability reputational risk is huge.

Where things have gone wrong in the past it’s been where a proj-ect has overrun and that has had a very negative impact on the








economics of this investment. This has been part of the experience with some project financed wind farms in Germany, of course you will not hear of this if the funding is on balance sheet! And turnkey fixed price contracts are not available in the market. The pendulum has swung back from multiple contracts with their heightened interface risk to best practice now of 2 main contracts.








ian Taylor head of uk Operations - Typhoon Offshore

Ian heads up the UK branch of Typhoon Offshore, an offshore wind farm development company which recently brought to financial close one of the largest wind farms in the world, the Gemini project.


Certainly non-recourse project finance has played a greater role in recent months and this drives projects down the EPC/ contractor route. An EPC contractor manages the interface risks between its sub-contractors whilst under a multi-contracting structure these risks are taken and managed by the project owner during construction. In practical terms the number of contractors tends to stand at between two and three, any more and the number of interfaces becomes too great to effectively manage. Keeping to a small number makes for risk limitation and this is obviously attractive to banks and other sponsors. In turn, higher comfort rates also means potentially secur-ing debt at a lower rate and higher ticket sizes.


Whether its balance sheet financing or project financing, it all comes down to risk management. Multi-contracting works on balance sheet projects but the developer needs to have the resource to be able to effectively manage multiple interfaces. Unless you are a major utility like DONG Energy, having multiple interfaces and balance sheet finance is going to be very hard to manage.

Although a project like Gemini shows that long-term commercial debt is available for offshore wind, it also demonstrated the impor-tance of the multi-laterals (e.g. EIB) and export credit agencies in providing a significant proportion of the cover and funding. This needs to further develop, particularly in the UK, with the help of the GIB, government and industry working together. Looking further








ahead, the commercial banks with a track record and in-depth understanding of the sector, could also play a role in un-tapping the funds from institutional investors in providing debt financing for construction.


Investors need confidence that the package they are asked to invest in is robust, comprehensive, realistic and fair. It can take around two years to properly prepare all the various packages and so there is a real need for contractors and developers alike to be able to work together and have a joint development approach. There are numer-ous interfaces to manage during this process in order to optimise the investment case: for example between supply contract guarantees and insurance provisions; between sub-contractor selection and financing (provision of ECA cover, supply costs and payment terms). The challenge is managing this process in line with the internal processes of all stakeholders – government subsidy obligations, board approvals from multi-laterals and the sponsors, to name a few . If this is done from an early stage then it should have a positive knock on effect when it comes to securing the end financing with minimal delay.

Essentially sponsors like to see that the construction risk has been dealt with and the banks like to see a structure and principles that they are familiar with and can lend against.


Collaboration is clearly needed to optimise the project returns but also to ensure down-side risks in the delivery of the project and its profitability are comprehensively addressed. Detailed risk mitigation and contingency planning is best achieved through working closely with experienced suppliers and insurers taking into account the requirements of the lenders. Construction plans and method state-ments are developed jointly and also reviewed by expert advisors








(for example marine warrantee surveyors) to ensure lessons learned from the industry have been factored into the plans. Ultimately this is all then reflected in the employer’s requirements and the contracts.


The long-term future of offshore wind is dependent on the industry attracting investment and reducing the cost of energy. Given the increasing role of PF, and the levels of debt required, bankability is a key concern of developers. But of equal concern is improving performance and reliability and driving down Capex and Opex - essential in order to maintain political support for the industry. There are significant gains to be made in reducing Opex, for example through sharing resources across projects (floating supply vessels, fixed accommodation modules) and improving accessibility for wind turbine maintenance. Capex savings can also be made through standardisation of components (e.g. substations) and increasing the supply base (e.g. outside of Europe) to avoid future bottle-necks. Some of these gains may entail introducing new risks (e.g. new suppliers) but providing adequate quality control measures are introduced, this should not impact the ability to raise project finance. It should be noted that other industries, for example aerospace, has been sourcing components from the Far East for many years.








Karl Smith Offshore director – green investment bank

Karl Smith currently leads the principal equity investments in the OSW sector within the GIB OSW team. In particular, he was the lead Principal on GIB’s investments in Rhyl Flats and Gwynt y Mor. Mr. Smith has extensive experience in principal investment, debt invest-ments and financial advisory across the Energy & Infrastructure space. He joined GIB in 2012, having previously spent almost three years with advisory and renewable development firm Hideal Partners.


Contracting structures have been evolving over the past 12 months to encourage more efficient financing and risk allocations in projects. GIB has been taking a leading role in encouraging new financiers into the market and educating investors of the risks of offshore wind investments. GIB recently invested alongside Marubeni, a Japanese strategic investor and Greencoat Capital in separate equity transactions.


Balance sheet financing is not a de facto thing of the past. Financing depends entirely on the project and smaller developments still use balance sheet financing as well as some larger ones. To go from an average of two to three investors and then add another one is a smaller step than going to a debt project finance model which potentially adds significant complexity to the contracting structure. However it is true to say that there has been a small swing towards project finance in order to attract investment for large scale projects and if carefully managed project financing can be efficiently intro-duced into offshore wind projects.









Banks and other lenders need to be involved in the whole process as soon as is possible and certainly early on. All the requirements of the various lenders need to be met, contractually, and this means a greater comfort level can be achieved prior to financial close.


The key to any successful project is collaboration and communica-tion. Any project is basically a huge jigsaw that is not complete with-out its composite parts. There is some room for improvement when it comes to the sharing of information but the issue is not over secrecy it is more that all parties need to get into their common practice the sharing of information as the norm and that sharing experience can actually help to increase knowledge and comfort levels within the broader industry. The UK government has set up a workflow scheme to facilitate this through the offshore wind industry program.


Developers and operators have a wider role to play in the develop-ment of the offshore wind industry. In particular they have a large role to play to bring down the costs of project delivery and innova-tion in the sector.








Mortimer Menzel Co-founder & Partner – Augusta & Co

Mortimer Menzel has nine years of expertise in placing equity finance in renewable energy deals (both for project and corporate finance) and over 20 years of banking, and legal experience. Prior to joining Augusta & Co plc in 2002, Mortimer was in the Investment Banking Division of Goldman Sachs and a solicitor with Bruckhaus Westrick in Frankfurt. He trained with Linklaters in London. At Augusta Mortimer has originated and executed some of the leading renewables transactions in the European market including the sale of wind turbine makers, a blade manufacturer, M&A on 20 offshore wind projects and various onshore wind and hydro project and portfolio sales. Mortimer has led transactions throughout Europe for clients including Deutsche Bank, Unicredit, Goldman Sachs, Dong, RWE, PNE Wind, Enertrag, Ventotec, Typhoon and Element Power. Mortimer is a frequent speaker on the financing of renewable energy projects and companies at various global industry conferences.


There has become a general level of standardisation behind contracting and this is a good thing. However equity investors do like to see that some leeway remains and that what is being proposed has not all been fully finalised. Immovable projects that lack flexibility do not give any wriggle room and that can entail possible risk and is harder to raise equity for pre financial close. If Investors are going to take some development risk anyway, they want some flexibility. Several German projects that have been looking for equity for years are a testament to this.


The utilities are, by and large in retreat be that through not buying into any more projects or actively looking to dispose of projects to reduce the impact on their balance sheet. However it is still very hard








to find equity investors that are comfortable taking development risk – even in the UK where the market is more developed and there is now certainty over the CfD support mechanism. The market needs to mature so that it is on a par with the onshore market. The concerns over regulatory stability, construction, insurance, weather risk and the like are much less problematic although serious concerns remain over the quality and reliability of the supply chain. In the offshore market financiers need to see that those who took early risks were rewarded before comfort levels are raised.

Something that is changing is that pensions funds are seeking involvement because they need investments of scale but do not need instant returns. They are increasingly looking to take the higher returns that investing earlier (i.e. into development and construction risk) brings with it. However a gap still remains in equity develop-ment capital which is the final piece of the financing puzzle. As more projects come successfully to fruition this should resolve itself.


The quality of the project really counts. If there are holes in the development or solvency issues then the financial backing is simply not going to be there. Quality developers are very valuable and the rest will not succeed. The whole bankability play is around choosing sound suppliers and making sure that all the deliverables and time-frames stack up and are realistic. Bringing in projects significantly under €5m/MW total investment cost would help, but we seem to be moving ever further away from that.


The earlier the communication starts between the various interested parties the better. If the financial backers are involved from a very early stage then they have a much better holistic understanding of how a project is going to work and be tied together within agreed timeframes. Ideally they should be involved after the permit has been








issued. Dong Energy for example has a very active group which reaches out to potential investors to ensure they are aware of what is happening, what is coming up next and what might be a good fit for a potential investor. Good developers know all this and ultimately they need the backing for their project so it is in their own interests to communicate effectively from an early stage.


Contractors need to have a credible history in order to be bankable. Saying that, bankability is less of a concern than it was and banks are actively seeking the large investments offshore provides and they are able to syndicate a €50m loan out pretty easily in this market. In addition they are facing competition from pensions funds and multi-national public money, so the number of interested parties interested in debt within a project is growing. Debt capital for a good European offshore wind farm is simply not in short supply right now.








cOnclusiOn

Clearly financing is an evolving puzzle but overall it seems that the most attractive proposition for project finance is a combination that has been proven to work previously and where a successful path has already been mapped out. Common sense says that a success-ful previous pathway can be replicated and tweaked where required, and with such large amounts of money involved then a model with previous success has inherent appeal.

The preference is now to seek much better and open communica-tion and at an early stage. In this way developers can involve poten-tial supporters at an early stage and to try and work as much as possible within their risk comfort zones and try and have a positive ongoing discussion. Generally working to supporter’s targets means using tried and tested contractors and suppliers, having visible and realistic targets and timeframes and most importantly trying to limit construction and operational risk wherever and whenever possible, notably by limiting the amount of people involved and therefore limit-ing the complexity and therefore risk of the interfaces between them.

In addition, there has becomes a general level of standardisation behind contracting and this is a good thing because again it means those financing projects know that they are dealing with. It will however give rise to consolidation with only the quality developers and contractors being able to succeed in a risk averse and exacting environment.

Looking towards the future though as the industry matures and evolves then investors will be encouraged by past success and hopefully be less risk averse. To an extent this is already happen-ing in the UK where the support mechanisms are now in place, The Nordic region too seems to be stable as does the Benelux region. The market will now look to Germany to provide more opportunity for growth.



The 6th Offshore Wind Series: Procurement & Construction Summit4-5 November 2014 // Hamburg // Germany

For more information on The 6th Offshore Wind Series: Procurement & Construction Summit please visit www.windenergyupdate.com/offshore-construction



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