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In cool, shallow waters, not far from the sugar beet fields of the Danish island of Lolland, sits a little wind farm called Vindeby. With 11 450 kW turbines, Vindeby is unremarkable but for the fact that it is Europe’s – and the world’s – first and oldest offshore wind farm. September marked 22 years of continuous operation since it was constructed using balance sheet funding from Elkraft, a Danish utility that later became part of DONG Energy.

Since Vindeby was built, much has changed in European offshore wind development. Turbines are larger, wind farms are built in deeper water and farther from shore, tough engineering lessons have been learned and new technologies have been developed. Meanwhile, the finance model for offshore wind has not changed nearly as rapidly. But changes are afoot.

Non-commercial finance from multilateral funding organizations such as the European Investment Bank (EIB) and export credit agencies such as Japan’s NEXI may play a significant role in attracting senior commercial debt. But until recently, offshore wind farm construction was funded largely by major utilities.

While utility equity was ample to get early projects up and running, the scale and technical risk of big offshore wind, combined with fragile utility balance sheets, has called the financing mechanism’s sustainability into question. European utilities are also reluctant to use project debt finance due to its impact on their already-strained credit ratings.

Recognizing that the utility equity model has its limits, industry leaders and governments fret the utilities’ pockets might not be deep enough to fund the ambitious deployment targets set by several European countries. However, maturing technology and a better understanding of the asset class mean there is good news in Europe that could very well spread across the Atlantic. Since 2010, a more diverse range of offshore wind finance structures has started to emerge (Figure 1). Institutional investors, including pension funds such as PGGM and Japanese trading houses such as Mitsubishi Corp. and Marubeni, have made substantial investments.

To stay on track, Europe’s offshore wind business will need to find new sources of debt. State banks like the EIB and KfW will remain a feature of the landscape for some time yet, but the entry of new sources of equity is a welcome addition to the European sector. Of particular interest is the involvement by North American players, demonstrating that the financial community is not waiting for offshore wind to make it across the Atlantic before getting comfortable with the risks.

Notable participation from North American players includes Blackstone’s 2011 investment in the 288 MW Meerwind project; the involvement of Caisse de depot et placement du Quebec in the world’s largest offshore wind farm, London Array; and the recent agreement between the owners of the 600 MW Gemini project off the Netherlands and Canada’s Northwind Power.

Just as these North American investors are getting comfortable with funding projects in the North Sea, their European and Japanese counterparts are set to drop anchor in U.S. waters, with eyes firmly set on the growing potential along the eastern seaboard.

PensionDanmark is one of the companies leading the way, recently announcing a $200 million conditional investment in the Cape Wind offshore project.

Having already financed the Anholt Wind Farm off the Danish coast, which uses the same Siemens turbines proposed for Cape Wind, PensionDanmark is perhaps an obvious first mover. The company’s decision reflects growing interest in the U.S. offshore market and most crucially reveals the belief that much of the engineering experience gained in European waters is directly transferable to the North American context.

PensionDanmark is not alone, with seasoned offshore investors like The Bank of Tokyo-Mitsubishi UFJ and Siemens also committed to the Cape Wind project. Utility financing is notably absent.



A different approach for the U.S.?

This lack of utility money is significant, demonstrating how a diversity of new financing options is enabling the U.S. to leapfrog the early utility-backed model of development used in Europe.

Breaking this dependency and unshackling the vast potential of the broader U.S. capital markets would remove a powerful barrier to the growth of U.S. offshore wind. Of course, there are other notable hurdles in the road toward the U.S. Department of Energy’s (DOE) proposed target of 54 GW of offshore wind by 2030, but the prospects for financing are brightening.

There is no question that the scale of investment needed to develop an offshore industry of the size envisioned by the DOE would be huge. However, the U.S. wind industry knows all about scale. The average size of new projects installed in 2012 was well over 100 MW, dwarfing the average of 23 MW for onshore projects in Europe last year. Consequently, investors in the U.S. are accustomed to much larger financing deals. Projects like the $1.9 billion, 845 MW Shepherds Flat Wind Farm are of comparable investment size to a large offshore project.

Furthermore, the U.S. market structure is dominated by large players seeking to offset sizable tax liabilities under the current mechanism of tax credits. This type of investor is needed to develop offshore wind farms where strong balance sheets and financial muscle are vitally important.

For U.S. investors comfortable with giant onshore projects, the financial leap of faith is much less daunting than that faced by the first European investors dipping their toes in North Sea waters.

As North American offshore wind gathers momentum, the industry can expect to see technology that bears little resemblance to Vindeby in 1991, demonstrating that ownership and finance structures have come an awfully long way, too. w


Craig Houston is a senior strategy and policy consultant at GL Garrad Hassan. He can be reached at craig.houston@gl-garrad-hassan.com.

Industry At Large: Offshore Wind

What European Financing Means For U.S. Offshore Wind

By Craig Houston

Growing confidence in the financing of European offshore wind assets portends big things for offshore development in the U.S.





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