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Leading voices in floating wind explore challenges ahead

RECHARGE, 30 April 2018

 

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Financing floating offshore wind

Martin Guzzetti and Jérôme Guillet, Green Giraffe

Floating offshore wind (FOW) projects are moving from the prototype phase to commercial endeavours, thus the question of how they will be financed is becoming critical. Utilities and technology providers may have been willing to bear the cost of demonstrators on their balance sheets, but if they want third-party funding for their next projects, they will need to mitigate the risks these financiers are asked to bear and get external validation of the technology.

It stands to reason that lenders and investors will work from what they know (offshore wind using fixed-bottom foundations), and try to understand how different FOW is from a risk perspective.

The good news is that fixed-bottom offshore wind is something that both lenders and investors are quite comfortable with and the risk analysis with respect to items such as turbine technology, regulatory context and price regimes will be based on what has already been done.

The focus will naturally move to the foundation technology, raising questions from “does the technology work?”, to “can enough of these gigantic structures be built on time?” or “is it doable and cost-effective to bring turbines back to shore to do repairs?”.

If the technical answers to these questions are satisfactory, then the focus will move to the contractual responsibility of parties – “can the responsible party be identified if problems arise?”, “will there be a risk of disputes between the turbine supplier and the foundation provider?”, or “are the foundation suppliers strong enough, financially, to provide the necessary guarantees backing their technology?”.

Fixed-bottom offshore wind forced financiers to deal with multi-contract construction setups, and to understand the corresponding interface risks. Financiers have accepted these risks, but are always very careful about it. Here, with FOW, we are again in a multi-contract situation, but with a new set of interfaces and risks that financiers will need to get comfortable with.

Full cooperation from the turbine supplier is needed to delineate the integrated design requirements and to confirm the acceptability of the substructure’s performance. Further, the integrated design must be certified by a reputable classification body. Logically, the availability guarantees (for both the turbine and the foundation), together with the power curve warranty, will be the key items to be negotiated.

Conversely, the risk allocation during construction is likely to be simpler than in fixed-bottom projects, as most of the construction work can be done onshore, with very limited weather risk and a more straightforward installation process.

In any case, the well-known principles of contractual strategy which have facilitated the project financing of fixed-bottom projects can be applied to FOW as well, such as distributing the project scope of work in well-defined contract lots (priced on the basis of fixed lump sum amounts), including delay damages and delay schedule rates in the contracts, and implementing liability caps high enough to compensate all losses resulting from delays, in case a contractor underperforms.

The track record of the chosen FOW technology and the strength of the industrial counterparties will play a major difference in the eyes of the investors and lenders: the technologies which have a satisfactory operating track record from large-scale demonstrators already installed are more likely to be financed on a non-recourse basis.

Ample contingency budgets, for both the construction and maintenance phases, together with a comprehensive insurance package, will be standard but essential components of the contractual and financing package.

An aspect which is interestingly different from fixed-bottom is that FOW will take place in countries with a very different political context. Support for renewables in places like Taiwan, the US or Spain is either untested or has been subject to serious vagaries and projects have seen serious obstacles, including challenges to permits or, as in Spain, retroactive changes to price regimes.

Financiers will want to be comfortable that a specific tariff regime for FOW is in place and is politically sustainable: there must be a good enough strategic rationale to develop the technology in the country, with demonstrated public support for that, and sufficient marketable local content. In any case, investors will likely want to see multilateral financing institutions involved in the early projects to provide for some level of “political cover”.

It is likely that the commercial terms of the first FOW deals will be guided by the traditional offshore wind market precedents, but end up, at least for the initial deals, with substantially more conservative terms.

We believe that funding could be available to the forthcoming round of early commercial FOW projects, subject to strict conditions and realistic expectations. This means that the cost basis of these early projects is not going to be the most competitive, as funding will not be on the most aggressive terms.

Such early deals will nevertheless be vital for the industry as it will allow the track record for commercially-proven FOW to start, which will give comfort that subsequent deals can be done with more optimistic assumptions and thus more favourable terms.