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A new financing horizon?Despite the enormous promise of offshore wind, projects have struggled to attract financing. Shane Woodroffe and Mark Dennes ask why, and explain how the wind is changingThe potential for offshore wind is huge. Properly developed, offshore wind projects address local community and environmental concerns, and can help to circumvent many of the barriers that face wind energy development onshore. And, with governments struggling to deliver on their renewable energy and carbon reduction goals – not to mention energy security – moving offshore is seen as a path to meeting those targets. The European Wind Energy Association (EWEA) predicts that Europe alone has the potential to install more than 70GW by 2020, equivalent to almost twice current installed wind capacity in Europe. The US Department of Energy, meanwhile, estimates the potential of offshore wind at up to 900GW. But the capital needed to develop wind farms offshore is enormous, and substantially greater, like for like, than for those onshore. At around £1.5 million ($2.8 million)/MW, today’s estimate of the all-in offshore installation cost, meeting the EWEA’s 70GW target will require more than £100 billion of investment, or some £7 billion/year.No wonder finance providers are so eager to explore investments in the sector.
However, the arrival of bankable offshore wind farm projects has been a long time coming. Wind farms have been operating offshore since 1991, but financiers have, to date, given them a wide berth – and those that have been built have almost all been financed on-balance sheet, typically by large utilities, rather than by tapping the commercial bank and project finance markets. Onshore wind is cheaper, simpler and proven – why should we be moving the turbines offshore? A fair wind It is often argued that there is more plentiful wind resource offshore. Certainly there are fewer topographical effects, but wind farms on hills in Scotland (with load factors – ie, the percentage of a year’s full output that they actually generate – of up to 51%1) are yielding more energy than some of the Danish offshore wind farms in more sheltered waters (with c. 30% load factors2). However, prominence on the tops of hills is one of the main reasons why wind farms are being driven offshore. Hilltops are both limited in number and often vociferously protected by nearby residents. Furthermore, offshore sites provide the possibility for increasingly large-scale developments, with planned wind farms in the hundreds-of-megawatts range now becoming the norm. But higher costs… Detractors of offshore wind often point to the increased costs, which must eventually filter through to our electricity bills. It is not simply the extra cost of trying to build up to 20 kilometres offshore in 20 to 30 metres of, at times, treacherous waters. The complexity of offshore construction is further exacerbated by the necessary use of specialist vessels in a restricted April to September weather window, and the additional installation of a subsea connection cable to bring the electricity back to shore.Current estimates show that electricity generated offshore is some 1.5–2 times as expensive as that coming from onshore wind sites, at around £82/MWh compared to about £54/MWh3.
A sizeable element of the offshore wind construction costs is the foundation and tower structure, at around £240,000/MW compared to £115,000/MW for onshore wind4.The foundations are typically either driven steel piles of up to five metres in diameter for deeper water sites, or large 17 metre-wide, 2,000-tonne concrete gravity-based structures that sit on the (pre-prepared) sea-bed in shallow water sites. Given the restrictive installation time window, and the increased cost of erecting turbines offshore, developers tend to opt for the largest size turbine possible.The wind industry has come a long way in the past five years, with a move towards ‘multi-megawatt’ turbines. Onshore turbines today are often in the 1.5MW to 2.5MW size, but the move offshore is seeing manufacturers striving for, and achieving, even larger sizes. The most recent offshore wind farms have been built using the 3MW turbine produced by Vestas of Denmark (Barrow and Kentish Flats, both off the coast of the UK), with the next announced UK project (Burbo Banks) going for the 3.6MW unit produced by Siemens.German turbine manufacturer REpower has been testing a 5MW model at Brunsbüttel on the coast of Germany for over a year now, and will be installing two of these 900-tonne behemoths, rising some 107 metres above the water, at the Beatrice wind farm in the North Sea, 22 kilometres off the northeast coast of Scotland in the Moray Firth. The impact of wind farms on the environment has always split public and official opinion and offshore wind farms, albeit less visible when located several kilometres offshore, are no different. And, in addition to the bird, plant and animal life concerns that onshore wind needs to address, offshore wind also has to meet shipping and coastguard requirements. Planning and permitting is rigorous, as evident by the time taken to complete studies and consultation before lodging a permit for planning approval. In the UK, this typically takes a minimum of two years. …and some problems Unsurprisingly, construction of offshore wind farms has not been without its problems.The most frequently cited case is the 160MW Horns Rev wind farm, located 14–20 kilometres off the coast of Denmark. Vestas, which installed 80 of its 2MW units at this deep-water site, had to take down each nacelle (the ‘box’ that sits at the top of the tower and houses the gearbox, generator and supporting ancillary items) and transport them back to shore to carry out repairs – replacing components that had been expected to last significantly longer. Many in the industry, however, saw this as positive with Vestas standing by its commitment to offshore wind and, within four months, all 80 nacelles had been taken down, repaired and were back up and generating. Other offshore wind farms have had similar, but less costly, stories of delays and reduced output, although many have eventually achieved their initially predicted performance. Serial failures of nacelle components are a financier’s worst nightmare. This slightly wobbly track record for offshore wind, plus the drive of the manufacturers to rush out newer and bigger turbines that have not yet been proven, are the main reasons why banks have not yet provided non-recourse financing for offshore wind farms. Operational questions The other big unknown for financiers and investors alike is long-term operational performance. While offshore wind farms have been in operation since 1991, the newer models in the hazardous North Sea have less of a track record.To capture the wind when it does blow requires each turbine in the wind farm to, in the jargon used by engineers and capital providers, be ‘available’. Consistent availability figures of 98% have been achieved onshore, but offshore it is less certain that even the predicted 95–96% availability levels can be achieved. This is due to adverse weather that can stop access, perhaps for days at a time, to turbines to fix a fault. Every hour lost through no availability is the loss of an hour of valuable generation and revenues that are needed to give returns on the invested capital. Progress to date As a consequence of these factors, progress to date has not been spectacular. Last year,90MW of offshore wind capacity was installed, compared to 11,441MW of onshore wind capacity. In 2004, the figures were 60MW and 7,967MW, according to the Global Wind Energy Council. Although there are almost 800MW of projects that have been consented in the UK alone, installation of offshore wind farms has recently been hampered by rising steel prices and limited turbine supply as manufacturers, wary of the risks of offshore wind construction, and still smarting from losses, refocus on the onshore market. Build-out rates are likely to continue to lag behind the predicted installation rates, but 2006 is shaping up to be a watershed in offshore development. The 120MW Q7 project located off the coast of the Netherlands and the 21.6MW first phase of the Thornton Bank project, under development by C-Power off the coast of Belgium, are fighting it out to be the first project-financed offshore wind farm. No matter who crosses the project finance finish line first, the introduction of commercial lending to the offshore wind sector will be a huge boost for the industry and should speed the installation of megawatts offshore. Europe leads The countries leading the development of offshore wind are the UK, Ireland, Germany, France, the Netherlands, Belgium, Spain and Portugal.To encourage overall renewable energy generation – which tends to be more expensive than fossil fuel-derived power – EU countries have introduced a variety of support regimes, typically feed-in (fixed price) tariffs or a quota system typically linked to tradable ‘green’ certificates (whose price is not necessarily fixed). These support mechanisms have rapidly advanced the installation of onshore wind, but additional measures have had to be employed to stimulate the growth of offshore wind. For example, in Belgium, electricity supply companies are obliged to pay €107/MWh for power from offshore wind farms, compared to as low as €65/MWh for its onshore equivalent. Similarly, France’s offshore feed-in tariff was recently raised to €130/MWh. To date, Denmark has seen the most wind farms installed offshore, with some 409MW installed and the 200MW Horns Rev II and 200MW Rodsand (Nysted II) consents now awarded, with construction expected to start in 2007 and 2008 respectively5. Going forward, the UK, given some of the best wind resources in Europe, is likely to provide the majority of new offshore wind projects. The UK offered £10 million in grants to encourage the development of its first round offshore sites, while the Energy Review has proposed that offshore farms receive more Renewable Obligation Certificates (the UK’s tradable green certificates) per MWh for second round offshore projects. German offshore projects receive the same feed-in tariff as for onshore windfarms but over 12 years, as opposed to five for onshore projects. North America progress The US as a whole has abundant acreage onshore, with large pockets of windy rural lands, most of which are found in the sparsely populated areas west of the Mississippi. With slightly more than half the country’s population living in the coastal zones, however, it would be necessary to upgrade the transmission grid to allow for the interstate transfer of large amounts of wind power back to the population centres.This would require huge investment, preceded by lengthy regulatory and legislative approvals. Tapping the strong winds offshore, which are much closer to urban load centres, is seen as an alternative to these transmission challenges. There are at least 15 offshore wind farms in development in the US including the 130-turbine, 420MW Cape Wind project in Nantucket Sound. Expected to be the first US first offshore development, Cape Wind has endured years of public and political opposition. With opponents further claiming that Cape Wind’s 247-foot-tall turbines would kill migrating birds and could threaten the region’s lucrative tourist industry, the project still faces significant challenges even if it survives its current regulatory review which is ongoing in Washington. Currently, US offshore wind does not receive any additional support over and above the normal renewable power production tax credit. Conclusion As stated at the outset, the arrival of bankable offshore wind farm projects has been a long time coming.To date, projects have been built on balance sheet, and financiers have shied away from the risks involved.With notable setbacks both very visible and well documented, many financiers believe they were right to wait until now before dipping their collective toes in the offshore water. Fortis has watched this market closely and, having already advised three offshore projects in preparation for project financing, will be one of those most certainly getting its feet wet. Shane Woodroffe is the London-based director of renewable energy, and Mark Dennes is a New York-based vice president, at Fortis Bank. E-mails: shane.woodroffe@fortis.com, mark.dennes@us.fortis.com The introduction of commercial lending to the offshore wind sector will be a huge boost for the industry and should speed the installation of megawatts offshore 1 Burradale Wind Farm, Shetland (DTI & Garrad Hassan and Partners) 5 Offshore Wind: Implementing a New Powerhouse for Europe, Greenpeace, 2005. |
