Financing questions for UK’s gargantuan offshore wind plan

London,14 January: A potential 32GW of offshore wind capacity could be developed in the UK after the government granted rights to nine coastal zones – but questions remain over how these projects will be financed.

Last week, the Crown Estate announced the third round of its offshore wind programme, granting exclusive rights to develop these zones, up to a potential 32GW or 6,400 turbines, enough to meet household demand for electricity in the UK. 

The biggest proposal could see 9GW of turbines erected in the Dogger Bank zone, by the Forewind Consortium, made up of SSE Renewables, RWE Npower Renewables, Statoil and Statkraft.

UK Prime Minister Gordon Brown said: “This new round of licences provides a substantial new platform for investing in UK industrial capacity. The offshore wind industry is at the heart of the UK economy’s shift to low carbon and could be worth £75 billion ($122 billion) and support up to 70,000 jobs by 2020.”

Mainstream Renewable Power, part of the SMart Wind consortium which won rights to develop 4GW in Round 3, calculates total investment required across all nine coastal zones would be more than €111 billion ($161 billion).

Thus far, most offshore wind farms have been financed using the balance sheets of energy companies – but financiers told Environmental Finance that structured finance or project finance will be needed for such a large scale of development. “Utilities haven’t got inexhaustible balance sheets,” observed one banker.

Gordon Edge, director of economics and markets at the British Wind Energy Association (BWEA), said: “There is interest from banks in offshore, but it'll be a while before we see a bank-financed construction.”

Arnaud Bouillé, a director in consultancy Ernst & Young’s energy and environmental infrastructure business, noted that some of the projects will be particularly challenging. “Some of the zones are quite far away from shore – more than 100, 200 kilometres,” posing technical challenges, he noted. In the current financing context, “that capital wouldn’t be available, just because the returns that could be expected for such investments wouldn’t be attractive enough” given the risks, he added.

However, Bouillé said there are signs that debt and equity financiers are interested in offshore wind, noting that in November Centrica refinanced a portfolio of completed onshore and offshore wind farms, with a consortium of 14 banks. He said that banks may not be willing to take on construction risk yet, but instead could get involved at an earlier stage through deals which would see this risk “managed by the equity sponsor”.

On the question of whether there is enough financier appetite for offshore wind to get the projects built, however, Rob Mansley, head of the European renewables practice at investment bank Credit Suisse, said: “It’s potentially so big that a lot of people on the finance side are going to have to look at it to avoid the risk of missing out.”

“I'd also say that there will need to be a lot of creativity in getting investment vehicles that will attract the £100 billion or so of capital required to get offshore away over the next 10-15 years,” the BWEA's Edge added. “It's not just bank lending we're talking about here. How you get institutional money into these projects strikes me as one of the key questions on the financing side.”

Project developers are expected to ask for additional government support. But, said Bouillé, this may not be needed – it will be at least five years before work starts on the most difficult projects. “We can’t project what the economics will be at that point in time,” he noted.