The - Energy Central€¦ · Web view3rd AnnualUS Offshore Wind 2018 Conference & Expo Boston Park Plaza Hotel June 7-8Your gateway to investments & partnerships in the US offshore

Path to Financing The US Offshore Wind Industry

3rd Annual

US Offshore Wind 2018 Conference & Expo Boston Park Plaza Hotel June 7-8Your gateway to investments & partnerships in the US offshore wind industry

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Path to Financing The US Offshore Wind Industry

In association with the 3rd US Offshore Wind 2018 Conference

The start of operations at the Block Island Wind Farm in December 2016 signaled the beginning of a commercial market for US offshore wind. With stakeholders now lining

up to grow the market, this white paper looks at the keys for US offshore finance success.

In association with the US Offshore Wind 2018 Conference. Click here to read more

Path to Financing The US Offshore Wind

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Financing US offshore windUS offshore wind may be able to use European financing models initially but will ultimately have to adapt to local conditions, experts have noted.

While the US market will likely be dominated by balance sheet and project financing, as has been the case in Europe, in America there are expectations that funding structures could also include instruments such as bonds and tax equity.

The latter, particularly, is expected to play a significant role in the development of US offshore wind.

In the US onshore market, says Roberto Simon, managing director and head of project and energy finance for Societe Generale Americas, “cost has come down a lot but unless there are regulatory changes as to how we dispatch energy, tax equity drives return.”

This is despite the US being the world’s second-largest market in terms of total installed wind capacity, after China, according to the Global Wind Energy Outlook 2016 published by the Global Wind Energy Council (GWEC).

Onshore wind has accounted for nearly 31% of new energy generation installed in the US in the last half decade, the GWEC says, but practically all this capacity has taken advantage of the country’s Production Tax Credit (PTC).

Proportion of new offshore wind capacity funded through project finance. Source: Green Giraffe.

The PTC has helped US onshore wind scale and cut costs, a pattern which is now expected to apply to offshore wind even though the credit will start to be phased down from 2019.

Bryan Martin, managing director of D.E. Shaw & Co and chairman of the board for Deepwater Wind, the developer of the Block Island project, says many states will increasingly look to offshore wind to replace aging thermal capacity.

“In many markets, offshore wind is the lowest cost replacement,” he says.

At the same time, though, a reliance on tax credits could increase the complexity of financing arrangements and hamper the early development of large US offshore wind projects.

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Nevertheless, observers believe the US offshore wind sector’s reliance on tax equity could decline over time, particularly as the industry scales and experienced European developers enter the market to help reduce costs in other areas.

“Over time, you’re going to see a natural decline in the cost to build these projects,” says Andrew Redinger, managing director and group head at KeyBanc Capital Markets. “Tax equity won’t be as needed.”

In fact, this trend has already found traction in Europe where offshore wind developers won auctions for zero subsidy projects, noted Ben Koenigsberg, partner at Norton Rose Fulbright. Ben added that “an important driver will be how quickly developers are permitted to seize upon the multiple opportunities to expand the offshore wind industry in the US”.

Who will fund US offshore, and on what terms?European players will be vital in scaling US offshore wind from its current 30 MW level to an estimated 800 MW a year by 2025.

FTI Consulting estimates the US market could install four-fifths of a gigawatt of offshore wind annually from the middle of the next decade, but Jerome Guillet, managing director of Green Giraffe, says European experience will play a key role in reaching this level.

“The financial markets are more sophisticated in the US,” he says, but activity “is likely to be led by European players in the early deals.”

Green Giraffe has been involved in financing half the offshore wind projects so far in Europe, and the financial advisory firm has seen an evolution in the European market over time. For example, the proportion of projects using project finance has grown, Guillet says.

In the US, he says, local factors will have a big influence on financing structures since “each state is going to have different rules.”

Besides European banks, he believes Japanese financial institutions could help fund early US projects, with the debt market playing a significant role in the underwriting construction risk.

Funding entity by project stage. Source: Green Giraffe.

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This could help the US offshore wind industry ramp up to around 1.4 GW of installed capacity by 2024, based on figures from MAKE Consulting.

At that point, offshore wind should be on track to deliver energy at a cost of $87 per MWh, including grid connection, by 2025, according to industry players Vattenfall, E.ON, Iberdrola, RWE, Siemens, MHI Vestas Offshore Wind, GE and Statoil (EY’s Renewable Country Attractiveness Index, May 2017).

Despite this, Guillet believes some sources of finance will remain hesitant in their approach to US offshore wind in the early stages.

For example, even though bond markets represent an important source of US funding, Guillet does not see them taking on construction risk as “these deals are not seen as investment-grade.”

Nevertheless, the overall outlook for US offshore wind project financing remains rosy. “Availability of funding will not be an issue,” Guillet predicts. “If you do it right you will get money.”

However, he adds:“The one thing that does need to be said is the standards in offshore wind finance have never dropped. If you’re trying to cut corners you will not find money at all. Your contractual structure will have an impact on whether your project is bankable.”

Designing a bankable insurance programEven if there is money to fund US offshore projects, insurers advisers say developers will have to plan carefully to achieve the best-value insurance cover.

With the US market likely to involve low-tenor contracts and innovations such as floating foundations, insurers will probably adopt a cautious approach to underwriting risk.

Foundations, particularly, will be a major focus, says Tom Sexton of Aon Risk Solutions, an insurance broker with 12 GW of offshore wind project experience. “The choice of foundation design, in some cases, can be more important than the choice of turbine,” he says.

The UK Carbon Trust estimates around 60% of US offshore wind resource could be in waters with a depth of more than 60m, which implies there is potential for up to 2,450 GW of floating foundation-based generation capacity.

Floating foundation technology is still in its infancy, with the world’s first commercial array, the Statoil Hywind II project, yet to be connected to the grid. But it is not the only US offshore wind farm component that insurers will likely be watching out for.

For example, says Sexton, there is “some major concern” among insurers over subsea cables.

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US offshore wind construction risks and corresponding insurance. Source: Aon.

These have traditionally been by far the greatest source of losses during the construction phase of offshore wind projects, typically accounting for around 90% of claims. More recently, the subsea cable claims proportion has dropped to around 70% during construction.

In a worrying development, though, failures in operational cables have spiked in the last 12 months. Since these kinds of failures prevent a plant from exporting energy, they have a big impact on project profitability.

The worry among insurance companies is that the recent outbreak of operational cable failures may be symptomatic of a deeper flaw. “We believe there may be a systemic failure in design,” Sexton says.

Other areas that developers will need to pay attention to include the robustness of the design to survive potential windstorm exposures, the availability of suitable vessels, installation contractor expertise, and the term and scope of manufacturer warranties, since most insurers expect these to pay out before insurance kicks in.

Finally, Sexton warns that the 25 or so insurers underwriting the offshore wind market are wary of high value, “catastrophic” events that have yet to occur in the industry. “An example of a major incident would be the total loss of an offshore substation either during installation or operation,” he says.

Such a loss, would amount to in excess of $200M, if the loss of revenue is taken into account, and“would change the insurance market overnight,” he says.

SECURE INVESTMENTS AND PARTNERSHIPS IN THE US

3RD ANNUAL

organized by in association with

SECURE INVESTMENTS AND PARTNERSHIPS IN THE US OFFSHORE WIND INDUSTRY BOOM

EXECUTIVE SPEAKERS CONFIRMED FOR #USOW18

Walter CruickshankActing Director

Bureau of Ocean Energy Management

Bryan MartinChairman of the Board Deepwater

WindManaging Director D.E. Shaw & Co.

Stephen PikeChief Executive Officer

Massachusetts Clean Energy Center

Mary Beth Tung

Director Maryland Energy Administration

Dr. Valerie ReedActing Director of the

Wind Energy Technologies Office

U.S. Department of Energy

Lars Thaaning PedersenCEO

Vineyard Wind

Gunnar GroeblerSVP Business Area

WindVattenfall

Stephen BullSVP, Wind and

CCSStatoil

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US OFFSHORE WIND DEVELOPMENT PIPELINE

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DEPLOYMENT SUPPLY CHAIN, INFRASTRUCTURE AND VESSEL REQUIREMENTS

COST REDUCTION TECHNOLOGY ROADMAP

NEW FOR 2018! COMMERCIALIZING FLOATING WIND TURBINES BREAKOUT SESSION

NEW FOR 2018! OPPORTUNITIES IN THE US OFFSHORE WIND SUPPLY CHAIN BREAKOUT SESSION

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The - Energy Central€¦ · Web view3rd AnnualUS Offshore Wind 2018 Conference & Expo Boston Park Plaza Hotel June 7-8Your gateway to investments & partnerships in the US offshore