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Financing Wind Ambitions: Offshore Wind Parks

Wind power is currently a highly relevant energy source, especially offshore wind. Within five years, offshore wind power plants are expected to account for approximately 20 percent of the entire wind-power market. Nevertheless, financing offshore wind projects faces an enormous challenge mainly because offshore wind projects are very capital intensive and, in the current economic environment, many financial players are reluctant to take risks for long-term projects.

The potential of offshore wind for green-energy generation is undeniable. According to a study by the European Environmental Agency (EEA) released in November 2011, the offshore wind capacity in Europe will increase 17-fold by 2020. In addition, the European Wind Energy Association (EWEA) released a report at its annual offshore wind conference in November 2011 that states that more than 141 GW of offshore wind energy capacity has been built, is under construction, has been approved or is being planned in the EU. At present, Europe has 4 GW of installed capacity – the current expected capacity of 141 GW could, once realized, provide more than 13 percent of Europe’s electricity production.

However, the ambitious sector faces an important challenge regarding the financing of offshore wind farms. As the global economy flattens, comprehensive and affordable financial solutions are becoming an increasingly critical precondition for the completion of wind projects. The EWEA report, for example, points out that financing is one of the most significant challenges to achieve rapid growth in the European offshore wind sector. As a result, large financial backing of the projects is highly needed.

But what are the exact difficulties associated with financing offshore wind parks?

First, offshore wind farms are highly capital intensive. New investments must be made in turbine foundations, electrical equipment, grid connection and installation. Furthermore, offshore turbines need to meet specific technological requirements arising from the hostile operating conditions they face at sea. Moreover, rising prices for copper and steel, which have climbed sharply since 2009, account for high investment and operating costs for offshore wind parks. Offshore wind is around 50% more expensive than onshore wind due to these special requirements.

The high capital costs cause many financial players to shy away from such projects. Under the looming financial crisis, banks are reluctant to provide large-ticket loans and tend to keep long-term projects at arm’s length. In such insecure times, risk-sharing gains further importance. Today, large infrastructure projects are mostly realized by club deals involving several financial players. Therefore, a major challenge is to identify and decide on the right financial parties. Moreover, a substantial effort is required to reach a balance that addresses the mutual interests of the different partners. It is fair to say that the major complication of such projects involves lining up the financial partners rather than identifying the appropriate technology to be used in off-shore wind farms. In such situations, competitive key players are needed to contribute the financial expertise, experience and a reliable network in the financial sphere.

Another uncertain feature of the offshore wind sector is the changing political environment. In general, most governments have laid a political foundation to support renewable-energy projects, including offshore wind farms that consist of tax credits or subsidies. However, this base is often influenced by political debates, compromises and even the personnel changes among the political leaders. Legal conditions may change, funding programs can be quite short, and developments are rather unpredictable.

There are important challenges lying ahead for the offshore wind sector. Although the prospects of wind power, especially offshore, are very bright, the tapping of its potential relies to a great extent on tailor-made financing solutions and experienced financial players as key enablers.

Roland W. Chalons-Browne is President and CEO of  Siemens Financial Services GmbH; Munich. Based in Munich, he is responsible for leading Siemens Financial Services business worldwide. Roland has been CEO of Siemens Financial Services Inc. in the U.S. since October 2005. Based in Iselin, New Jersey, he was responsible for leading commercial finance and leasing business across North America. Prior to joining Siemens, Roland served as Managing Director of WestLB in the Americas from 1989 through 2004, including securitizations of future cash flows, project and structured finance deals, and transactions in natural resources. The Financial Services unit of Siemens is an international provider of financial solutions in the business-to-business area. The international network of financial companies coordinated by Siemens Financial Services GmbH in Munich, comprises more than 2,500 employees worldwide. Financial Services supports Siemens as well as other companies, with a particular focus on the Sectors of Energy, Industry and Healthcare. The unit finances infrastructure, equipment and working capital and acts as an expert manager of financial risks within Siemens. End of June 2011 the total assets amounted to EUR 12.8 billion. For more information see: www.siemens.com/finance.

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