* Two deals currently in the finance market
* Sponsors seek to transfer construction risk
* UK wind speeds at 180 year low
By Rod Morrison and Azadeh Sharafshahi
LONDON (Project Finance International) - Two projects in the
embryonic but fast growing offshore wind sector are currently
seeking debt finance. The sponsors, large European utilities,
want to transfer construction risk on the deals to the banks to
keep the financings off their balance sheets. A further test for
the financiers is the fact UK wind speeds have been at 180 year
record lows this year - raising concerns about the reliability
of wind as an energy source.
C-Power - in which RWE (RWEG.DE) and EDF (EDF.PA) are
involved - has put together a second 950m euros financing on its
325MW Thornton Bank scheme off Belgium while Centrica (CNA.L),
DONG [DONG.UL] and Siemens (SIEGn.DE) are out to banks on their
new 270MW £1bn Lincs deal off the UK.
Despite the risks, neither scheme has a construction
guarantee from the sponsors. And there is plenty of risk on
offshore deals. The Fluor (FLR.N) additional revenue claim on
its US$1.7bn Greater Gabbard construction contract now stands at
US$202m and could rise further. The 500MW UK scheme, being
developed by Scottish & Southern Energy (SSE.L) and RWE, had
been suffering from faulty monopiles. The scheme is being
financed solely on balance sheet. C-Power believes, as an
expansion project with an operating first phase, its
construction story is already well progressed. However, its
first phase was for just 30MW whereas the latest will be for a
further 295MW. The Centrica team is offering various financial
contingencies to cover its construction risk - up to £180m on
the £1bn plus scheme.
It's not windy
The deals are being launched as it has become clear 2010 has
been a bad year for UK wind speeds, perhaps the worse since
1821. Wind speeds clearly have a direct impact on energy MW
yields from wind.
A recent report from wind consultancy Garrad Hassan said UK
wind yields have dropped this year to perhaps a 1 in 15 year
event due to stable high pressure. Energy levels from wind
dropped 27.8% in the first quarter compared with the average and
18.3% in the second quarter - compared with a 5% drop in the
last quarter of 2009 and a 15.7% increase in the third quarter
of 2009. The North Atlantic Oscillation index has been measured
since 1821 and this correlates with the Garrad Hassan wind index
which itself been in existence for 15 years. The NAO index
numbers for the 4 months from December 2009 to March 2010 were
the most negative since 1821.
Unless something very odd is happening it is fair to assume
wind yields will continue to vary quarter by quarter. Debt and
equity financiers use probability models - P50 and P90 tests -
to make judgments on the wind yields over a period of time so
while low wind yields are not good, they can be factored into
The much bigger question, however, is for energy planners.
Relying on a variable source of energy creates problems in terms
of day-to-day security of power supply, particularly if wind
accounts a quarter of the country's power generation by 2030 as
planned in the UK. National Grid Company (NG.L) has already
started to build up its short term operating reserve (STOR)
programme to encourage the building of peaking power plants
which can be turned on very quickly, for short periods of time.
Seven banks have been mandated to finance the second C-Power
scheme - Dexia, KBC, SG, Rabobank, Commerzbank and ASN Bank, and
another bank that does not wish to be disclosed. In addition to
the commercial lenders, the European Investment Bank (EIB) and
two export credit agencies are involved - Denmark's Eksport
Kredit Fonden (EKF) and Germany's Euler Hermes. Commercial
banks are providing 500m euros in funding and 350m euros in risk
commitments. The contractors are the same as those involved in
the successful first phase. REpower Systems AG is providing the
turbines. Loan margins are said to be relatively low. The tenor
on the commercial loan is about eight years. C-Power concluded a
177m euros debt financing for the first 30MW phase in 2007.
The Lincs deal is a £1.045bn financing that includes £250m
to fund the transmission part of the scheme. The windfarm itself
is just 270MW, showing how expensive offshore wind currently is.
The 17-year loan is split into a £575m term loan, the £250m
transmission component, a £25m standby, a £150m letter of
credit, a £20m working capital facility and a £25m VAT facility.
The transmission element is expected to be sold and the debt
repaid early under the government's offshore transmission owner
(OFTO) programme. The risk profile is not as high on the
transmission as for the wind farm itself.
The wind farm construction contingencies are contained
within the financing plan. There is a £70m base case contingency
and a £60m risk contingency within the term loan. In addition,
the standby funds a further £50m split between debt and equity.
As a carrot to taking construction risk on this entirely new
project, the other project financing structuring aspects of the
scheme are fairly attractive from a banking point of view. The
debt service cover ratio is 1.55x and the deal is driven by
maintaining the ratio under Poyry forward looking scenarios.
Just over 90% of the income to the scheme is backed by power
purchase agreements and renewable obligation certificates (ROCs)
with Centrica and DONG. The equity on the deal is around 40%.
The EIB and EKF have been approached as potential funders,
either by providing direct loans or funding banks, or even the
EIB funding an EKF guaranteed portion. Low wind yields
Lower than expected wind speeds can be a global phenomenon in
the renewables market. In a recent note on FPL Energy American
Wind's US$250m of bond debt, rating agency Moody's referred to
the recent "very low wind years" in the US. However the bonds
kept their rating due the financial structural protections built
into the debt. In Europe, rating agency Fitch has downgraded the
350m euros of bonds issued by Breeze Finance twice this year on
a portfolio of German and French wind farms to below investment
grade due to lower than expected wind yields and some unbudgeted