August 27, 2010 / 11:25 AM / 7 years ago

PFI - Offshore deals tests banks as wind drops

* 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 financial models.

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 construction costs.

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