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What Developers Need to Know about US Offshore Wind Project Financing

Accessing prime sources of finance is going to be an important play in the burgeoning US Offshore Wind market. New Energy Update has been researching this sector to deliver valuable information to developers, finance and legal specialists.

Bryan Martin, chairman of Deepwater Wind prior to its sale to Ørsted in 2018, said: “The US market is fundamentally different in a number of ways. When one looks at the role of an owner in the US, it’s very different than in Europe.”

The US has perhaps the most sophisticated financing market in the world with large numbers of investors both institutional and individual, and because this market is mature, there could be plenty of financing opportunities for new offshore wind projects. In the beginning this is likely to be bank financing and tax equity, as offshore renewables are perceived as risky, but as arrays start delivering power, refinancing using bonds is possible.

The only commercial US wind farm to date, Block Island, was was funded through a $290 million project financing package provided by Société Générale of France, and KeyBank National Association of Cleveland, Ohio. The financing from these two sources was in addition to more than $70 million in equity funding provided by Deepwater Wind’s owners.

The Essentials of Offshore wind projects

These come down to three points of importance:

Land: What onshore and offshore land rights are needed to construct the turbines and connect them to the grid?  Have all those rights been obtained or are some still being negotiated?  If onshore rights are required, how will they be obtained in a timely manner?

Consents: Given that offshore wind project development necessarily takes time it is not unusual to find that land rights or consents are not in the project company's name and need to be transferred (often backed by appropriate credit support) or that the requisite consents need to be changed because the precise layout of the site has varied, or that more advanced technology is available, or that the capacity and number of turbines has been modified.

Appeals process: With regard to consents, have all necessary consents been obtained and have all statutory appeal periods expired?

The Contracting Process

As offshore wind turbines consist of many components it is unusual for there to be one supplier so multiple contracts in a complex supply chain:

  • turbine supply and installation
  • foundations
  • offshore platforms
  • inter-array cabling;
  • main transmission cable
  • onshore works.

Subsidies and Tax Credits

There is a complex tangle of federal, state, and local subsidies, which means that each project may vary, depending on which state it is based in. “The most important subsidies for renewables are federal investment tax credits and production tax credits for solar and wind, and state renewable portfolio standards,” said Nicholas Steckler, an analyst at Bloomberg New Energy Finance.  The renewable energy tax breaks, which allows developers to take 30% off their projects are due to come to an end in 2022. It will be interesting to see if the US or state governments step into the breach to keep renewable rollout rolling forward.

This is important because the most progressive states, like New York and California have legal requirements for the percentage of their electricity that has to come from renewable sources. The latter two are aiming for 50% by 2030. Another progressive state, Vermont, has a target of 75% by 2032.  To hit those targets they will need a mix of different power sources, which may well include offshore wind, so they will have to create incentives for producers. Thirteen states, however, have no targets.

Risk Factors

The key issue in ROI is the variability of wind. Although there are other risk factors in complex, offshore projects, the financial viability depends on whether the projected amount of electricity is generated. The energy yield assessment (EYA) will be one of the most important pieces of technical due diligence.  The project sponsors will have carried out their own EYA during the development phase and the lenders' technical advisor (LTA) will need to validate that EYA.  The sponsors' EYA will be the subject of careful scrutiny: it may be that there will be some disagreement as to the data or methodologies used which will need to be resolved between the sponsors and the LTA.

Conclusion

As the US offshore wind market develops and matures there will be a wide variety of financing opportunities, so this will be an important part of the discussions at the upcoming US Annual Offshore Wind Conference on June 10-11 in Boston.

Click here to read more about the Boston US Offshore Wind 2019 Conference and Exhibition. 

By Julian Jackson


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