As floating offshore wind projects move from the demonstration to the commercial phase, questions need to be asked about how they will be financed, as Martin Guzzetti* explains
Until now, utilities and technology providers may have been willing to bear the cost of demonstration projects for floating offshore wind on their balance sheets but will want third-party funding for their projects in future to reduce risk and to get external validation of the technology. It stands to reason that lenders and investors will work from what they know (offshore wind using bottom-fixed foundations) and try to understand how different floating offshore wind is from a risk perspective.
The good news is that bottom-fixed offshore wind is something that lenders and investors are comfortable with, and the risk analysis with respect to items such as turbine technology, regulatory context and price regimes will be based on what has already been done in the bottom-fixed sector and will not, for well-structured projects, raise new issues. The focus will therefore move to foundation technology, raising some questions.
An obvious starter is, does the technology work? Do the foundations provide a stable enough base for wind turbines in all sea conditions, and can we be sure that they don’t create unexpected stresses on the turbine? Do engineers understand the combined effects of waves and wind on the structure of a turbine?
Specific due diligence and transparency will be required on components that are new to the financial community, such as the interaction between the operation of the turbine and the motion of the substructure, the export and inter-array cabling, the dis/connectivity of cables and the mooring lines (for maintenance purposes) and issues such as the type of ballast system used (active or passive) and the use of a floating offshore substation (which would be a first for the offshore wind industry).
A second question would focus on cost and feasibility of construction. Is it possible to build these huge structures in the numbers required and the timescales contemplated? Is the onshore infrastructure available to do that?
Other questions will be raised about the operations and maintenance (O&M) strategy for floating offshore windfarms. How will maintenance on floating turbines in deep waters be carried out? Is it do-able, or cost-effective, to bring turbines back to shore to repair them? And what about maintenance of foundations, mooring systems and power cables?
If the answers to these technical questions are satisfactory, questions will then move to contractual responsibility of the parties involved. Can the responsible party be identified if a problem occurs, or is there a risk of dispute between the turbine supplier and the foundation provider? Are foundation suppliers strong enough, financially, to provide the necessary guarantees backing their technology?
Bottom-fixed offshore wind forced financiers to deal with multicontract construction and to understand the corresponding interface risks. They have done so, but are always very cautious about it. With floating offshore wind, we are once again in a multicontract situation, but with a new set of interfaces and risks that financiers will need to be comfortable with. In addition to turbine manufacturers and marine civil contractors, there will be a new, critical party involved in the form of a shipyard and/or a floating technology provider.
In particular, the design of the floating foundation must ensure that the wind turbine generator remains within its operational envelope. Full co-operation from the turbine supplier will be required to delineate the integrated design requirements and to confirm acceptability of the substructure’s performance. Not only must the responsibility of each party be clearly defined, but financiers will also want to be comfortable that the operational envelope can be measured in a way that is acceptable – and binding – for all parties if problems arise. They will also need to know that the consequences – and potential cost – of moving outside the agreed parameters are understood, whether it is ‘just’ lost production or if it precludes the need for repairs to any part of the equipment.
From a contractual point of view, design certification by a reputable classification body is an obvious ‘must have’, but that will not eliminate the need for a detailed interface matrix for the operational phase of a floating windfarm. Availability guarantees for the turbine and the substructure, together with the power curve warranty, will be the ‘hot items’ to negotiate, as will the commitments of the technology provider.
Conversely, risk allocation during construction is likely to be more straightforward than with bottom-fixed foundations, because most of the construction work can be carried out ashore where there is limited weather risk. Floating offshore wind will, in many cases, also have a more straightforward installation process than that for bottom-fixed foundations with, in many cases, the structures being towed to the location rather than assembled there.
Well-known principles of contractual strategy, which have facilitated project financing for bottom-fixed projects, can also be applied to floating offshore wind. Like bottom-fixed windfarms, the contracting strategy for floating offshore wind will see the scope of work broken down into well-defined lots, priced on the basis of fixed lump-sum amounts; the inclusion of delay damages and delay schedule rates into contracts, in order to protect developer and contractor against possible underperformance; and the implementation of absolute liability caps for contractors that are high enough to compensate for losses resulting from an employer being sued.
The turbine availability track record of floating offshore wind technology and strength of industrial counterparties will be important to investors and lenders, and technology that has been used successfully in demonstration projects that have a good track record is more likely to be financed on a non-recourse basis. Ample contingency budgets, both for the construction and maintenance phases, together with a comprehensive insurance package will be essential components of the contractual and financing package.
One aspect of floating offshore wind that will differ from bottom-fixed windfarms is the very different political context. Support for renewables in countries such as Taiwan and the US is relatively untested. Some projects have faced obstacles such as challenges to permits or, as in Spain, retroactive changes to pricing regimes.
Financiers will want to be comfortable with the specific regimes put in place for floating offshore wind and be reassured that such regimes are sustainable. This means that tariffs must be reasonable – not too different from those for bottom-fixed offshore windfarms and other renewable energy technology – and they will need to feel that there is sufficient strategic rationale to develop the technology in a country and demonstrated public support for doing so.
Private sector financiers will probably want to see multilateral financing institutions (such as the European Investment Bank, export credit agencies or public development banks) involved in early projects to provide ‘political cover’ to a certain extent.
If all of this can be resolved via technical and legal due diligence, it is likely that the commercial terms of the first deals for floating offshore wind will be guided by the traditional offshore wind market precedents but end up, at least initially, being rather more conservative. One can expect lower leverage (with 50:50 debt to equity ratios rather than the 70:30 that is common for bottom-fixed windfarms, for example) and higher debt pricing (with probably a 50–100 bps premium on margins above traditional offshore).
Prior to the first commercial deal, project developers and technical advisers must make effort and take the time to educate the financial community so that investors and lenders understand the risks associated with floating offshore wind technology and are comfortable that the risks can be managed.
Funding for early commercial-scale floating offshore windfarms will be subject to strict conditions. This means that the cost base of early projects may not be the most competitive. However, early deals will nevertheless be vital for the industry and will enable floating offshore windfarms to build up a track record that will reassure investors and enable subsequent deals to be done on more favourable terms.
Martin Guzzetti is a financial analyst and contracting adviser at Green Giraffe. He joined the renewable energy financial advisers in 2016 and has provided contracting advice to the developer of a pilot floating windfarm in France and collaborated with a floating technology provider in regard to its project developments in Scotland. Previously, he worked in parallel on a master thesis in risk assessment of floating offshore windfarms and within Green Giraffe as a contracting adviser to offshore wind projects. Before joining Green Giraffe, he gained international experience in design and construction management of major infrastructure projects, including nearshore marine civil works.
Mr Guzzetti's blog was originally posted on Green Giraffe's website and edited/adapted for publication in Offshore Wind Journal