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ROI and funding issues hampers European offshore wind

The offshore wind industry has moved from a niche market to a maturing industry, however securing funding and low returns on investment are major issues for players in this sector, according to KPMG.

Over three quarters of respondents to the report Offshore Wind in Europe 2010 ranked debt refinancing as the key issue for the sector, demonstrating how the economic crisis has had an impact on the sector since 2007, when debt refinancing was ranked the 6th most important issue according to respondents.

As a result of the economic crisis, 76% of respondents felt that the risk premium for offshore wind projects were high or significant, and had considerably restricted the financing options available to companies, making recovery in the financial markets vital if investors are to move forward on projects currently in the pipeline, KPMG says.

However, 38% of respondents are not expecting the normalisation of financial markets to take place until at least 2012.

The report reveals that commercial lenders active in financing offshore wind projects are not able to fund the construction of projects as their credit committees will not accept the high construction and technology risks, without robust support either from sponsors or other external guarantors.

Annette Schmitt, Energy Director at KPMG in Frankfurt, says: “The offshore wind industry is maturing and the issues that we saw three years ago around the technical and construction issues hampering the sector have now been superseded in the perception of the survey participants with issues around funding and return on investment.

“The financial crisis has had a huge impact on the sector where lenders which were active in the market have now significantly reduced their lending activities and are not yet ready to finance projects without extensive funding support from government and public funding institutions such as export credit agencies.

“Just as with the equity markets, the offshore wind markets across Europe are now competing against each other for available debt financing. The fight for funding to get projects off the ground will certainly have an impact on national and European climate objectives.”

Offshore wind growth across Europe

The report highlights that since 2007, offshore wind growth has taken place almost exclusively in Denmark (ranked second fastest for growth) and the Netherlands, with the UK leading the pack with the largest expansion in the offshore wind market.

The report concludes that with around half of Europe’s installed offshore wind capacity (as of May 2010); the UK is now the global leader in offshore wind.

With the UK Round 3 portfolio currently at a total size of 32 GW and ongoing tweaks to its revenue support mechanism, the report highlights how the UK Government has set the stage for the comprehensive expansion of the offshore wind sector with other European countries being perceived as less receptive to the industry’s needs.

The report concludes that as at summer 2010, the market price-based compensation scheme for offshore wind in the UK is the most financially attractive within Europe.

Adrian Scholtz, Energy Director at KPMG in the UK, says: “The offshore wind market is truly a North West European market, where any changes in one country will directly impact the investments being made in other countries.

“The keenly anticipated Round 3 projects in the UK will put extra pressure on the limited funding and supply chain available across Europe to deliver projects. Unless the other European governments and regulators review the incentives that they currently offer for development and construction of OWPs, they could lose out as investors, lender, manufacturers and skilled labour are attracted to the favourable conditions offered in the UK.

“Much of the development of the offshore wind market in the UK has been funded by larger European utilities utilising balance sheet funding and external support from the European Investment Bank. However, utility capital requirements are set to rise significantly over the next few years and they face decreasing margins from energy sales. Alternative funding sources will be required to recycle capital, enabling the leading market participants to meet their ambitious offshore wind expansion plans.”

Return on investments remain low

In cooperation with the German Offshore Wind Energy Foundation, KPMG Frankfurt has had access to the business cases for 7 offshore wind projects close to construction readiness in Germany to analyse the financial viability of offshore wind projects in Germany on the basis of real data.

The financial analysis found that a model offshore wind park in Germany that is fully equity financed will provide a post tax project return of 7.1%.

Scholtz concludes: “Many of Germany’s long list of development projects are construction ready. They are however characterised by challenging conditions, in particular deep waters and significant distance to shore.

“A 7% post tax project return is insufficient to attract the necessary capital to achieve Germany’s ambitious offshore wind targets. With other forms of renewable energy offering lower risks yet higher returns, policy makers will need to review the present regulatory framework for offshore wind in order to ensure that Germany achieves its renewables targets and captures its share of the offshore wind industry value chain.”

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