The investment potential for offshore wind through this decade is immense, says Standard & Poor’s in a new report Strong Growth Of Global Offshore Wind Power Provides Big Opportunities For Project Finance (available as a complimentary download via the Alacra Store).
Many countries expect wind power to account for a large share of their renewable-energy investment to meet energy and climate goals. The new capacity by 2020 envisioned by the U.K. (16 gigawatts [GW]) and Germany (10 GW) alone would require about €91 billion ($117 billion) to €104 billion ($133 billion). China’s current five-year plan envisioning 30 GW of offshore capacity by 2020 would involve even more investment.
Most European offshore wind projects have to date been sponsored by utilities and funded on their balance sheets. Only utilities could put together funding on reasonable terms to pay for these capital-intensive projects. In addition, utilities are motivated by strategic objectives and regulatory incentives.
After construction and commissioning are complete, some utilities sell the project or part of it to long-term investors. But some rated utilities have limited headroom at their current ratings to accommodate the increase in financial risk inherent in the substantial upfront investments required. This will likely increase the incentive for utilities to develop the projects off their balance sheets through single-asset project financing and shared equity stakes with infrastructure or financial investors.
We think utility funding will remain the predominant source for projects in the early stages of development for the next few years, then gradually decline as offshore wind technology evolves and investors are better able to quantify construction and commissioning risks.
Despite the good match of long-term assets with institutional investors’ long-term investment horizons, investors have so far shown little interest in these projects until they have established operations and are generating a profit. Institutional investors are typically reluctant to assume construction risk and instead focus on yield. But this is beginning to change. In 2008, a private investor group led by Blackstone Group L.P. began to develop the 288 MW Meerwind project in Germany, the first offshore wind project to be sponsored privately. This €1.2 billion project is in construction and funded with private equity and debt.
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