Large-scale offshore wind development is central to Europe’s ambitious 2020 renewables targets, and projects are becoming ever larger. Germany wants to bring 25,000MW of offshore capacity online by 2030 from a current installed base of 520MW. The Netherlands said in September that it wants 4,450MW to come online by 2023, from a 250MW current installed base, and the UK plans to reach 18,000MW by 2030, from a market-leading base of 3,600GW.

But project financing activity remains subdued. Germany and the UK have each produced one financing – Butendiek and Masdar’s stake in the London Array, respectively – in 2013 and one or two more projects may close before the year is out.

German developer wpd closed on 288MW Butendiek in February 2013, making it the first German offshore project to reach the finish line in almost 18 months. Butendiek’s Eu1.42 billion ($1.96 billion) financing featured a robust bank club and, following an arduous effort to line up equity that started 2011, solid pension fund participation in the project’s equity. The debt featured two loans from the European Investment Bank, of Eu150 million and Eu300 million, with EKF guaranteeing the larger of the two.

A club of nine European banks provided Eu487 million, with the debt reaching a 10.5-year tenor, including construction, and pricing of at least 300bp over Euribor. According to offshore advisory firm Green Giraffe Energy Bankers, in the current 2013 market typical debt/equity ratios stand at 70/30, up from an average 65/35 in 2012, while margins in 2013 range between 275bp and 375bp.

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Danish pension funds Industriens Pension and PKA each provided 22.5% of Butendiek’s Eu480 million equity total, but the deal did not feature any institutional debt. PensionDanmark made a Eu35 million EKF-guaranteed commitment to Northwind in 2012, the first time a pension fund provided debt, and wrote a similar ticket to the banks.

“For Butendiek the Danish pension funds committed themselves at an early stage, taking on construction risk, which was not necessarily a surprise but a development,” says Christoph Tomas, head of project, asset and export finance for Germany at SEB. “The expectation in general is that a lot of these large projects will need to be refinanced once operational and the institutional investors may well enter then.”

US private equity firm Blackstone bought an 80% stake in the Eu1.3 billion Meerwind project offshore Germany before construction started in 2008. “As the market matures costs come down, supply contract structures simplify, people understand the interface and integration commissioning risks more closely, and more organisations are prepared to wrap or underwrite delivery and performance of aspects of offshore wind farms or cables,” says Andrew Briggs, partner at Hogan Lovells. “The more the delivery can be wrapped, the more it looks like a traditional project finance structure rather than a utility corporate balance sheet structure, therefore the more suitable it is to financial investors rather than purely commercial generators. The way the industry is moving is supporting new sources of capital.”

Developer Windreich has been marketing its 400MW MEG 1 project offshore Germany to institutional investors, although Windreich filed for insolvency in September. The bankruptcy means that some of that effort’s momentum has dissipated, though Windreich insists that the process continues. A consultant familiar with the MEG 1 says that the project is sound, but will not come to market until its equity is in place. Windreich had approached its own financial adviser Macquarie Capital for an equity contribution. Canadian developer Northland Power had been considering MEG 1, but is no longer looking at the deal.

Asian and Canadian equity steps in

Masdar’s £266 million ($430 million) financing for its 20% stake in the 600MW London Array phase 1 closed in October. Masdar, E.ON and Dong brought the project online in April this year after financing construction on-balance sheet. Masdar, a subsidiary of the UAE state-owned Mubadala, had wanted to project finance its share of construction, but struggled to assemble a bankable deal before completion. The Green Investment Bank (GIB), BTMU and KfW took large tickets on the eventual successful financing, whilst SMBC and Siemens Bank also participated. The tenor was 12 years and pricing about 300bp over Libor.

Until recently, European banks dominated offshore. BTMU has been the only active Japanese lender willing to make substantial construction debt commitments, participating in Global Tech 1 in 2011, followed by Meerwind and Lincs in 2012. Other Japanese lenders have participated in acquisition financings for operational assets. In 2012 Mizuho and SMBC provided £158 million of non-recourse, NEXI-insured financing in support of Marubeni’s £200 million acquisition of a 49.9% stake in Dong’s Gunfleet Sands. Gunfleet Sands has been in operation off the Essex coast since 2010. JBIC is now looking at a UK offshore project, which makes it a significant new market entrant.

The growing presence of Japanese equity in UK wind includes Marubeni’s purchase of a 25% stake in Mainstream Renewable Power for Eu100 million. And in July, Sumitomo Corporation acquired stakes in Parkwind’s operational Belwind 1 and Northwind projects (39% and 33.3% respectively) in Belgium, Sumitomo’s first investment in offshore anywhere.

Canada’s Northland Power made its first investment in offshore in August, in the 600MW Gemini plant offshore the Netherlands. Gemini is a mammoth Eu2.8 billion deal and could be the next European project to close. Northland Power acquired its 55% stake from developer Typhoon, which had been struggling to pin down equity. Siemens, Van Oord, HVC and Typhoon are the other equity providers.

According to Northland, it had been eyeing up the European offshore sector for about a year and invested because “the sector has de-risked, after hard and expensive lessons, emerging with the ability to offer good returns.”

The sponsors have been looking for equity and mezzanine debt of Eu500 million. The EIB approved a Eu500 million loan in December 2012 and ECAs, active commercial bank lenders and, for the first time, Canadian banks, are also likely to participate. The project benefits from a 15-year SDE subsidy, confirmed in 2010. The Dutch regime is considered stable, and Siemens is supplying turbines, so the project should get a solid reception.

Public financial institutions

In 2012 and 2013, all of the European projects to close – Lincs (UK), Northwind (Belgium), Gunfleet Sands (UK) and Butendiek (Germany) – featured export credit or development lenders. Their presence does not necessarily ensure competitive terms, but their large tickets fill out debt requirements. The EIB accounts for half of all offshore project financing. EKF participates wherever Danish content – typically Siemens or Vestas turbines – is involved. Likewise development bank KfW’s offshore financing programme has been vital in Germany according to Christian Knuetel, a partner at Hogan Lovells.

The UK government has noticed how crucial development finance has been to offshore development, and offshore is a focus of the Green Investment Bank, which was established in November 2012 with £3 billion at its disposal. It provided £45 million of the £244 million refinancing of PGGM and Ampere’s 24.8% stake in Walney 1 in January 2013, and has also been active in financings for waste-to-energy and biomass plants.

In May the GIB signed a memorandum of understanding with Masdar to co-invest as much as £1 billion in clean energy projects. Given Masdar’s long struggle to finance its share of the London Array, it was no surprise when the GIB wrote a £58.6 million ticket on that financing. The refinancing freed up capital for Masdar to recycle in new projects elsewhere in the UK.

The UK’s infrastructure guarantees scheme may help developers. As Project Finance was going to press, Mainstream Renewable Power and Marubeni’s 450MW £1.4 billion Neart na Gaoithe project was one of 15 infrastructure projects to have been prequalified under the scheme. The project is scheduled to be completed in 2016, and should meet with a strong response from lenders.

Is Germany wavering?

German offshore had a banner year in 2011, with Borkum West II, Global Tech 1, Meerwind and Baltic 1 closing, and Butendiek followed in February 2013. But Butendiek is unlikely to lead to a recovery in offshore volumes, despite Germany’s well-publicised nuclear phase-out.

At the end of January, in a surprise move, the German environment minister said he would draft legislation that caps subsidies to renewable generators, citing a sharp increase in electricity bills. No legislation appeared before the 22 September 2013 federal election however, and Germany’s latest coalition has yet to shape up. With the likelihood of MEG 1 closing soon receding, Germany is unlikely to see any offshore financings in the next six months.

The uncertainty over the German offshore subsidy regime is especially disappointing because Germnay appeared to be putting the last source of uncertainty – transmission planning – behind it.

TenneT, which owns Dutch and German transmission infrastructure, had protested its obligation to connect all German offshore projects at commercial operations, or else be liable for revenue damages. In October Trianel, the German group of municipal utilities, sued TenneT over losses of Eu50 million at its Borkum West wind farm in 2012.

Hogan Lovells’ Knuetel says: “For generators there was legal uncertainty over how enforceable their damages claims were. Liability issues significantly delayed the establishment of connections and motivated TenneT not to connect wind farms until the German government changed the law and released them from potentially unlimited liabilities.” The law’s passing created more certainty, establishing that the transmission operator bears limited liability and can pass-through damages from delays to its customers.

Grid connection issues have mostly cleared up from a bankability perspective. “There have been some open issues regarding timing and when compensation takes place, and still there are discussions here and there.” says SEB’s Tomas. “But the concept as such is satisfactory as provides stability.” But aside from MEG 1, RWE’s Innogy Nordsee 1, which was permitted in April and may receive Eu500 million from the EIB, is the only deal near market.

UK looks to push the envelope

The UK is in transition from its renewable obligation certificate regime to the contracts for difference (CfD) that will arrive in 2017 with Electricity Market Reform. The draft strike price for offshore wind that the UK’s Department of Energy and Climate Change published in June is £155 per MWh, falling steadily to £135 per MWh by 2018/19, and receives the second-highest level of support after tidal and marine energy.

The new tariffs will be guaranteed for 15 years, as opposed to ROCs, which were grandfathered for 20 years. “Whether it is material depends on where we get with capital expenditure,” says John Deacon, partner at Hogan Lovells. “The intention behind the tariff changes, and the general expectation, is that capital expenditure  will come down....If the industry can get costs down by, say, 20-25% going forward then projects should remain viable on a 15-year tariff.” Green Giraffe estimates costs of between Eu3 million and Eu4 million per MW.