Securing finance is a vital step for any project, but it is just one step.
We were reminded of this last month when utility E.On announced it had reached financial close on the £1.3 billion Rampion wind farm, which it is looking to build off the UK south coast.
E.On announced the 400-MW project after entering a partnership with the UK Green Investment Bank, which paid £236 million for an undisclosed stake. Offshore construction is due to begin in 2016 with completion scheduled for 2018.
This is clearly good news for the team behind the project, and there is every indication that things will proceed as planned. Even so, when projects like this reach financial close, there can be a sense that the job is done. In reality, things have only just begun.
Reaching financial close for an offshore wind farm in Europe is just not that big a challenge at present. If you are a known developer with a good plan and support from the government, then finding willing investors is relatively simple.
This may seem counterintuitive. Projects are getting larger and further from shore, and so the risks are increasing. This means that developers need to find more money to make projects happen.
And yet, more often than not, developers are in a position where they can choose between bidders. This is partly because there is such a wide range of ways that investors can get involved, and at different stages in the projects.
The scale of the projects may mean that balance sheet financing does not work, but there are other funding mechanisms that have stepped in, predominantly project finance. This is the result of gradual evolution in the sector that will continue in coming years.
It is a good position to be in, and means that reaching financial close in Europe is not the huge milestone it once was. Investors are pretty much falling over each other to lend to developers.
That is not to say financial close is not important. We can see just how important it is in the failure of the 468-MW U.S. Cape Wind project. It couldn’t reach financial close by the end of 2014, and gave National Grid and NStar the chance to walk away from power deals.
It was always going to be tough for Cape Wind Associates to take a huge scheme into a completely untested market, where a supply chain for offshore wind farms does not exist. But we have not seen a European scheme fall apart in the same way as Cape Wind. Over here, the big funding challenge does not come from financial markets, but governments.
In UK waters, for instance, it is still vital for planned offshore wind farms to gain support under the government’s Contracts for Difference or Renewables Obligation regimes. This gives project teams the confidence that they will be able to sell their energy for fixed prices.
For Rampion, that support is set to come from the Renewables Obligation. That means the money is all sorted. Now onto the next step.
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