Our latest report on global energy M&A trends makes it clear investors are committed to renewable energy, driven by market potential, improving economics, customer preference and corporate sustainability goals. But while investment in all renewables continues to increase in momentum, offshore wind is particularly gathering pace across the globe. What is driving the increased interest and how can investors make the most of these projects?
Around the world, financial sponsors and strategic investors are eyeing renewable assets, resulting in a significant pool of investment capital at play. An increasing amount of capital is making its way to offshore wind, where greenfield investment is increasing in many markets. As reported in EY’s Q1 issue of Power Transactions and Trends, major new offshore wind projects have been announced in Australia, Japan, China, Korea, India and the Netherlands. Meanwhile, the US offshore wind market is on the cusp of a tipping point as interest in offshore leases continues to grow.
The sharp rise in offshore wind investment is driven by a combination of factors:
As all indicators point to the expansion of offshore wind, now is the time for potential investors to consider how to participate in the value chain, either in project development, supply chain, logistics or financial sponsorship. Early offshore wind projects were financed by the balance sheet of utilities, but there has been increasing interest from financial institutions. Development of new offshore wind projects will provide opportunities for financial sponsors who typically enter a project either after a power purchase agreement is in place or after construction. The larger size of offshore wind projects compared to onshore will allow more capital to be deployed, but will also concentrate investor risk.
Those financial sponsors and corporates seeking opportunities in offshore wind development should consider these key factors:
Partner with experienced European players: Europe is the world’s most advanced region in offshore wind development, with a majority of installed capacity located in Northern Europe. The European supply chain has recognised this competitive advantage. Established European offshore wind developers have been proactive in expanding into new geographies including the US and Asia Pacific. Most have chosen to do so through local strategic partnerships offering opportunities to mitigate risk.
Understand the local market: A detailed understanding of local market conditions, the timing and risk around the procurement of offshore leases, interconnection and power purchase agreements and regulatory relationships will help reduce potential project delays and mitigate project risk. This is particularly important for a foreign company seeking investments in new markets.
Adapt financing structure and off-take agreements: A number of financing structures will support the development of offshore wind. The key is selecting the most appropriate model for each project. Whether the project is funded off-balance sheet or developed through project financing, local market conditions and risks must be considered. In Europe, awarding engineering, procurement, construction and installation (EPCI) contracts has helped limit financial risks. In a new geography where risks are less clear, it is unlikely EPCI contracts would provide price benefits as higher risks will initially be priced in. Another practice for financing offshore wind does not include an EPCI wrap and splits construction into several smaller packages of work. This has become more common practice as offshore wind projects are more modular than other large-scale renewables.
In terms of off-take, financiers will prefer a long-term power purchase agreement and may expect off-takers to take on the system imbalance risk associated with the variability of renewable energy production.
Marrying the best experience both locally and from overseas, and developing a financing structure that works in the local market, will provide bankable projects delivered on time and below cost. This, however, will only be achieved through time and experience in a market that continues to evolve.
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