A whole new approach to financing large scale wind power development was forced into existence by the financial crisis of 2008. In the intervening years innovative finance models have been tested and steadily refined. The result is a new level of investor confidence in the sector.

In the aftermath of the 2008 financial crisis, raising debt for large wind power projects was akin to fishing in a dry pond. Banks that before the crisis had fallen over themselves to attract wind industry custom, offering loans to cover up to 85% of a wind project’s cost, had closed their doors overnight.

Stuck in a decidedly dry place, wind project developers and their financial backers were forced to think creatively. Innovative financing became the new catch-phrase. Eight years later, what was once innovative is becoming the norm. A new financial sophistication has come to the sector, bringing with it lower financing costs.

Much of the innovation was initiated by investors looking to get into the fledgling offshore wind business. The sheer scale of offshore projects made them an attractive money-making opportunity for financial investors and the participation of the utility sector provided a degree of confidence.

Partnership model

DONG Energy’s partnership model was an early example of the new trend. It was set up by Denmark’s public-privately owned national utility specifically to raise finance for large offshore wind projects. “Basically, the idea was to optimise our value creation by using our own capital to build projects while inviting partners to invest in the projects. Developing the partnership model was an integrated part of our focus on offshore wind,” says Ole Kjems Sørensen, senior vice president and responsible for partnerships at DONG Energy. The utility has since developed and built more offshore wind capacity than any other company and retains ownership stakes in much of it.

The first partnership invitation extended by DONG was to Danish pension funds. Typically, pension funds have long-term obligations and the attractions of a 20-25 year investment providing steady, if unspectacular, returns were obvious.

“It was just a perfect match from the beginning and the pension funds have certainly contributed to the development of the partnership model,” says Kjems Sørensen.

Freeing up capital

One of the aims of the partnership model is to allow DONG Energy to recycle its invested capital.

“A new partner brings fresh capital, which allows us to pull capital out of the project and channel it into a new project. Without the possibility of recycling capital, our capital need would be much, much larger,” says Kjems Sørensen, adding that a key element of the partnership model is DONG’s promise to stay on as a service provider for the entire project lifetime. To date, DONG Energy has raised more than €5.7 billion in capital through the divestment of partnership interests and has executed ten partnerships with financial and institutional investors.

One of the several companies inspired by DONG Energy’s partnership model is Burmeister & Wain Scandinavian Contractor (BWSC), a provider of power plant solutions globally.

“We saw how the DONG model worked and we started to develop a similar model for biomass-fired power plant, with PensionDanmark supplying the capital. The strength of this model is built on close cooperation. We can have the projects de facto approved at a very early stage in the process and we do not have the uncertainty and risk of a partner pulling out at the last moment. We can focus entirely on bringing the quality and profitability of the project to a high level,” says BWSC boss Anders Heine Jensen.

Beyond bonds

PensionDanmark, aside from its involvement with DONG Energy, also became involved in wind with Copenhagen Infrastructure Partners (CIP), a fund managed by five former DONG Energy employees. They had worked together for a decade prior to CIP and between them the team had been responsible for construction and operation of some of Europe’s largest energy projects.

Established in 2012, CIP was founded as a direct response to the need for more innovation in renewable energy financing. As the reasons for the financial crisis unfolded, returns on fixed income investments took a nosedive. Bonds went rapidly out of favour. Earnings on them were low and are likely to remain that way for years, says PensionDanmark’s Torben Möger Pedersen.

“We needed a new investment possibility, one that would provide a stable return — higher than bonds but without the volatility related to investing in the stock market,” he says and adds that PensionDanmark looks for returns of 5-10% on energy infrastructure investments.

More than money managers

Unlike asset management partnerships that traditionally rely on broad business skills, CIP’s strength lies in the team’s specialised experience at the front end of power plant development. Particularly attractive to Möger Pedersen is CIP’s wide experience of technical engineering as well as its understanding of the economic and legal aspects of power plant development.

“This enables the team to enter large energy projects at a very early stage. They can design the projects, put together a financial plan and monitor developments, both during construction and the later operational phase,” he says. To secure attractive returns and be paid appropriately for the risk undertaken, he believes investors should get involved at the project development stage and take on construction risk.

In arguing his case, Möger Pedersen points out that competition among investors for stakes in completed and well-tested, operating wind farms is tough, pushing down rates of return for late entrants.

Spreading risk

All investments carry some risk and renewable energy is no exception. PensionDanmark has invested in 2500 MW of green power capacity, spread over a number of different offshore projects and biomass-fired power stations.

“Spreading your risks is one thing you can do. The other thing is to understand the risks in the projects and when putting together the final transaction, making sure that risks are placed with the partner best equipped to carry them,” says Möger Pedersen.

A performance guarantee of five to eight years on the technology should be carried by the technology supplier, in the case of wind the wind turbine manufacturer.

BWSC’s Anders Heine Jensen believes that future financing models for large scale energy projects will follow the CIP example. “I believe that special funds like Copenhagen Infrastructure Partners are the future and I think many firms will copy this model, though it requires competencies and strong expertise to create value for the owners. In order to identify the right investments, you really need to gather the expertise with the right fund managers,” he says.

Möger Pedersen agrees. “The scarce resource here is not capital, but competency. The reason why CIP is in demand as a partner on energy projects is that it provides intelligent capital. Those with only capital will not provide the same value. We have a unique level of competency at CIP, which I believe is the strongest team for direct investments in renewable infrastructure, at least in western Europe,” he says. •

TEXT Karin Jensen