In our recent European offshore wind in turbulent times webinar, S&P Global Commodity Insights discussed the implications of rising interest rates and supply chain challenges on the business case for projects in Europe.
Among the speakers was Lisa McDermott, Managing director, Energy transition project finance at ABN AMRO Bank.
In a raft of audience questions, the theme of the bankability of offshore wind stood out, and Lisa McDermott took the time to answer some questions we did not get to during the session.
She shares insights on preferred routes to market for offshore wind, banks’ view on the viable lifetime of turbines, as well as the project finance perspective on risks in a market in turmoil.
Lisa McDermott
Managing Director
Energy transition project finance
ABN AMRO Bank
For banks in wind project financing, is there any preference between contracts for difference or corporate power purchase agreements when financing a new development?
Contracts for difference tend to be backed by very highly rated government entities. Where this is the case, this form of revenue support is considered to present a very low counterparty credit risk, even over a long period, and is therefore typically very popular with project financing banks. A Contract for Difference (CfD) type subsidy does entail additional regulatory risk, however, since a government could decide to amend the terms of such subsidy at some point during its life. Although thankfully rare for offshore wind, we have seen some examples of this in recent years (e.g. Belgium).
A corporate PPA entails lower regulatory risk (although this type of revenue scheme did not isolate projects from the impact of energy price caps imposed in recent years) and has proved a very useful revenue stabilization substitute when subsidies are not available. Banks also recognize the strong value such contracts bring to the energy market, stimulating both industrial decarbonization and additional renewable build-out.
However, corporate PPAs can present increased risk from counterparty credit exposure compared to CfDs. Although corporate PPAs typically need investment-grade support, taking long-term credit exposure on corporates is not something commercial lenders typically do. This risk is compounded if a PPA becomes ‘’out of the money’’ for a corporation over time.
In practice, however, most commercial lenders have a mix of CfD and corporate PPA-backed projects in their renewable portfolios.
What do banks think about increasing tenors of wind projects based on presumably longer life spans of wind turbines (tenors beyond 20 years)? There is no data (yet) to technically assess so what are you looking at for your due diligence?
Banks will look to the type certificate for a wind turbine for the best estimate of expected asset life. However, the tenor over which financing will be granted will also heavily depend upon the robustness of a project’s operations & maintenance and operational expenditure budgeting strategy. A full-service O&M contract backed by an uptime guarantee from a leading turbine supplier is still the best way to get banks to lend long-term to a wind project, especially where turbine platforms with little or no operating track record are concerned.
To what extent has the news of projects being canceled rattled the market, especially on the sponsor side and regarding future projects?
Recent years have demonstrated that the wind sector, like many others, is not immune to the impact of war and a global pandemic. Project developers and suppliers alike have been heavily challenged by huge swings in power and commodity prices, cost inflation, interest rate rises, and scarcity of materials and vessels.
Some effects have been positive however: for starters, the offshore wind supply chain, which had been heavily squeezed for years in the quest for lower and lower levelized cost of energy, to the point where few could turn a profit, is now recovering and finally able to raise prices to sustainable levels. That is also important for the viability of the wind business.
Of course, this has had the effect of passing the pain on to another part of the market, mainly developers, who locked in fixed-price auction bids based on best estimates, only to find those figures outdated and insufficient two years later. This has triggered a degree of pain across the industry but has also served as a wake-up call for governments to make necessary price corrections. As such we expect interest on the financing side to remain strong for this type of project.
Did you miss the webinar? Listen back to the conversation with the panel here.