Where the UK leads, others follow
by Shaun Kingsbury
The offshore wind industry has come of age as a mainstream asset class, driven by rapid improvements and falling costs in technology, installation, supply chain, operational maintenance and financing. In the last five years, offshore wind has moved from a highly niche and specialist interest into the financial mainstream.
A very small number of specialist investors – including the Green Investment Bank – have accelerated the market adoption of offshore wind. For the past four years, the bank has been working at the heart of the world’s largest and most advanced offshore wind market: the UK.
Laying the foundations
The foundations of the UK offshore sector were laid by energy utility companies and largely funded on-balance sheet. First movers in UK waters included companies such as RWE, Statoil, Centrica, E.ON and Denmark’s DONG Energy, undertaking a series of projects between 2004 and 2010.
This initial phase of the sector’s development came under pressure on two fronts. First, the long-term finance requirement for the growth of offshore wind was greater than the balance sheet capacity of these utility firms, even in the best of times. And second, these were not the best of times. Liquidity was in short supply following the 2008 banking crisis and utility companies faced limitations on their borrowing capacity. A solution was required to maintain momentum in the construction of new projects.
That solution was to allow those utilities to refinance their existing investments in operating wind farms. This created an attractive investment opportunity for new investors in the lower-risk stages of the project lifecycle. Capital would be returned to the small band of investors prepared to commit to development and construction, freeing them to reinvest in new projects.
Early stage investors
By 2014, it was evident that debt liquidity was returning and that banks’ appetite for offshore wind was increasing. However, balance sheets in the utility sector remained under pressure. With their growing experience and capability, many of these utility companies were best placed to lead development and construction, but lacked the financial capacity to build out their project pipelines.
The solution was to introduce non-utility and infrastructure investors at an earlier stage of the project development cycle. This approach allowed utilities to sell down a stake in the assets while retaining an important presence in projects through construction, commissioning and early stage operations.
The offshore wind sector’s long-term growth prospects – alongside attracting sufficient capital – depend on its ability to reduce costs, and introducing debt earlier in the project lifecycle was key to lowering the cost of capital. By bringing more cautious debt lenders into construction financing, a project’s gearing could be improved, reducing the proportion of more expensive equity finance.
A sustained need to bring greater volumes of capital into the sector has prompted efforts to diversify the investor base. This includes the opportunity to connect long-term, low-risk investors such as pension funds and life assurance funds with a scale of transaction, risk profile and, most importantly, yields that meet their investment objectives.
Low carbon infrastructure projects
The UK government launched GIB in 2012 with a mandate to invest in low carbon infrastructure projects such as offshore wind. As the bank passes its fourth anniversary and approaches a move from government ownership into the private sector, offshore wind remains its largest sector.
By acting as a narrowly focused but flexible expert investor, GIB has been able to demonstrate the commercial opportunities in the market. The bank has been involved in a number of financing innovations and ‘firsts’, helping the market to quickly transition through the phases outlined above. It has raised a £900m offshore wind fund through its Financial Conduct Authority-regulated subsidiary, a dedicated investment vehicle for unlevered, operating assets.
Offshore wind in the UK has firmly entered the mainstream, both as a source of reliable and increasingly competitive energy, and as an investment class. Where the UK leads, other countries are rapidly following.
The next phase of the market’s global expansion will see growth in north-west Europe, Asia and the north American eastern seaboard. Under private ownership, GIB expects to play a key role in the development of some of these markets, as it has in
Offshore wind’s ‘coming of age’ could not be better timed. The sector is perfectly poised to make a major contribution to realising the policy ambitions of the Paris climate agreement. Moreover, it is ideally placed to realise the investment returns required to build the infrastructure to turn the agreement into reality.
Shaun Kingsbury is Chief Executive of the Green Investment Bank. Back