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Windfarm Finance

The windpower industry in the UK complains that  the two main obstacles to the development of wind power are the Planning System and Finance. Windfarm objectors are very familiar with the Planning issues, and regard the Planning System as the essential democratic bulwark against the erection of thousands of of 100 metre high steel towers in the countryside, but where does the "finance" issue come in?. Is it possible that the the lack of finance has been a real real brake on development has been  all the time?

The two letters from The Times, which picked up on the DTI announcement of "Offshore Round 2", illustrate the essential weakness. Offshore wind turbines are  loss-makers, and can only be built if massives subsidies are provided from somewhere, either directly by the Government or by artificially inflating the price paid by the customer. Onshore turbines are cheaper to build and run, so the economics are somewhat different, so are naturally favoured by developers. This was the subject of a recent article in Windpower Monthly, which promotes the wind industry, and also an article in the Sunday Times (August 10 2003)

Times [London] online

August 10, 2003
Reluctant banks may blow a hole in Blair’s plan for offshore wind farms
Labour wants 10% of our power to be from renewable sources but financing may prove a problem. Lucinda Kemeny reports
WHEN day trippers flock to the coast this weekend to soak up the summer sun, they will be able to enjoy the sand, the sea and a horizon broken only by the odd ship.

Fast forward 10 years and instead of a clear view, holidaymakers may instead be confronted with rows and rows of huge, white windmills rising out of the sea.

The government wants Britain to produce 10% of its energy from renewable sources by 2010 and has aspirations to push that figure to 20% by 2020. Wind farms will be the key to reaching these targets. It has been estimated that Britain will need to install 15,000 turbines at a capital cost of £12 billion.

The Labour government has just opened the second round of tenders for offshore wind-farm development and has ambitious plans for the future, but critics are starting to voice concern. They believe the government’s plan is a pipedream because it does not have the backing of one of the most crucial groups it needs to make it a success — the banks.

Bad memories and uncertainty about the future have combined to leave a sour taste in the mouths of many banks when it comes to the power industry.

The British Wind Energy Association (BWEA), the trade association that champions wind power, has already recognised this. It has been holding its own talks with City financiers to find out where the problems lie.

Next month James Glennie, head of offshore at the BWEA, will present his findings to the government. He believes changes will have to be made if the banks are again to feel comfortable with the energy sector.

Much of the banks’ reluctance to get involved goes back to the collapse in electricity prices in the past two years, which caught many by surprise. Well-known names, including Royal Bank of Scotland and Abbey National, invested heavily in building power stations in the 1990s when electricity prices were high. But oversupply caused prices to collapse by 40%, making some power stations uneconomic.

According to research from Citigroup, 26 European and international banks have been left nursing £5 billion of exposure to the British power market. Much of this may never be repaid.

Although most power stations have been kept out of administration, banks have long memories and insiders believe the government will struggle to convince them that investing in wind farms will be any less risky.

One project-finance expert says: “Many banks have enough exposure to last them for years, and if they went to their credit committees to ask if they could put £100m into a wind farm they would be told to get on their bike.”

Banks are not just fearful of getting their fingers burnt again by power prices. The other issue is the carrot-and-stick package the government has introduced to get electricity suppliers to start investing in green energy.

Power companies are legally bound to obtain renewable obligation certificates (ROCs) to prove they are buying at least some of their electricity from renewable sources.

If companies miss their targets they are fined by being forced to make up the difference by buying ROCs in a traded market at £30 per megawatt hour.

But Britain has a chronic shortage of renewable energy — with only one existing offshore windfarm, at Blyth near Newcastle upon Tyne. This has pushed up the cost of ROCs, which are hovering at just under £50 per megawatt hour, and put the impetus on utilities to invest.

Only two weeks ago Centrica announced a £500m investment in renewable energy, following the example set by other power companies. Innogy, now owned by RWE of Germany, is raising funds for its own wind business, and a deal is expected to be completed by the end of September.

But while wind farms have become the new must-haves for the big utilities, it is less obvious how they will be funded.

Project-finance schemes typically run for decades, and banks are cautious about ROCs, which are a recent invention. However, the current trading price shows their value can move up and down, depending on the level of renewables available, and concerns are being raised about what will happen after 2010 when the 10% target is supposed to be reached. No targets have been stated beyond this date, although the government says the ROC system will stay until at least 2027. Few banks will be prepared to lend to a project where they cannot predict the revenue stream.

Tony White, a director with Climate Change Capital, a newly formed adviser to the energy industry, says banks may become more confident about the new structure over time, but their reluctance could knock the government’s timing off course.

And with academics estimating that Britain will need to install 20 turbines a week to stay on track, the targets start to look very shaky.

But it is not all gloom and doom. One way to provide banks with a secure income would be for a wind farm to sign a long-term contract to sell its energy, and that is already starting to happen.

Also, building wind farms onshore is seen as less risky than building offshore. Construction is cheaper and connection to the electricity grid easier.

But there are problems even here. Brian Senior, managing director of trading and asset management at Innogy, says the planning process is slow, with local residents and the Ministry of Defence among the vested interests that are putting the brakes on development.

All eyes are now on the government to see whether there will be a change in policy. Without it, Labour’s grand design could be in jeopardy.

OFFSHORE WIND FARMS

 
Existing: Blyth wind farm, 1km off the coast at Blyth Harbour, Northumberland. It was commissioned in December 2000 and is intended to generate enough electricity to power 3,000 homes



Farms under construction after the first round of leasing in 2000: North Hoyle and Scroby Sands, which should result in more than 500 turbines generating enough electricity to power all the households in Manchester

Approved or under consideration: Solway Firth, Teesside, Barrow, Shell Flat, Burbo, Rhyl Flats, Lynn, Inner Dowsing, Cromer, Gunfleet Sands, Kentish Flats and Scarweather Sands

Round-two bidding has opened for farms at:

Greater Wash — stretching from Great Yarmouth to Bridlington

Thames estuary — from Ramsgate to Clacton-on-Sea

Northwest — from Liverpool to the Solway Firth

Basically, what this article is saying is that the myriad of financial organisation which would normally be expected to finance wind energy have a lot of potential bad debts through lending money to electricity generators, and have no stomach for generation schemes which are even more uncertain that conventional power stations.  The article makes much of the need for "off-balance sheet" financing, which must raise a few eyebrows in th light of Enro's problems A critiacl element is the so-called PPA (Power Purchase Agreement), by which the generator is guarnteed a long-term price for the electricity. Unfortunately TXU had such an agreement with the owner of Drax power staion, which it has simply walked away from. In  the case of the UK the NFFO/SRO arrangement, which provided a Government-guaranteed PPA for 15 years, has been replaced by a mixed bag of incentives (grants, the Climate Change Levy, and particularly Renewable Obligation Certificates). This policy is likely to push up the price of all qualifying renewable energy, particularly as there is a great scarcity of it (in 2003  when 3% of our electricity is already supposed to come from renewables, the contribution from wind is about 0.5%), and this is already happening, to the extent that many NFFO/SRO contracts are being ditched. Will this target slide, with many others, from being "binding" to being "aspirational"?.