With Danish companies such as Dong Energy, Vestas Wind Power, Siemens Wind Power and LM Wind Power (formerly LM Glasfiber) gracing the wind energy headlines on an almost daily basis, it should come as little surprise that Danish manufacturers have produced around half of the installed wind turbines, the world over.
In fact, wind energy accounts for a significant part of Danish industry. Reflecting this is the fact that wind sector investments account for one-third of the Danish Export Credit Agency’s (EKF) investment portfolio.
Given this fact, it is worth asking what makes the Danish manufacturers and developers so attractive to investors and what is the secret to their success?
WindEnergyUpdate speaks to Henrik Welch, EKF’s senior director for guarantees and project finance to find out more about the current wind energy investment climate and what developers, manufacturers and utilities should be doing in order to attract the banks.
WindEnergyUpdate: To what extent has the project finance environment changed since 2007?
Henrik Welch: It has definitely changed from the banks fighting to get mandates during a period when pricing was getting cheaper and cheaper back in 2007. Many banks were fighting for different deals at the time but that is no longer the case; these days, if there are any deals, it is in the club deal arrangement.
It has not come back to that point we were at in 2007– there was a lot of liquidity three years ago but there is still not enough liquidity.
When you look at the size of the big projects and the long tenors, the banks are not ready for that yet. That said, there seems to be a bit of a thaw with regard to smaller amounts and shorter tenors, such as six to eight years.
WindEnergyUpdate: You mentioned club deals among banks. What other types of financing arrangements are we seeing nowadays? Are any creative deal structures emerging?
Henrik Welch: I think it’s the other way around – banks are going back to basics, insofar as projects need to have good sponsors, good offtake, be backed up by good studies, and have good security structure. Projects need to be solid in order to create an appetite among banks.
There are several major players that we work with in offshore wind. We typically support these financial institutions with guarantees, however, we have also used EKF’s Export Lending Scheme in a couple of long term financings for wind power deals. Then there is the EIB – we also cooperate with them on some of the transactions.
At the moment it is really not a commercial bank market. But that is not to say that the commercial banks are not gradually coming back to the table. It is certainly beginning to look a little more positive especially on projects with strong sponsors and offtakers. In the last couple of years about15 banks have been involved in project finance deals in the wind sector. However, only a limited number of these have acted as lead arrangers.
WindEnergyUpdate: From a financing perspective, what is key to attracting investors? And to what extent would the presence of bigger players with proven track records entering the market help to ease investor concerns?
Henrik Welch: It’s a good question. It probably wouldn’t help in the short term as it has less to do with the players than with the banks themselves.
That said, it is absolutely sure that if you deal with larger players with a proven track record – be it Siemens Wind Power or Vestas – then there is more of an investment appetite.
But you have to look at the other side as well. If the project is developed by the utility, those companies also have to have banking support.
If you are purely talking about the developers then you would want the supplier to be a good one, you would want to use a reputable contractor, good service practice – you’d need to provide a very robust package.
This is certainly what we’ve seen in the projects we have worked on such as the Q7 wind park, the Belwind project and the project finance deals we have been involved with in the UK – each of these projects had very strong merits.
WindEnergyUpdate: What other factors would help attract project finance? Would more robust testing standards and certification methods from institutions like NAREC instill greater confidence in investors?
Henrik Welch: We always look at wind studies from at least two independent companies. Other things they can do to build greater reliability into a project, more security in the cash flow would help for sure.
Coming back to your question directly, people like NAREC providing the testing methods seems to be a good idea.
But if you are dealing with the bigger names on the supplier side, they can already provide a high level of quality assurance, both for themselves and their sub-contractors. And again, the other parts of the project, foundations for example, also need to use reputable and strong suppliers, that are able to stand up for their commitments if things go wrong.
WindEnergyUpdate: Which implies that there are already very high barriers to entry into offshore wind?
Henrik Welch: Absolutely.
WindEnergyUpdate: Is more project finance becoming available now to project developers from the banks?
Henrik Welch: It will come, but it takes some time. To my knowledge, there are still bottlenecks in the banking system.
We need to see very good projects to create a teaser for the banks – to get them involved. Once they’ve done one project, they will want to do the second project and so on and so forth. We haven’t seen it yet but I think it will gradually come in the coming year.
But it also depends on how much the utilities are pushing for project finance structures. So far many of them have financed offshore wind off their own balance sheets, which it makes it a bit easier for banks to assess the risk because the risk lies not with the project but with the utility.
WindEnergyUpdate: Does the EKF have a mandate to back renewables?
Henrik Welch: Our mandate is to support Danish export and investment and to support Danish industry. As renewable energy technology represents a large part of the Danish industry, we are supporting it.
Currently around a third to a fourth of our portfolio is in wind energy. We have outstanding commitments of around €1.5 – 2 billion at the moment – we have no upper limit on that. If you would ask me if even more is being invested in renewables generally, I would say: “Yes”.
Wind industry is one of the largest industries in Denmark.
WindEnergyUpdate: What are the perceived risk factors for lenders and how can these be mitigated?
Henrik Welch: I think the whole service set up should be a key consideration – the main manufacturers that supply components and the aftercare. It is always good to have a long-term O&M contract because this makes sure that the turbine is operating and it should reduce the downtime.
Whether the wind actually blows is a major factor – whether it blows as it is expected, so in this respect, forecasting is key.
The construction period is of course very important. Aspects such as the degree of precision in your contracts with sub-suppliers – there are so many logistics in this alone.
There are many variables that can cause project delays, so it is critical that these are anticipated, where possible, in order to keep a project on track. Given that the capital expenditures are so big, any costs resulting from over-running on the timeline will be large, so you want to limit that.
The PPA is also a major component that we would look into. What is the regime that we are working on for example a UK project, what are the incentive programmes that, say, the UK government has in place and is there a risk that the incentives might be removed in the near future.
And then there is insurance – project insurance is definitely an important factor.
Wind Energy Update: Who are the key players when it comes to insurance products?
Henrik Welch: For example a company like Codan / Sun Alliance is very active in this area – they really have a lot of expertise in wind energy. They provide insurance on many different aspect of the project.
Banks require insurance – when you start working offshore it is so different from onshore operations. There are so many more dangers involved. Insurance is an important feature of offshore projects in this respect.
WindEnergyupdate: How important are remote applications for O&M and surveillance?
Henrik Welch: This is a key factor going forward – that monitoring is carried out remotely. Again this is down to track record – building up the data so that you know when you need to replace things. Better planning of “down time” = better economy!
The large Danish players like Vestas and Siemens Wind Power has worked extensively on this and the sub-suppliers are beginning to do the same.