Upload
chubakabarabaka
View
239
Download
1
Embed Size (px)
Citation preview
7/31/2019 PwC Offshore Wind
1/20
Energy, utilities and mining
Meeting the 2020 renewable energy targets:Filling the oshore wind fnancing gap
7/31/2019 PwC Offshore Wind
2/20
PricewaterhouseCoopers provides industry-ocused assurance, tax and advisory
services to build public trust and enhance value or our clients and their stakeholders.
More than 163,000 people in 151 countries across our network share their thinking,
experience and solutions to develop resh perspectives and practical advice.
PricewaterhouseCoopers reers to PricewaterhouseCoopers LLP (a limited liability
partnership in the United Kingdom) or, as the context requires, the
PricewaterhouseCoopers global network or other member frms the network,
each o which is a separate and independent legal entity.
7/31/2019 PwC Offshore Wind
3/20
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
PricewaterhouseCoopers Energy, utilities and mining 1
Introduction 2
Executive summary 3
1. The UK renewable energy targets 5
What are the targets?
What are the implications or power generation?
2. The make or break role o oshore wind 6
How much needs to be built and how ast?
The pre-construction fnancing gap
3. Resolving the pre-construction fnancing issue 10
Who could invest?
What would make them invest?
Attracting pension and lie und investment
4. Moving orward: solutions to boost pre-construction fnancing 12
Solutions to reduce construction phase risk
Solutions to improve short-term returns
Contents
7/31/2019 PwC Offshore Wind
4/20PricewaterhouseCoopers Energy, utilities and mining
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
The UKs power utilities sector aces immense investmentchallenges over the coming decade. The main challenge is the partthe sector needs to play in responding to climate change andprotecting security o supply, whilst keeping energy aordable tothe consumer.
Oshore wind generation is a key component o the renewable energy strategy, and
will be critical to achieving the target to deliver over 30% o electricity generationrom renewable sources by 2020. While there are a number o challenges to deliver
signifcant volumes o oshore wind, the most signifcant is likely to be the
availability o fnance to support the construction phase o oshore wind projects.
In this report, PricewaterhouseCoopers1 (PwC) looks at the role that oshore wind
needs to play in delivering the renewable energy strategy, the investment levels
required, and the constraints on securing that investment. A quantum leap in
oshore wind capacity is needed and, with it, an equal leap in investment i we are
to avoid a situation later in the decade where time runs out on the UKs ability to
achieve the 2020 renewable energy target.
At a time when the new government will be considering the best way to respond to
the considerable energy challenges acing the UK, our report outlines our solutions
that could resolve the pre-construction fnancing constraint acing oshore wind.
The solutions seek to specifcally address the barrier to investment by creating
mechanisms to either limit the risk associated with the construction phase or to
improve short-term returns, without unduly pushing excess costs on to the consumer.
These are starting points rather than fnal answers and we hope they will help
stimulate debate on how best to attract greater oshore wind arm investment.
Michael Hurley
Partner, Global energy, utilities
and mining advisory leader
Ronan ORegan
Director, energy and utilities
PricewaterhouseCoopers LLP
July 2010
Introduction
1 PricewaterhouseCoopers reers to PricewaterhouseCoopers LLP (a limited liability partnership in the Un ited Kingdom) or, as the context requires,
the PricewaterhouseCoopers global network or other member frms o the network, each o which is a separate legal entity.
7/31/2019 PwC Offshore Wind
5/20
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
PricewaterhouseCoopers Energy, utilities and mining 3
The UK Renewable EnergyStrategy relies on investmentin renewable power generationto deliver around hal (49%) oits target o 15% o gross fnalenergy consumption comingrom renewable sources by2020. Oshore wind plays amake or break role. It will
need to deliver some 12GW,or 45%, o the additional circa27GW renewable generationneeded to reach the 2020renewable energy target.
To reach the target will require a rapid
increase in the oshore wind construction
rate. In 2009, 0.3GW o oshore wind
capacity was completed in the UK.
In an optimistic scenario we could still
achieve the required average roll-out
rate to reach the 2020 target. However,
there are a number o constraints which
threaten this. These include supply
chain bottle necks (including people with
the right skills mix), issues o obtainingconsents, and access to the grid, but
perhaps the most signifcant barrier is the
difculty that developers ace in securing
fnancing pre-construction. I this
fnancing issue can be resolved on a
large scale it would not only enable
sufcient investments, but would drive
confdence within the supply chain and
help ease other constraints. It would also
provide a strong signal to the market
that the oshore wind deployment
target is achievable and realistic. The
danger is that, unless these limiting
constraints are eased soon, we will be
signifcantly short o the required roll-out
path and targets will not be met.
The problem is that the balance o risk
and returns needs to be sufcient to
attract investors. Projects ace
considerable construction, technology,
operations and maintenance (O&M),
price and volume risks with many o
these ront-loaded with returns back-
ended. Historically the large utilities have
dominated the development o oshore
wind. However these companies have
many competing pressures or capital
which may limit their ability to und all
the required oshore wind projects. A
key reason why the fnancial constraint is
an issue is that project fnance to support
the development phase o oshore wind
projects has not been available to UK
projects to date. The challenge or banks
and other fnancial investors is to take
construction risk in the absence o an
engineering procurement contract(EPC) wrap rom the sponsors. Even i
some project developers can overcome
this challenge, there are doubts as to
whether this can be resolved or all
projects requiring project fnance.
We believe that current incentive
mechanisms, in the orm o Renewable
Obligation Certifcates (ROCs) and
the carbon price (even with a oor),
while important are unlikely to address
the specifc challenges o oshore
pre-construction fnancing. Usingthese incentives on their own to
boost investment would run the risk
o pushing excessive cost onto the
consumer. Instead, this report outlines
ways in which the incentives could
be supplemented with solutions that
specifcally address the risk associated
with the construction phase and
solutions that stimulate investment
by improving short-term returns.
In particular, we consider ways in which
oshore wind arm development could
be opened up to pension and lie und
investments. The energy sector,
including oshore wind, can in principle
provide long term stable cash ows
which are the requirement or the like o
pension unds. However this will require
a new way o looking at the allocation
o risks amongst all the stake holders
involved in developing this new industry.
We have considered our potential
solutions to the issue designed to
either reduce risk or improve returns
or investors in oshore wind projects.
These are:
Reducing risk
Solution 1 underwriting risk by a
consumer levy
Solution 2 a regulated asset scheme
Improving returns
Solution 3 additional ROCs or a
limited period
Solution 4 ISA bonds or an equity und
Executive summary
7/31/2019 PwC Offshore Wind
6/20PricewaterhouseCoopers Energy, utilities and mining
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
Solutions 1 and 2 address the specifc
risks associated with the construction
phase o oshore wind projects with a
view to attract investors with a low risk
appetite, such as pension and insurance
unds, but also potentially open up
access to project fnance. We outline the
type o wind arm capital structure these
solutions would make possible and
show how fnance rom the proposed
Green Investment Bank could playa role alongside much larger private
investments. Solutions 3 and 4 are
ocused on increasing the return o
investments in the short term (the frst
ew years o operation) to attract private
investors who would seek a higher
return in order to accept the risks
associated with the construction phase,
such as private equity houses, hedge
unds and individuals. A summary o
each proposal is given in Figure 1 and
they are discussed in more detail in
chapter 6.
Each has its advantages and
disadvantages. We put them orward to
stimulate discussion on how best to
tackle the scarcity o pre-constructionfnance and increase oshore wind arm
development to put the achievement o
the 2020 renewable energy targets on a
more certain ooting.
Figure 1: Summary o potential solutions
Source: PwC analysis.
Increased number ofROCs over the firstfew years to provideincreased returns forthe investor taking theconstruction risk
Underwritten by a
consumer levy
ISA Bonds or an
equity fund
Additional Rocs for
a limited period
Regulated Asset
scheme
Risk sharing ofconstruction and
technology risks (overa limited time period)
Developer can sell atRAB value includingreturn
Risk sharing withconsumer
Stable long-termrevenues
Suppliers and indirectlyconsumers through alevy in the event of arevenue short fall for theongoing revenue stream
Consumers directlythrough a levy but
recouped through lowerROC level when theproject is operational
Suppliers and indirectlyconsumers throughincreased ROCpayments
The taxpayers in the
form of reduced incometax
Make investments in
off-shore wind tax freefor the public
Risk profile reducedand returns more
certain (insuranceagainst uncontrollablerisks)
Reduced risks for thedeveloper and a clearexit path
Long-term operatorhas price and volumeprotection
Variable but potentiallyhigh returns in the shortterm
Risk that supply chaincaptures higher marginsinstead of increasedreturns
Increased net return
since free tax gains
Levy based system isnot easy to implement
Complex to implementgiven that the RABscheme would requirea completely newregulatory regime
Relatively easy toimplement since it isan amendment to theexisting regulatorystructure
Process to allocate
funds to individualprojects
Clear communicationto the public that itrepresents a potentiallysignificant risk
1
2
3
4
Reduces construction
technology and
price/volume risks
Reduces construction
and technology risks
Increases return
Increases return
Solution DescriptionWho bears
the cost?Impact on returns Barriers to delivery
A solution toaddress thespecifc risksassociated with
the constructionphase ooshore windprojects isrequired toattract investors
with a lowrisk appetite
7/31/2019 PwC Offshore Wind
7/20
7/31/2019 PwC Offshore Wind
8/20PricewaterhouseCoopers Energy, utilities and mining
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
Oshore wind plays a make or break
role as the largest single contributor to
the UKs expansion in renewable power
generation. As discussed in the previous
section, oshore wind would need to
deliver some 12GW o the additional
circa 27GW renewable generation
needed to reach the 30% target.
How much needs to be built
and how ast?The amount o oshore generation
needed is a quantum leap above the
1GW o total capacity that had been
reached by April 2010. It will require a
rapid increase in the rate o oshore
wind construction. The oshore wind
pipeline is healthy at close to 50GW,
but the bulk o the projects are in a very
early stage o the development cycle.
O the total pipeline some 32GW is
attributable to the recently awarded
Round 3 projects and a urther circa6GW to early stage projects in Scottish
territorial waters. Nevertheless i projects
could move steadily through the pipeline
there are a sufcient number o projects
to be able to meet the 2020 target o
12GW additional oshore wind capacity.
The problem is not the potential pipeline
o projects but the roll-out rate. In 2009
0.3GW o oshore wind capacity was
completed in the UK. However, the
12GW target implies an average annual
roll-out rate o 1.1GW, which is
signifcantly above the historical build
rate (see Figure 5).
RenewableUK (ormerly the British Wind
Energy Association) has developed a
number o orecast scenarios or UK
oshore wind based on potential delays
and barriers aecting economic viability,
connections to the grid, ability to get
consents etc. Figure 6 shows the high
and low scenarios respectively compared
to the average required roll-out rate to
meet the 30% renewable target by 2020.
These orecasts exclude Round 3 as well
as the recently approved extension o
existing wind arm sites, potentially
adding 2GW o capacity, which will not
start to have an impact until 2014.
The roll-out rate orecast is set toincrease signifcantly compared to 2009
and will be helped by the increase in the
average size o oshore wind arms. In an
optimistic scenario the oshore wind
roll-out rate could reach the required
average to meet the 2020 target beore
the middle o the decade. However, there
is a signifcant risk that constraints such
as fnancing, supply chain limitations
and delays in accessing the grid will
result in a roll-out rate that is well below
the required average. In this scenario a
signifcant increase would have to takeplace in the second hal o the decade
i the UK is to meet the 2020 target.
Our view is that it is highly risky to plan
or a signifcant increase towards the
second hal o the decade to reach the
target, particularly i it emerges that the
power sector needs to deliver in excess
o 30% rom renewable sources. It is
desirable to attain a roll-out rate in
line with the high scenario outlined by
RenewableUK and maintain it, since it
is close to the required average and willallow or a smoother scaling up o the
supply chain. To do this, it will be critical
to take active steps to resolve the
barriers that hamper the deployment
rate. It is not a long-term issue that can
wait but, rather, must be addressed now
given the long lead times involved. A
greater sense o urgency is needed.
The pre-constructionfnancing gap
There are a range o constraints on the
expansion o oshore wind. They include
supply chain capacity limitations,
planning delays and restricted access to
grid connections. However, the most
signifcant barrier is the difculty that
developers ace in securing pre-
construction unding. I this could be
resolved it would not only enable
sufcient investment, but would drive
confdence within the supply chain and
help ease other constraints. It would also
provide a strong signal to the marketthat the oshore wind deployment target
is achievable and realistic.
2. The make or break role o oshore wind
Figure 5: Required oshore average annual
build rate compared to historical data
Source: PwC analysis based on RenewableUK (ormerly the
British Wind Energy Association) data.
0.0
0.2
0.4
0.6
0.8
1.0
1.2
GW
2003 2004 2005 2006 2007 2008 2009
0.06 0.060.09 0.09 0.10
0.00
0.28
1.11
2010-
2020Actual Average
Figure 6: Oshore wind roll-out orecast
Source: RenewableUK (ormerly the British Wind Energy
Association), PwC analysis.
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Annual completed capacity (GW)
2010 2011 2012 2013 2014 2015
Low scenario (based on delays and delivery constraints)High scenario (based on delays and delivery constraints)
Required average to meet the 30% target
7/31/2019 PwC Offshore Wind
9/20
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
PricewaterhouseCoopers Energy, utilities and mining 7
The total investment needed is
substantial. An estimated 33bn or so
would be needed between now and
2020 to develop 12GW o oshore
generation and a urther circa 7bn
is needed or the associated oshore
transmission connections. The actual net
unding requirement rom the developer
point o view would be less because
completed projects would provide
operating revenues during this periodand expect it will be possible to
refnance projects once they are
operational. This cash can be reused
in new projects and thus reduce net
unding requirement.
What level o net unding is required to
accelerate the expansion o oshore wind
and avoid the high risk o leaving much o
the roll-out until later in the decade? Our
analysis shows that a rapid increase to a
cumulative net unding requirement rom
a developer point o view o around10bn would be needed or generation
capacity alone to achieve the 1.1GW
average annual roll-out rate we identifed
in the previous section. A key assumption
to limit the capital requirement is that
wind arms can be project fnanced at
70% one year ater they have become
operational and that the capital released
can be reinvested into the pre-
construction phase o new projects.
Competition or unding
Oshore wind aces immense competition
or unding. Ogem has estimated that the
combined power and heat sector needs
to make investments approaching
200bn over the coming decade. This
is based on a lower economic growth
scenario and includes investment areas,
such as renewable and conventional
power generation, renewable heat,
transmission, but also investments in
energy efciency measures and smart
meters. It is estimated that meeting
the renewable targets will require an
additional circa 100bn in investment
in comparison to a business as usual
scenario whereby the ocus remain
on conventional power generation
technologies like gas turbines.
The 200bn or so required is an average
o about 17bn per annum. This is
double the annual capital expenditure
programmes o the big utilities combined
which, taking the biggest six and
National Grid together, totalled 8.6bn in
2009. Independent developers will also
play a role in oshore wind development
but the lions share o development will
need to come rom the big utility
companies in the absence o project
fnance or new sources o equity.
Figure 7: Hypothetical build scenario and
peak unding requirement
Source: PwC analysis.
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
0
2
4
6
8
10
12
14
GW bn
2010 20202012 20182014 2016
Annual build rate
Peak funding requirement (cumulative)
Required averageroll-out rate (30% target)
Rapid ramp-up offunding requirementto c.10bn
Figure 8: Total UK Capex by the Big 6 utilities
and National Grid
Source: Company annual reports and presentations,
PwC analysis.
0
2
4
6
8
10
bn
2008 2009
7.7
8.6
7/31/2019 PwC Offshore Wind
10/20PricewaterhouseCoopers Energy, utilities and mining
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
The big utility companies have a
signifcant international ootprint.
Our analysis o the our utilities with
a predominant ocus outside the UK
shows that their UK capital spending
accounted or just 14% o their total
capital expenditure (see Figure 9). Thus,
UK oshore wind investment not only
has to compete with a range o other
pressing power industry investment
demands, such as nuclear and gasstorage, but also has to make its case
in an international corporate investment
context in which geopolitical actors
have to be considered alongside
fnancial returns.
Constraints on unding
The issue o competition or undsoutlined in the previous section is
compounded by the risks associated
with oshore wind power and the
continuing sub-optimal banking and
investment climate. So ar there has
been no availability in the UK o project
fnance to support the development
phase o oshore wind projects pre-
construction. This is in contrast to
onshore wind projects where project
fnance is available i the project is
o sufcient scale.
Oshore wind developers have only
been able to fnance new projects once
an existing arm has an operational track
record. An example o this is Centricas
re-fnancing o the Lynn and Inner
Dowsing and Glens o Foudland wind
arms. However, this model creates an
inherent time lag and as described
above will not be able to support the
required development rate to meet the
30% renewable power target.The tight unding and banking climate
has been o little help, but the main
reason or the inability to project fnance
oshore wind arms pre-construction is
that the risk is deemed to be too high
(see panel opposite) or the banks to
take onboard. The project sponsors
would need to provide some orm o
guarantee to cover construction risks
beore banks will consider lending
pre-construction. Even i some project
developers can overcome this challenge,there are doubts as to whether this can
be resolved or all projects requiring
project fnance.
The result is that oshore wind
developers must fnance oshore wind
projects largely rom their balance
sheets or wait to roll over fnancing once
projects become operational which,
as discussed above, has its limitations.
However, even the large utility
companies are not in a position to
countenance unding to the scale o therequired oshore wind investment rom
their balance sheets and, as we have
seen in the previous section, the level
o investment implies a doubling o
current capital expenditure.
UK oshorewind investmentnot only hasto compete
with a range oother pressingpower industryinvestmentdemands, butalso has to
make its case inan internationalcorporateinvestmentcontext
Figure 9: 2009 capital expenditure
by company and territory
Source: Company annual reports and presentations,
PwC analysis.
0
5
10
15
20
25
30
35
Euro bn
TotalIberdrolaEONRWEEDF
2.2
12.4
10.2
RoW UK
18%
0.9
5.9
5.1
14%
0.9
8.4
7.5
10%
0.7
6.4
5.7
11%
4.6
33.0
28.4
14%
% Proportion invested in the UK
7/31/2019 PwC Offshore Wind
11/20
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
PricewaterhouseCoopers Energy, utilities and mining 9
Oshore wind risks
Construction risk
Untested construction techniques, unpredictable weather
conditions, and the potentially severe consequences o
accidents all create a high level o construction risk or
oshore wind projects. The projects that are currently being
developed are relatively close to shore and in relatively
shallow waters. Much o the oshore wind expansion will be
in deeper waters and as ar as 200km out at sea.
Technology risk
The current technology platorm, based on 3.6MW turbines
(and to a lesser extent 5MW), is starting to develop an
operational track-record, reducing the technology risk or
projects based on the same technology. However the next
generation turbines will have an increased capacity greater
than 5MW, which is untested and will heighten the
technology risk.
Operations and Maintenance (O&M) risk
There is uncertainty about the required operations and
maintenance costs over the lie time o an oshore windarm project. This cost is related to the technology risk since
the reliability determines the required O&M costs, but it also
depends on the impact o adverse weather conditions and
the availability o required equipment and vessels. Operators
are starting to get a better understanding or the O&M costs
through their early oshore projects, but as the technology
evolves and arms are deployed urther out at sea, the risk
will increase.
Volume risk
The volume risk relates to the unpredictability o the load
actor that a particular wind arm will be able to achieve.The average load actor is dependent on the prevailing
conditions applicable to a site, but also on annual variations
due to weather patterns. This risk can be better understood,
but not eliminated, by surveying the wind patterns at a site
prior to commencing construction.
Price Volatility risk
The revenues that a wind arm operator is able to secure
on a per MWh basis have three components the MWh
output, the wholesale power price and the value o
Renewable Obligation Certifcates (ROCs). As depicted in
Figure 10 the electricity price in the wholesale spot market is
highly volatile. It is possible that the volatility will increase
over time since a higher proportion o variable output wind
generation could result in very low or even negative
wholesale prices when the wind output is high and high
prices when there is limited wind generation.
Based on the experience rom project fnance-backed
onshore wind arms, independent operators typically do not
sell output on the spot market, but through a Power
Purchase Agreement (PPA) with an o-taker. However such
agreements typically have the power price linked to the
market price, or at best only locked or a shorter time period,
and the developer thereore will have an exposure to the
market price.
The ROC component o the revenue stream is currently
based on two ROCs per MWh produced and split out into
two parts:
A fxed amount that is RPI indexed over time(buy-out price)
A variable component that is dependent on the overall
number o ROCs that are presented to Ogem by the UK
suppliers compared to the target (recycled beneft)
The introduction o a ROC headroom mechanism will lead
to the buy-out price being viewed as a oor price.
A cap and collar mechanism or a eed in tari are ways to
mitigate the price risk and were discussed as potential
options by the previous government.
Figure 10: UK wholesale power spot price (weekly rolling average)
Source: Elexon, PwC analysis.
0
20
40
60
80
100
120
Price (/MWh)
01/01/
2004
01/01/
2005
01/01/
2006
01/01/
2007
01/01/
2008
01/01/
2009
01/01/
2010
7/31/2019 PwC Offshore Wind
12/200 PricewaterhouseCoopers Energy, utilities and mining
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
In the previous chapter we saw that a
much aster acceleration in oshore
wind development is needed to avoid
a situation where time runs out on the
achievement o the 2020 renewable
energy target. But pre-construction
unding is unlikely to come orward
quickly enough to deliver the scale o
roll-out needed to put oshore wind on
course to deliver its 45% share o the
renewable power generation target.In this section we look at solutions to
address the problem o the scarcity o
pre-construction fnancing.
Who could invest?
Figure 11 reviews the various potential
sources o unds available and their
attitude to the risks inherent in oshore
wind generation. Banks, although
they have some availability o capital,
are unwilling to provide project fnance
pre-construction due to the associatedconstruction and technology risks
unless as a minimum there is a
clearly articulated contingency plan
to manage risks or at best there are
parent guarantees rom the sponsors.
However, the sponsors are not keen to
provide the EPC wrap which makes
project fnancing by banks difcult.
Other investors, such as pension and
insurance unds, potentially have ample
capital available, but also are not willing
to assume the associated risks.Private investors, or example private
equity houses, hedge unds and
individuals, would potentially be willing
to accept the risk provided that the
returns available are commensurate with
the risk profle. However, at the moment
there is a mismatch the risk is high but
the returns available are only in line with
a utility-type return.
3. Resolving the pre-construction fnancing issue
A Green Investment Bank
The new coalition government has decided to proceed with the plan to create
a Green Investment Bank (GIB), although no detailed proposals have yet been
published. The GIB outlined by the previous Labour government assumed
a capitalisation o around 2bn which potentially could be more signifcant
i gearing is possible. However, it would not be sufcient to plug the pre-
construction unding gap, nor is it clear under what premises a GIB will seek
to invest. I the investment criteria are not vastly dierent to those used by
commercial banks, it would restrict the ability to und oshore wind projects
pre-construction, although smaller stakes in individual projects may be possible
to spread the risk through a portolio approach.
Figure 11: Availability o unds and attitude to risk by source o unds
Source: PwC analysis.
Source
of funds
Availability
of funds
Investment
profile Construction Technical Price Volume
Attitude to specific risk currently present for offshore wind
Infrastructure
funds
Low to medium risk depending on
fund profiles (risk spreading key)M UA UA PP
Private investorsCan accept a range of risks provided
that the return is appropriateM PPPP
Project finance
(banks)Risk adverseM UA UA UA P
P PDeveloper equityWilling to invest as long as return in
line with risk (has control of projects) UAPAL
Pension funds Requires lower but certain returms UA UA UA PH
Insurance funds Requires lower but certain returms UA UA UA PH
M Medium H HighL Limited P Possible A AcceptableUA Unacceptable
7/31/2019 PwC Offshore Wind
13/20
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
PricewaterhouseCoopers Energy, utilities and mining 11
Issues with the existing supportmechanisms.
What would make them invest?
To attract investments, the risk and
reward profle between type o unds
available and the investment must be
aligned. Current market mechanisms,
including ROCs and the carbon price, all
short o an eective solution because theydo not address the dierent risk profles
over the project lie cycle. They increase
the return available over the project lie,
which is attractive to utilities but not to
more risk-averse investors or investors
with shorter investment horizons.
The beneft o ROCs and the carbon
price are only realised once a project is
operational leaving investors exposed
during the construction phase. I the
number o ROCs and the carbon oor
were raised to higher levels, privateinvestors would at some point fnd the
prospect o these uture returns
attractive enough to accept the risk and
inject pre-construction phase fnancing.
However, the cost to the consumer
would be substantial.
In short, ROCs and the carbon price
are too blunt an instrument. Instead,
solutions are needed that specifcally
address the risk associated with the
construction phase or which improve
short-term returns without undulypushing excess costs on to the
consumer. We look at possible options
in the next chapter.
Attracting pension andlie und investment
The stable and predictable annual
cashows o inrastructure investments
are attractive to pension and lie
companies. Demographic trends
heighten the need or this type o
investment. With an ageing population,
more pension assets have to move
rom accumulation stage into an annuity
or payment stage and there is an
accompanying need to shit rom
long-term investments like equities,
to investments with regular and certain
returns. The energy sector, including
oshore wind, is a good match to the
investment needs o such unds
provided that the construction risk is
understood and steps taken to either
insure or transer it.
The historical model
Previously, low risk investors such
as pension unds and lie companies
invested in inrastructure or asset-
backed securities through investment
grade rated bonds or securities. Some
higher ratings were achieved by
wrapping (in eect insuring) the unrated
or lower rated securities through
monoline insurers. With the higher AAA
ratings guaranteed, investors did notneed to assess the risks associated with
the underlying asset.
The sub-prime crisis and ensuing credit
crunch, led to a downgrade o the
monoline sector. It is no longer viable
to insure inrastructure asset-backed
securities to achieve a AAA rating. The
balance sheets o monoline companies
are weak and they are not in a position
to write policies. Historically, the
insurance was mispriced based on too
optimistic a view o the risk and, eveni monoline insurance was to be oered
today, it would be much more expensive.
What is needed in the uture?
Given that the asset cannot be insured
at acceptable cost, the pension or lie
company must now take a more direct
interest in the underlying asset and
understand the associated risk. Some
pension unds have already started to
think about building teams with
inrastructure and energy expertise to be
able to assess the risk but it represents a
signifcant investment and, thereore, will
not happen in the short term. Even i
they develop their own internal expertise,
the specifc construction and technical
risks in oshore wind are too high or
them to consider investing unless they
were underwritten or transerred.
However, i the construction/technology
risks could be underwritten or
transerred, this would open up oshore
wind to pension and lie companyinvestors. Solutions 1 and 2 in the next
chapter outline two possible ways in
which this could be done. Having
pension or lie company investment
available rom the pre-construction
phase would be o enormous beneft
to oshore wind developers as it could
provide fnance or the 20 years+
duration o the project, providing an
end-to-end solution that avoids the
uncertainty and cost o having a bridging
fnance solution.
In turn, with the assurance o the
underwriting or transer o construction
stage risk, pension and lie companies
would be attracted by the regular and
low risk cashows post-development.
The attraction would be all the greater
because o the shortage o long dated
sterling assets o 20 or 30 years in
duration that can provide the kind o
stable and predictable annual cash ows
they are looking or. In the next chapter,
we look at solutions that could open upthis opportunity or pension and lie
companies and the kind o oshore wind
project capital structure that could be
made possible.
7/31/2019 PwC Offshore Wind
14/202 PricewaterhouseCoopers Energy, utilities and mining
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
4. Moving orward solutions to boostpre-construction fnancing
Solutions to reduce constructionphase risk
Solution 1: Underwriting construction
and technology risks by a
consumer levy
The principle o this solution is that
construction and technology/O&M risks
are shared between the developer and
the consumer. The consumer is
represented through a government bodythat acts as the scheme administrator.
Prior to commencing construction the
developer would need to register the
project with the administrator. As a
prerequisite the administrator must
approve the ollowing:
The general ability and fnancial
strength o the developer
Key supplier and sub-contractor
agreements (assuring appropriate
transer o risk)
Agreements with the fnanciers
Availability o unding in the event o
additional capital required
Only the generation component o the
project would be included in the
scheme. The oshore transmission
would be handled through the Oshore
Transmission Network Owners (OFTO)
scheme.
Underwriting o project risk
I unoreseen construction or technology
issues aect the project during the
construction phase leading to cost
overruns, the developer would be
compensated. There would be an
element o risk sharing between the
administrator and the developer. A fxed
cap would limit the level o overrun costs
that would be covered. For example, the
fxed cap might be set to 10% o the
total project cost.
An absolute cap at the appropriate level
would be necessary to provide the
required comort or lower risk investors
who need to understand what the worst
case scenario could be. Similarly during
the initial operating phase, or interim
operating phase, the administrator will
cover under the same cap any
unoreseen costs and revenue losses
due to operational issues.
Within a defned period o interim
operation the wind arm should have
demonstrated its operational stability
and the arm will enter its ull ongoingoperating phase. At this point the
administrator would no longer cover or
unoreseen costs and revenue losses.
The lower risk investor that invested in
the pre-construction phase could either
exit or stay on, given that the risk profle
is signifcantly reduced once the project
is ully proven and operational.
Project lie-cycle risk
Figure 12 outlines who will bear the
various risk elements through the lie
cycle o the project.
Scheme fnancing
The scheme would be fnanced through
a levy on all electricity consumers on a
usage basis, but potentially recouped
through a reduced number o ROCs
available to developers who elect to
participate in the scheme. I projects
participating in the scheme suered
overruns o 20% on average and the
developer exposure is capped at 10%,
the number o ROCs could be reducedproportionally or the consumer to
recoup the cost.
In eect, part o the beneft o ROCs
is brought orward and transerred
into the risk-underwriting scheme in
the event that overruns have to be
unded. The overall return to a
developer should, on average, be the
same but the developer is able to go
ahead with the project knowing they
ace a much lower level o construction
and commissioning risk.
Figure 12: Underwriting through consumer levy: Risk taker through the project lie cycle
Source: PwC analysis.
Decision point whether to enter the scheme or not
Consenting risk N/A N/AN/ADeveloper
Price risk N/A N/A OperatorDeveloper
Volume risk N/A N/A OperatorDeveloper
Construction risk N/A N/A N/AShared between
Developer & Consumer
Technology/
O&M riskN/A Operator
Shared between
Developer & Consumer
Shared between
Developer & Consumer
1
1
2
2
The underwriting scheme ends after c.1 year of operations and the Operator continues to receives a reduced number of
ROCs as a trade-off to have had the construction risk and technology risks underwritten through the duration of the project
Pre-construction Interim operations Ongoing operationsConstruction
7/31/2019 PwC Offshore Wind
15/20
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
PricewaterhouseCoopers Energy, utilities and mining 13
Implementation considerations
We would envisage that such a scheme
would be in place or a limited time up
until a point where the market has been
sufciently derisked to be able to
sel-sustain the required pre-
construction fnancing. To speed up the
overall derisking o the market,
participants in the scheme could be
required to share project development
knowledge on certain pre-agreed topicswith other developers participating in the
same scheme.
This type o levy-based scheme is not
unique. Carbon capture and storage
demonstration plants are, or example,
intended to be fnanced in a similar way.
However, the challenge o implementing
this scheme in a timely ashion and
managing it in an efcient manner
should not be underestimated. A
signifcant advantage o this scheme is
that the cost impact to the consumer willpotentially be neutral compared to the
current market mechanisms in place.
Oshore wind project capital structure
Solutions 1 and 2, by underwriting or transerring construction phase risk,
potentially open up oshore wind arm development to low risk investors, such
as pension unds. We illustrate below the capital structure this might create.
Low risk investors, such as pension unds, could invest in the highergrade tranche but possibly also the lower grade tranche which would have
a higher yield.
On a case by case basis the capital structure could be split into multiple
tranches that represent dierent levels o risk.
For example, the higher grade tranche could be backed by the buy-out
ROC component that is indexed at P90 output levels.
Higher risk levels would be based on wholesale revenues (excluding ROCs),
the recycled beneft proportion o ROCs and higher load actors.
The role o the proposed GIB could be to provide a mezzanine or high yield
loan acility, representing a small proportion o the total capital requirement.In this way, the available GIB und o 2bn would be sufcient to fnance the
unding requirement or oshore wind.
The developer would raise more fnance than required in the project plan,
providing an upside incentive i the plan is achieved.
Figure 13:
Source: PwC analysis.
Guaranteed by consumer
Capped developer risk
Target cost 900M
Above
developer cap
Developer downside
Higher grade tranche
Lower grade tranche
GIB loan
Developer equity
Developer upside
Capital requirement
and risk
900
100
100
Finance raised
pre-construction
200
100
300
400
7/31/2019 PwC Offshore Wind
16/204 PricewaterhouseCoopers Energy, utilities and mining
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
Solution 2: Regulated asset regime
The second solution is based on
bringing oshore wind arms into a
regulated asset scheme. The risk sharing
principle would be in line with that
described or the levy-unded
underwriting scheme. It would also be
on a voluntary basis and regulated by a
scheme administrator. Participation in
the scheme would be subject to the
same prerequisites outlined undersolution 1 above and, like that solution,
the transmission element o the project
would continue to be managed through
the OFTO regime.
The developer would share construction
and commissioning risk with the
administrator and indirectly with
consumers. Once the wind arm has
demonstrated operational stability ater
an agreed period o operation it would
be auctioned o. The price would be
set to the regulated asset base (RAB)value and the winning bidder would be
the one oering the lowest required
return on the capital. This ongoing
capital return might be reviewed every
fve years by the administrator, similar to
other regulated assets.
The administrator would assume
responsibility or the o-take and any
potential short-all in selling to the
market would be covered through a
consumer levy.
Determining the regulated asset
base (RAB)
The RAB would include fve cost
elements, each reviewed and approved
by the administrator:
1. Pre-construction costs
benchmarked and adjusted or
specifc circumstances.
2. Construction costs based on plan.
3. Overruns based on a risk sharing
mechanism (the developer liabilitywould be capped at perhaps 10%
o the total cost as or the levy-based
underwriting solution).
4. Capital costs based on agreed
return rates or allowed costs.
5. Interim operating phase overruns.
Auction and ongoing revenue
determination
The winner o the auction at the end o
the interim operating phase would pay
the RAB value and receive an ongoing
return on the capital to manage the
asset. I the operator ails to maintain the
agreed availability, fnancial penalties
would be imposed. At a regular interval,
perhaps fve years, the administrator
would re-adjust the ongoing revenue
stream based on a determination
process. The logic or this review would
be that the costs were highly uncertain
at the start o the scheme but, over time,
actual costs and the potential or
efciency gains would become known.
Project liecycle risk
Figure 14 below demonstrates who is
assuming the various risk elements or
the duration o the project liecycle.
Scheme fnancing
The administrator would control all
output rom the wind arm and sell it
primarily through the wholesale market
on a bilateral basis and, to some extent,
on the spot market. The revenue stream
would include a reduced number o
ROCs, to compensate the consumer
or the risks assumed during the
construction risk in very much the
same way as under solution one.The market price risk is transerred to
the consumer and any potential shortall
in the required revenue streams to the
wind arm operators would be covered
through a levy on all consumers on
a per MWh basis. Any surplus would
either be retained in a und to cover
or other potential shortalls, be given
to the Treasury or transerred back to
the consumer.
I the auction is competitive, and on
the basis that the operator could expect
to become more efcient over time in
managing the asset, the net result could
be cost neutral compared to the two
ROCs currently received.
Figure 14: Regulated asset model: Risk taker through the project lie cycle
Source: PwC analysis.
Decision point whether the asset should be managed as a regulated asset
Consenting risk N/A N/AN/ADeveloper
Price risk N/A N/A ConsumerConsumer
Volume risk N/A N/A Consumer
Construction risk N/A N/A N/AShared between
Developer & Consumer
Technology/
O&M riskN/A
Shared between
Developer & Consumer
Shared between
Developer & Consumer
Shared between
Developer & Consumer
Shared between
Developer & Consumer
1
1
2
2 3
The asset is auctioned off to a operator who pays the RAB value and bids required revenues p.a.
3 The scheme Administrator determines the level of ongoing revenues p.a. for example every five years
P re- co ns tr uct io n Co ns tr uc ti on I nt er im o pe rat io ns O ng oi ng o per at io ns
7/31/2019 PwC Offshore Wind
17/20
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
PricewaterhouseCoopers Energy, utilities and mining 15
A low risk investor, or example a
pension und, could participate as
fnancier in the pre-construction phase
o the project and remain as such or the
duration o the asset lie. Once the arm
is operational and it is auctioned o the
fnance arrangement would roll over to
the operator acquiring the asset.
Eectively the operator would pay the
developers equity proportion and
potentially chose to refnance some othe lower grade tranches o the capital
structure.
Implementation considerations
As with solution one, the RAB scheme
could be put in place or a limited period
o time until the market or oshore wind
development has been derisked
sufciently to attract the required
investments. Alternatively, it could be
viewed as a more permanent solution
more in line with the already established
Oshore Transmission Network Owners(OFTO) regime. A RAB scheme as a
concept is not something new. The
OFTO regime and that o similar
arrangements in other sectors could
provide a useul guide to how to
structure the oshore wind scheme.
A potential downside o the regulated
asset regime would be that the
implementation time rame could be
lengthy. It might require thorough
consultation processes and is
administratively complex to implement.Another downside that may aect the
willingness to invest is the risk that
insufcient investors would be willing to
participate in the auctioning o a project
given that, potentially, a large number o
projects would be coming to the market
at the same time.
Solutions to increase returnin the short-term
Solution 3: Additional ROCs
or a limited period
This solution boosts the short-term
return by increasing the number o
ROCs available or oshore wind arms
in the frst couple o years o operation.
An investor who invests under this
scheme would assume the ullconstruction and technology/O&M
risks. However, the increased return is
intended to compensate or the
additional risk. The main principles o
this scheme are illustrated in Figure 15.
Investments and returns
The required capital to commence
construction would be invested on an
equity basis, split 50:50 between the
developer and the private fnancial
investor. For private individuals this type
o investment would have to be managedthrough an intermediary such as an
equity und managed by a commercial
bank. The construction phase would be
expected to last or two to three years.
Under this scheme the wind arm would
be entitled to, or example, our ROCs
rather than two during the frst two years
or so o the operational phase. The
entire dividend payable during this
period is paid to the private investor.
At the end o the initial two year period
the project can be refnanced and the
private investor is repaid the initial
equity stake. Any potential equity
upside is retained by the developer in
compensation or not receiving any
dividend in the frst couple o years o
commercial operation.
Depending on the precise confguration
o the scheme private investors couldachieve an IRR o up to 20% i the
project is delivered on time and budget.
However, developers may fnd it difcult
to invest hal o the required capital.
I this is the case, the proposed Green
Investment Bank (GIB) could support
the developer to fnance its part o the
investment. In this way, this scheme
could help the GIB leverage private
unds and, thus, make a substantial
contribution.
Implementation considerations
The additional ROCs scheme would
be relatively easy to implement given
that it would build on the existing ROC
scheme and not require a substantial
restructuring o the market. As a
consequence the scheme could make
an impact in the short-term and put
the UK on track to achieve the 2020
renewable target.
Figure 15: Illustrative: Model to attract a private investor with an attractive return and exit
within 5 years
Source: PwC analysis.
1 4
Year 1Year 0 Year 2 Year 3 Year 4 Year 5 Year 6
Additional RoCs
Standard RoCs
Wholesale revenues less opex
Developer equity
Private investor equity
Developer and private
investor splits the required
equity investment 50:50
The ongoing c.2 RoCs will provide
sufficient return for both the developer
and the new low risk investor
Initial private investor achieves
c.15%-20% IRR through the benefit
of additional RoCs (all available
dividends to private investor)
New low risk equity
investor any upside
to initial investment
to developer
2 3
7/31/2019 PwC Offshore Wind
18/206 PricewaterhouseCoopers Energy, utilities and mining
Meeting the 2020 renewable energy targets: Filling the oshore wind fnancing gap
A potential downside o the scheme is
that the supply chain might absorb a
signifcant proportion o the incremental
revenues generated by the additional
ROCs. This is because there are
constraints in the supply chain and
suppliers might be able to push through
higher prices i they know that additional
revenues are available. The result would
be reduced returns to the private
investors and, with it, the danger o lack
o interest rom the private investors in
anticipation that this supply chain
squeeze could happen. Another
downside is that the cost o enabling the
increased investor returns would need tobe absorbed in ull by consumers
through increased electricity prices.
Solution 4: ISA bonds or equity und
To attract investments rom private
individuals to und the construction
phase o projects, investments in the
oshore wind sector could be made tax
ree through an extension o current ISA
allowances or individuals. This could
either be in the orm o a fve year
renewable ISA bond or a renewable
equity und. The capital raised through
such schemes would be unnelled to
appropriate projects by the commercial
bank managing the investment or
through the GIB. These schemes would
require the capital to be tied up or a
minimum period covering construction
and commissioning o the asset and
would only oer returns ater thisminimum period. Cost and timing
overruns would continue to be borne
by the developer.
Developers would either seek an
equity investment rom the renewable
equity und or raise the required
fnance through bond fnancing.
The bank managing the und would
screen and select projects and the
scheme would be monitored by a
regulator. The return or private investors
would need to be commensurate withalternative investments products.
It should be noted that the scheme
would not suit all private investors,
or example private equity houses
who would fnd that the risk associated
with the investment would prevent
them being able to get the leverage
on their investment that they need.
Implementation considerations
This scheme would be relatively
straightorward to implement. It would,
however, be important to inorm thepublic about the level o risk o investing
in the scheme. The management and
marketing o the bond/equity unds
would be managed by commercial
banks and their expenses would need to
be paid rom investment returns. The
ultimate cost o providing the additional
return to attract the investment would be
borne by the taxpayer in the orm o
reduced tax revenues or the treasury.
7/31/2019 PwC Offshore Wind
19/20
Michael HurleyPartner, Global energy, utilities
and mining advisory leader
Email: [email protected]
Tel: 020 7804 4465
Ronan OReganDirector, energy and utilities
Email: [email protected]
Tel: 020 7804 4259
Contact details
This publication has been prepared or general guidance on matters o interest only, and does not
constitute proessional advice. You should not act upon the inormation contained in this publication
without obtaining specifc proessional advice. No representation or warranty (express or implied) is
given as to the accuracy or completeness o the inormation contained in this publication, and, to
the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do
not accept or assume any liability, responsibility or duty o care or any consequences o you or
anyone else acting, or reraining to act, in reliance on the inormation contained in this publication or
or any decision based on it.
2010 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers reers to
PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context
requires, the PricewaterhouseCoopers global network or other member frms o the network, each o
which is a separate legal entity.
Designed by studioec4 20287 (07/10)
7/31/2019 PwC Offshore Wind
20/20