PwC RENEWABLE ENERGY VIEW 2015
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expected to require £24bn of investment to reach the forecast 2020 capacity (57% of total investment in renewable power to 2020).
Accordingly, enabling investment in wind
energy is paramount to achieving capacity targets. An interesting development in this regard during 2014 was the Green Investment Bank (GIB) investment in the 210MW Westermost Rough project. This marked the first time GIB was willing to take construction risk, and the bank’s involvement allowed additional investment from Marubeni Corporation, who is also sharing construction risk. This change in approach will be welcomed by large utilities who have seen considerable pressure on their generation business during recent years, limiting their ability to fund large offshore projects on their own balance sheets.
Evidence suggests that the outlook for
capital availability for other technologies is broadly positive, with confidence from developers in the availability of debt and equity alike.
Solar PV is increasingly succeeding in
attracting growing volumes of institutional investment by delivering a suitable risk return profile to investors seeking to diversify their renewable portfolios. Fund managers credit the increasing awareness among institutional investors of the low volatility and index linked yields that solar PV can provide for the growth in appetite for the technology.21 Allianz Capital Partners, for example, assert that by investing in solar PV they are able to hedge against the high volatility their wind
Target deployment volumes are unclear beyond the tenor of the Levy Control Framework (LCF) The investment case for renewables is unclear beyond the end of the current LCF in March 2021. The lack of clear guidance is challenging for developers, who rely on capacity targets to appropriately manage their pipeline and equally to the supply chain, which requires confidence in the post-2021 market to justify investment.
Contracts for Difference provide certainty to winners but risk to all The budgetary constraint applied to the CfD mechanism via the limited LCF budget
WESTERMOST ROUGH CONSTRUCTION RISK SHARING
2014 saw a notable investment in offshore wind, with the Green Investment Bank (GIB) and Marubeni Corporation jointly investing c. £500m to purchase a 50% stake in Dong Energy’s 210MW Westermost Rough project. Dong Energy’s Westermost Rough wind
farm is located c. 8km off the Holderness coast and consists of 35 Siemens 6MW turbines expected to generate 800GWh of renewable electricity annually once commissioned in H2 2015. The Westermost Rough project was at the
early stages of construction off the Yorkshire coast at the time of investment and will be the first commercial scale project in the UK to deploy Siemens’ 6MW direct drive turbine. The project marks the first case of the GIB taking construction risk in an investment. This landmark risk sharing approach signals a shift from GIB’s traditional role of investing in operational assets to facilitate capital recycling (e.g. Sheringham Shoal, Walney, Rhyl
Flats and London Array). It forms part of GIB’s strategy to mobilise capital into the UK offshore wind industry by helping developers to refinance part of their investment in developed projects, thereby supporting them in delivering the next round of new projects. “We have been able to enter into a shared
construction risk partnership and at the same time we have locked-in significant value creation from the transaction,” explained Sam Leopold, executive VP of Dong Wind Power, “today’s agreement enables us to free up capital to continue our investment programme and meet our 2020 target.” By making these investments on fully commercial terms, GIB hopes to finance the expansion of the sector and create a demonstration effect that other investors can follow. This demonstration effect is seen to have contributed to Marubeni Corporation’s decision to provide £259m towards the transaction.
The Westermost Rough investment decision was accompanied by agreement for GIB to acquire a 10% stake in Gwynt y Môr from RWE Innogy for £220m. The £2bn Gwynt y Môr project has an installed capacity of 576MW and was in the late stages of construction at the time of investment. The implications for industry are positive. By creating conditions that allow new types of investors to provide capital for offshore development, GIB is able to free up developer’s capital at the same time as sharing risks. The demonstration effect also supports the industry’s efforts to reduce costs, by investing in innovative technologies which would typically be associated with higher investment risk.
Sources: UK GIB invests £461m in the UK offshore wind sector, Press release, March 2014
energy portfolio, since solar output typically only deviates 3-5% annually compared to wind energy’s 25%.22
3.6. Current challenges to securing investment in offshore wind OREC’s CRMF study consists of a number of indicators, which are grouped into three areas: technology, supply chain and finance. 2015 findings suggested that all finance indicators were either ‘ahead’ or ‘on target’, in the context of reaching a LCOE of £100/MWh. Evidence to support the finance indicator levels (cost of equity, cost of debt and cost of insurance) came from interviews with stakeholders spanning investors (equity and debt), developers and insurers. This coverage of stakeholders led to consensus about a number of themes influencing investment in offshore wind energy in the UK.
is reported to have increased the risk of developers failing to secure a CfD at auction. This level of allocation risk is creating a barrier to developers, who must sink considerable development costs without certainty of securing a contract. Investors in turn are reluctant to engage with project developers who have not yet secured a CfD. It is too early to say whether this change in risk profile is sufficient to force developers (particularly for technologies with higher development costs) to stop developing projects.
Technology innovation aimed at reducing costs is increasing risk to investors In a bid to reduce costs, industry has delivered strong technological innovation. However, the unproven nature of the new technology is viewed by investors as an unwelcome risk, preventing a fall in the cost of capital (by increasing the construction and operation phase risk premia). The report identifies investor’s preference for proven processes and components and suggests there must be greater awareness of the implications of innovation on financing costs
Potential equity pinch point as developers push to construct and accredit under the RO The report identifies the potential for an increased demand for equity in response to the large number of projects which are likely to target FID before the support scheme closes to new capacity.
88 REview Renewable Energy View 2015
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