The higher costs for the companies that often must transport components from Europe can be significantly reduced by establishing a robust U.S. supply chain, finds a new financial report issued today by the Business Network for Offshore Wind and Société Générale, a French multi-national banking and financial services company headquartered in Paris.
The report further finds that the federal government is helping to pave the way for getting this industry rolling by issuing lease areas that today offer up to 17 GW of offshore wind capacity that powers up millions of homes.
Liz Burdock, the Executive Director of the Business Network for Offshore Wind, praised the Bureau of Ocean Energy Management for continuing its effort to “avoid potential slow-downs and plan for future leases of new areas for offshore wind while states are signing agreements with developers. Thanks to BOEM sufficient federal lease areas exist to support a pipeline of early projects.”
The report also shows that the growth of capital markets in offshore wind has become “very intensive,” said Burdock.
The report’s most important finding is the possible loss of the investment tax credit. It states: “The winding down of the U.S. federal production tax credits (PTC) and investment tax credits (ITC) will change the medium term future balanced cost of capital for U.S. offshore wind projects. However, again underscoring the importance of the U.S. businesses, the expectation that the potential for the shortfall in savings from the low cost of tax equity is to be offset from a more robust, efficient domestic U.S. supply chain. The next phase is ensuring adequate financing with the appropriate finance instruments to support development of the project pipeline.”
To address cost and supply chain issues, the Business Network for Offshore Wind brought together global financial experts in New York City for the Finance Forum to compare differences and similarities in financing offshore wind in different global markets and discuss ways in which to bring additional capital to the accelerating U.S. offshore wind market. The Finance Forum report highlights the start of this process by taking a deeper look at the needs of the finance industry in order to improve the case for investment into the U.S. offshore wind sector.
“The U.S. is in the most enviable position” said Ross Tyler, Strategy and Development Director for the Business Network, “The U.S. has scale, the Europeans have developed the technology, and we have lease areas while States are beginning to issue power purchase agreements. We have the major building blocks, but the most important is the financing which cements them all together.”
The U.S. financial market may be more conservative with respect to the contracting structures, yet the finance community has a good finance stack and appetite for investment. “The timing is good, and we might expect increasingly competitive banks and expansive lending limits for debt, suitable for the offshore wind industry as more projects are completed,” said Chris Moscardelli, Director, Energy Project Finance, Société Générale.
Over the past few months, the Bureau of Ocean Energy Management approved four site assessment plans and started the review process for a Construction and Operation Plan, furthering the industry’s momentum. BOEM intends to improve the federal review process by: simplifying marine buoys approval; reducing the length of time for geotechnical surveying results; and, allowing developers to incorporate an element of flexibility in its applications with a voluntary option to use a project ‘design envelope’.
The upcoming 18 months will be significant for the U.S. offshore wind industry. Advances are expected for permitting the West Coast, and progress will be seen for the existing leased and new lease areas along the North-East Coast (New York / New Jersey and Massachusetts). “The future financing of these projects are going to be vital for the growing U.S. supply chain,” said Burdock.
Some of the key findings covered in the report include:
- European lenders are now comfortable with offshore wind technology – even new technology and debt financing can amount to 70% of capital expenditure.
- Bonds are beginning to be introduced into some European offshore wind projects.
- The suite of 20 to 30 European lenders, experienced with offshore wind, are involved and knowledgeable with the U.S. offshore wind market but are less familiar with the U.S. Tax equity.
- Capital markets have not replaced debt in the refinancing of the European projects. In contrast, the U.S. might witness earlier entry of the capital markets through institutional financing.
- A significant appeal to financing the U.S. offshore wind projects is the long, usually 20-year power purchase agreements, strengthening the revenue side.
- Unlike European projects that may have 12 or more interfacing contractors, the equity and lending will remain more conservative with the construction structures, ideally looking for wrapped formations or with few contracts but managed by experienced, strong, project construction staff.
Importantly, the report highlights that equity investors for offshore wind will continue to seek reassurances from the risks associated with permitting, lack of social acceptance and potential litigation. The industry has done well in its out reach to policy makers and businesses but more work needs to be done with clarifying public perception.
Similarly, planning to bring predictability is important to both equity and debt investors. One might expect a future focus on the inclusion or unbundling of export cable and grid connection within the U.S. offshore wind financial structures be a topic of importance to all parties