Lead Session Chair:
Stephan Barth, Managing Director, ForWind - Center for Wind Energy Research, Germany
Charles Yates (1) F P
(1) CmY Consultants, BROMLEY, United Kingdom
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Presenter's biographyBiographies are supplied directly by presenters at OFFSHORE 2015 and are published here unedited
Charles Yates has been financing infrastructure and renewable projects for 30 years. He is the Managing Director of CY Consultants which delivers policy advice and transactions support for regulated generation. Previously, he led Grant Thornton’s renewable team in London. For Ofgem, he managed the procurement of £1.4bn of transmission for offshore wind farms including for London Array. He worked for Nomura Investment Bank and its PFG which acquired businesses worth €21 billion. He has an M.Phil. in economics from Oxford University and a B.Sc. in Economics & Accountancy from the University of Bristol.
Turbine manufacturer M&A boosts competition and will drive down offshore wind costs
M&A among turbine manufacturers has created stronger competition to Siemens (60% European offshore turbine market share) which will drive down the capital cost per MWh of turbines and financing costs. The joint venture (JV) between Vestas and Mitsubishi; GE acquiring the offshore turbine business of Alstrom; and the Areva Gamesa offshore JV have created businesses with the reach and scale to spread the costs of developing, deploying and maintaining offshore turbines. These new players will compete by, among other things, innovating to reduce the capital cost per MWh of offshore turbines and developing new sales propositions to reduce financing costs.
Mitsubishi and GE bring financial strength and can provide credible performance guarantees over the life of a turbine. For established generation technology, long–term performance guarantees reduce investor risk and drive sales.
Siemens, GE and Alstrom provide performance guarantees when selling large gas turbines. For example, in 2013 GE signed a service agreement valued at more than €30m as part of a deal to provide gas turbines to generate more than 300MW in Thailand. The 13-year contractual service agreement includes power output efficiency, reliability and performance guarantees for eight gas turbines. This illustrates the way forward for offshore wind.
Main body of abstract
This M&A positions manufacturers to take more turbine performance risk and so reduce risk for project developers and banks. Many potential investors are concerned about offshore turbine performance as the new, innovative and ever-larger turbines are unproven, revenue lost due to unplanned outages comes straight off the bottom line and in deep-water it can take many months to repair turbines. Where manufacturers innovate to effectively shoulder turbine risk, a major impediment to project finance is removed and investment by financial institutions is encouraged so taking some of the strain off developers’ stretched balance sheets.
This risk allocation makes sense as turbine manufacturers have the knowledge and the reputational incentive to maintain their products, and now have the financial strength to provide credit-worthy, long-term guarantees.
The growing competition among turbine manufacturers has already increased the tenor and scope of performance guarantees and this trend should continue. The €2bn of debt funding for the Project Gemini offshore wind farm was catalysed by a risk transfer package which included Siemens signing a 15-year project service and maintenance agreement. This managed the operating risk efficiently with the minimum of interfaces and Siemens’ equity in the project aligned the interests of all parties. The Gemini project documentation provides a template for long term turbine performance guarantees.
Transferring operating risk from investors encourages investment from deep pools of capital which otherwise would be deterred. Accessing this new capital will drive down funding costs. This is important as the cost of capital is a key driver of the Levelised Cost of Energy (LCOE). A drop of 1% in the Weighted Average Cost of Capital (WACC) reduces the LCOE by around 6%.
Heightened competition among offshore turbine manufacturers gives investors more options to manage risks. Project developers can improve their risk / return using performance guarantees . The offshore wind industry can learn from the gas turbine industry how to best use performance guarantees.
The offshore wind industry is moving towards a more efficient risk allocation and management framework which will reduce the cost of finance, facilitate recycling of capital and so make a significant contribution to driving down the cost of energy and securing enough finance to fund the ambitious pipeline of offshore wind projects.