Lessons learnt from the European offshore sector

Asia Offshore Wind Day

Tokyo, 25 January 2018

Lessons learnt from the European offshore sector
Table of contents

1. Green Giraffe introduction

2. Lessons from Europe for the OW industry

3. Bankability of offshore wind projects

4. Financing lessons learnt from Europe

5. Offshore wind in Japan

6. Key takeaways

2 CONFIDENTIAL
1. Green Giraffe – The renewable energy finance specialist
We get deals done

Deep roots in renewable energy finance Close to EUR 20 billion

• Launched in 2010 by experienced finance specialists with a funding raised for renewable
strong and proven track record in renewable energy
energy projects in 8 years
• 70+ professionals with offices in Paris (France), Utrecht
(the Netherlands), London (UK), Hamburg (Germany), and
Cape Town (South Africa)
• Multi-disciplinary skillset including project & structured
70+ professionals in
finance, contract management, M&A, and legal expertise
5 countries
High-quality, specialised advisory services
• Focus on projects where we can actually add value
• We can provide a holistic approach and are able to include
sector-specific tasks in addition to traditional debt or
equity advisory (such as contracting, strategic advisory
Involved in over 100 renewable
and development services) energy projects with a total
• Widening geographical reach with a burgeoning presence capacity of ca. 25 GW
in the Americas and Africa in addition to Europe
• Priority given to getting the deal done!

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1. Green Giraffe – Consistently highly-ranked in league tables
2016 renewable energy – Inspiratia 3Q 2017 renewable energy – InfraNews

Company Deal count USD bn Company USD bn Deal count

1 KPMG 22 17.8 1 Green Giraffe 5.8 11

2 Green Giraffe 11 3.6 2 Macquarie Capital 5.2 6

3 PWC 10 1.5 3 JP Morgan 3.7 3

4 EY 8 - 4 Royal Bank of Canada 3.7 5

5 JLL 7 - 5 Bank of America Merrill Lynch 3.6 5

6= Santander 6 4.9 6 UBS Investment Bank 2.9 1

6= Elgar Middleton 6 - 7 KPMG 2.3 9

6= Augusta & Co 6 - 8 Santander 1.9 17

9 Crédit Suisse 5 16.1 9 Rothschild 1.6 7

10 JC Rathbone 4 2.3 10 Mitsubishi UFJ Financial Group 1.5 2

Inspiratia Global league tables 2016 (website) InfraNews league table (website)

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2. Lessons from Europe for the OW industry
The European market is a good reference point for offshore wind

Country

United Kingdom 6,712 1,685 8,397

Germany 5,349 1,231 6,580

China 1,989 2,193 4,182

Denmark 1,266 28 1,294

Belgium 877 309 1,186

Netherlands 1,118 1,118

Region Status
Other 378 115 493
EMEA Installed capacity
Sweden 202
APAC Under construction
Japan 80

Taiwan 8

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Capacity (MW)

Source: 4COffshore, Market Review Report, October 2017

Out of 18 GW offshore wind capacity installed worldwide (Q3 2017), almost 16 GW is in Europe
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2. Lessons from Europe for the OW industry
Where does the European market stand – an active offshore wind market in 2017

A lot of recent regulatory changes

• Germany approved a new EEG regime mid 2016 and provided clarity on volumes to be built by 2025, resulting in “zero bids”
during the first auction in April 2017. The next auction will take place in H1 2018
• EMR (electricity market reform) in the UK up and running. The most recent CfD auction, long delayed saw prices halved
compared to the previous ones and record volumes of new offshore wind capacity allocated as a result, creating new
momentum for the industry; meanwhile all old ROCs and feed-enabling projects are now in operation or under construction
• Latest Dutch tender took place late 2017 and “zero-bids” were confirmed by several parties. Regular volumes to be auctioned
• In Belgium, a new “LCOE” regime has been implemented for two projects (Norther and Rentel, for which the financing is now
secured) and recently approved for the last permitted projects, Northwester 2 and Mermaid/Seastar (tariff at 79 EUR/MWh)
• Projects from the first tenders in France have been delayed, but a tender for floating demonstrators has taken place and the
third French tender is now ongoing under “competitive dialogue” process

An active equity market

• Renewable energy assets are trading at high prices as investors competitively chase yield, pushing down IRRs
• Such IRR compression makes onshore wind and solar assets less attractive to yield-seeking investors and they are now
switching their focus to offshore wind, with its higher, but increasingly understood, risks
• Continued high transaction volume in 2017 (both for projects and companies like GIB & A2Sea)
• Emergence of Chinese buyers (CTG, SDIC) and continued active presence of Japanese and Canadian investors

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2. Lessons from Europe for the OW industry
How did Europe get there? The German example

Offshore wind LCOE development in Germany

German development
German projection
Reliable market conditions to build-up (local)
supply chain for long-term cost reductions
200
EUR/MWh (real)

Maturation: Benefit from well managed supply

150
chain, through intense market competition to
ensure long-term competitiveness
100
End 2015 End 2019
Stable industry with 18,000 10 years of feed-in tariff
50 jobs created in offshore wind

0
1 2 3 4 5 6 7 8 9 10 … 12 … 15

GW build-out

Feed-in-tariff & introduction of fixed market premium Competitive auctions

Source: Ørsted

Germany enabled stable remuneration for a decade, setting the ground for drop in LCOE
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2. Lessons from Europe for the OW industry
Key factors of success

A stable and long term regulatory framework

• Stable, predictable and reliable legal framework (including maritime legal framework)
• No volume risk & certainty about grid connection
• Remuneration & support schemes to attract both debt financiers & investors
• To create a strong supply chain, visibility of the deal flow is key
• Potential public or multilateral debt schemes to support initial deals (cf. KfW or EIB in Europe)

Building offshore wind farms is complex

• It is necessary to be surrounded by strong and experienced partners
• A limited number of key construction contracts to reduce interface risks (5-10 max)
• Time and cost buffers have to be factored in during the construction period
• When using project finance, an extensive risk analysis and due diligence should be performed by knowledgeable parties
• Long term O&M create long term jobs!

Stable framework & support scheme to allow for the supply chain learning curve and attract
investors as well as banks to support the industry
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3. Bankability of offshore wind projects
“Balance sheet” (equity) vs “non-recourse” (debt) financing

Large projects are typically developed through a standalone Equity

project company
Sponsor(s)
• Owned by the project investors
Dividends
• With its own revenues & balance sheet and thus the
ability to raise debt on its own merits Project
company
There are only two discrete sources of funding
• By the owners (directly via equity or shareholder loans, or
indirectly via guarantees)
Equity Debt
• By banks without recourse to the equity investors – this Sponsor(s) Lenders
is “project finance”
Dividends Debt service
The way a project is funded will have a material impact on
how it deals with contractors Project
company
• In a project finance deal, you need to deal with the senior
lenders’ requirements!
• Tax, accounting, consolidation and rating issues

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3. Bankability of offshore wind projects
A quick focus on project finance

No recourse No upside

Recourse to investors is contractually limited Lenders receive a fixed remuneration

Lenders rely on project revenues only Lenders do not benefit from better performance

Capital intensive projects requiring long term financing Low single-digit margins vs high leverage

Lenders need long term operational performance Risks to be commensurate with remuneration

• Lenders need to make sure that the project works on a • Lenders need risks to be measurable and to have
standalone basis, with no third party commitments than probabilities of occurring in the low single digits for
those made at financial close. Such commitments must investment to make sense. Risks which are (seen as)
be realistic, credible and durable, both from a contractual well understood are thus easier to bear
and an economic standpoint
• Project finance lenders will usually have priority access
• This typically entails very detailed contractual to cash-flows and security on all assets, contracts and
frameworks and extensive due diligence equity of the project

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3. Bankability of offshore wind projects
Bankability is key for offshore wind projects requiring high capital expenditure

Development phase Construction phase Operational phase

No project! Delay and cost overruns Lost revenue

No permits Scope gaps Lower availability

No tariff / PPA Contractor delays Higher O&M cost
No contracts Adverse weather Lower prices
Not enough money Accidents Less wind

Mitigation tools

Project coordination Project coordination

Project management
Solid contracts (LDs) Solid contracts (LDs)
Detailed planning
Contingency budget Contingency budget
Committed sponsors
Insurance Insurance

Projects are bankable when risks are well identified and tackled appropriately, in each phase
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3. Bankability of offshore wind projects
Construction risk – banks focus on interfaces between key tasks as well as between contracts

Several completely different industries Equity Debt

• Turbine manufacture Sponsor(s) Lenders

• Foundation / steelwork supplies
Debt service
Project
• Electricals management
O&M Project
• Cabling company
Support/
• Marine construction work Warranties
Interfaces
Due
diligence
No obvious general contractor! Turbine supply

Marine construction
And yet banks do take construction risk Electrical
Direct
• Focus on project management works
Construction agreements

• Focus on key interfaces contracts

Foundations
• Understanding of critical path items
• Heavy involvement in contract negotiation
Regulatory
Construction permits authorities

The higher risks borne by the banks impose different development and contractual approaches
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4. Financing lessons learnt from Europe
Market trends – history

Typical project finance Maturity

Leverage Pricing Maximum underwriting
conditions - offshore post-completion

2006-2007 60:40 10-15 years 150-200 bps EUR 50-100 M

2009-2011 65:35 10-15 years 300 bps EUR 30-50 M

2012-2013 70:30 10-15 years 300-375 bps EUR 50-75 M

2014-2015 70:30 10-15 years 200-250 bps EUR 100-200 M

2016-2017 75:25 15-17 years 150-225 bps EUR 100-150 M

Debt is currently extremely cheap

• Margins rose after the crisis (reflecting higher bank cost of funding), but have been trending down since 2014
• With low underlying rates, the overall cost of >15-year debt is now around 3%

Structures (ratios, maturity, covenants) have actually been quite stable since 2007
• Debt terms fundamentally driven by regulatory framework (duration, merchant risk, public financing opportunities)
• Commercial fights are rarely about debt sizing or pricing
• General improvement in commercial terms over the past two years

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5. Offshore wind in Japan
Japan offshore wind context – challenges & opportunities

Key strengths & opportunities Key challenges & threats

Energy transition towards more OW generation Offshore wind faces challenge to persuade government
planners as OW energy costs remain high for now
• High reliance on energy imports & high costs of gas
• Onshore wind is facing geographical & social opposition, Grid and onshore infrastructure are limited
caused by population density and solar is at its limits
• Supply and demand mismatch as regions with the best
wind resources also have the least utility grid capacity
Attractive FiT for offshore wind is a primary policy driver
• Thus OW is heavily restricted by regional utilities and risk
• Japan has the highest OW FiT (315 EUR/MWh)
of curtailment is high

Strong local supply chain • Higher base costs to establish industry foundation and
support infrastructure
• Able to supply WTG & world class leader in floating R&D

Long consenting process

Solid financing landscape: mature market for project finance
• Lengthy EIA process which takes at least 3y to complete
• A lot of liquidity available from the Japanese banks
• Development mainly in port areas as easier due to
• No hedging issue – liquid market, for FX and interest rate
permitting hurdles (only 5y right of usage at general sea)
• Long term loans are available, up to 18-19 years for solar
• Lack of installation vessel (foreign vessels not allowed)
and onshore wind
• Pricing is competitive Challenging natural predispositions (earthquakes, typhoons)

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5. Offshore wind in Japan
Planned offshore wind projects

Majority of pipeline in planning stage Selected announced projects in pipeline

• Most of the current planned projects are clustered along
Wakkanai Port
the western coastline & central region due to lower
water depth Ishikari Shinko

• Project in central and northern regions face opposition

from local grid utility operating in monopoly Mutsu
Yuri Honjo
Ogawara
• Too much solar intake Noshiro & Akita Port
• Keeping grid space for potential nuclear restart Sakata Port Fukushima
• Reluctant to upgrade the grid Murakami FORWARD

• Southern regions are more likely to face social Kashima

opposition potentially interfering with the EIA process Port
Kitakyushu Port
Key focus on port/harbour areas NEDO
floating
• Most projects are in general sea area but focus will be Planned project
on port/harbour for easier permitting and lower costs Yasuoka
Demonstration project

Source: MAKE, METI, MOE

Approved project

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6. Key takeaways
Hopefully some of the European lessons can allow Japan to bring down OW cost faster

Offshore wind development would allow Japan to rely less on imports & increase the
I
renewable share of the energy mix

Japan has a strong local supply chain already able to supply turbines and some key
II
component for OW development (high FiT, strong research in floating, etc.)

…but the development barriers remain high, mainly due to the complex and long
III
approval EIA procedure and to the lack of long term regulation for general sea areas

Bringing down the cost per MW installed quickly is key – Japan can benefit from
IV
Europe’s experience to bring down the cost of capital (projects, FiT, land right etc.)

Even though the banking market is mature & liquid with some OW and PF experience,
V
the lending thresholds & requirements for detailed due diligence will remain high

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