Wind News

Monday 26 July 2010

PwC claims there is a £10 billion funding gap for offshore wind developers

The UK will miss its 2020 renewable energy targets without a "quantum leap" in offshore wind investment, according to analysis published today (July 26) by auditing and advisory firm Pricewaterhouse Coopers (PwC).

According to PwC's ‘Meeting the 2020 renewable energy targets - Filling the offshore wind financing gap' report, the sector has a make or break role to play in making sure the 15% renewable energy target is met, but offshore wind developers will require £10 billion by 2015 if projects are going to contribute.

The analysis uses data in the UK's Renewable Energy Strategy which shows that offshore wind is targeted with delivering around half of the additional 27GW generation capacity required to meet the UK's 30% renewable electricity generation target by 2020. However, PwC claims that last year, less than half the average annual roll-out rate of 1.1GW needed to meet the target was achieved.

And, it claims that developers will face a peak cumulative funding need of up to £10 billion per annum to achieve the annual roll-out rate of capacity needed, assuming limited project finance is available during the construction stage.

Commenting on the findings, Michael Hurley, global energy and utilities advisory leader at PwC, said: "Offshore wind plays a make or break role in the UK's ability to hit its energy targets and time is running out very quickly on our ability to achieve them.

"The required roll-out rate to achieve the 2020 targets is being hampered by the scarcity of pre-construction finance. We need to dismantle 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."

He added that if the construction and technology risks could be underwritten or transferred, this would open up offshore wind to pension and life company investors.

Mr Hurley said: "The stable and predictable annual cash flows of infrastructure investments are attractive to pension and life companies provided that the construction risk is understood and steps taken to either insure or transfer it.

"They could provide finance for the 20 years + duration of the project, providing an end - to end solution that avoids the uncertainty and cost of having a bridging finance solution."

Proposals

The report puts forward proposals to resolve pre-construction financing issues in the sector, including:

• Underwriting risk through a consumer levy - PwC claims this would reduce construction and technology risks;
• A regulated asset scheme - this would reduce construction, technology and price/volume risks, according to PwC;
• Additional Renewable Obligation Certificates (ROCs) for a limited period - PwC believes this would increase short term returns for investors;
• ISA bonds or equity funds - the analysis show this would increase short term returns for investors.

According to PwC, options three and four focus on increasing the return on investment in the first few years of operation to attract private investors, who PwC claim would seek a higher return in order to accept the risks associated with the construction phase, such as private equity houses, hedge funds and individuals.

The report finds that current incentive mechanisms, in the form of ROCs and the carbon price, are unlikely to address the specific challenge of offshore pre-construction financing alone. PwC claims that using these incentives on their own to boost investment would also run the risk of pushing excessive cost onto the consumer.

Pensions

PwC said its analysis of possible capital structures demonstrated an important role for the Green Investment Bank in "bridging the funding gap", if focused solely on the highest risk loan elements in the construction process.

For example, the report claims that a low risk investor, such as a pension fund, could be attracted to a regulated asset regime. This would work by it participating as financier of the pre-construction phase of the project, with capped liabilities for cost over-runs, with the option of remaining as an investor for the duration of the asset life.

Once the wind farm has demonstrated operational stability after an agreed period of operation, it would be auctioned off, and the finance arrangement would roll over to the operator acquiring the asset.

Currently, PwC claims that with limited availability of project finance or new sources of equity, the "lion's share" of development is expected to come from big utilities companies. However, its analysis shows that against an average £17 billion investment per annum across the whole energy sector to 2020, the combined current capital expenditure of the six largest utility companies and National Grid in the UK is less than half the level required.