The Oil Drum

64 comments on The First Ever Off-Shore Wind Farm Financed by Banks...

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Nate Hagens on October 31, 2006 - 11:04am

Great job Jerome - two questions:

1) what is status/climate of these type of bank financings for large wind in US (offshore)

and

2) to finance such a project, does the bank/utility do a risk adjusted view of electricity flows based on a certain discrete timeframe? In other words, do the terms of a project get better if the wind fits nicely into an electricity portfolio, adjusted for shortfall risk? Or is it just looked at in MW potential itself, and the other componenets of the affected electricity grid are viewed exogenously?

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Jerome a Paris on October 31, 2006 - 11:12am

I'll admit that I'm not following all that closely US projects as we have a team in NY - we get consulted when projects get close to the stage where banks need to take decisions (bidding process to be selected, por apporval process for a mostly or fully negotiated transaction). So far, we have not been consulted, and my bank is one of the leaders on the North american market, so they are presumably following the projects underway.
No, we just want certainty that all kWh produced will be sold, and that they will get a price we can understand. In the US, that means either taking merchant risk, or getting a PPA. After the merchant power plant bloodbath a few years ago, merchant risk has gone out of fashion, and we usually require a PPA for the full volume produced, and with a acceptable price formula (fixed, or merchant with a floor). The management of the intermittancy is passed on to the utility that buys the electricity. In any case, we do not want to have to bear the "balancing costs" that may be imposed on wind projects (udually this is covered through a lower priced PPA by the utility that then manages its own supplies)

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eutawal on October 31, 2006 - 2:44pm

You mention PPA (Power Purchase Agreement) for the wind generation, but if a wind facility is able to sign such an agreement, it seems that financing becomes simple and the need for the novel features you mentioned (contingent facility and equity and cash sweeps) are not necessary.

Here in the US, the PPAs for wind are getting harder to obtain because of the second point you mentioned - the management of the intermittancy - which has become a burden for the local utility. I took that the structure you described took these burdens and mitigated them through the cash sweep mechanisms and guarantees...did they not?
Does the Vestas guarantee only cover low availability caused by mechanical failures rather than lack of wind? If so, does the contingent equity cover the risk of intermittancy and the utility's other generation steps in? do the cash sweep mechanisms true up in times of no wind? or is this site lucky to have a high capacity factor?
Very interesting stuff, would love to learn more and figure how to apply and solve the intermittant issue over the pond here in the US.

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Jerome a Paris on October 31, 2006 - 5:11pm

This is offshore. These features are there to cover for uncertainty in construction schedule and then on operating budgets - for which there is little track record.

Intermittancy has to be managed outside the project; it's too much of a burden for a single project.

There is never any coverage for lack of wind. We rely on statistical analysis and cover ratios that protect us even if you have a low wind year - that's true onshore as well.

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NC on October 31, 2006 - 12:59pm

Nate,

I have a friend with a finance degree who works for the insurance industry and finds interesting places to invest the money. He has helped finance 2 wind farms in the U.S. via bond issues. My limited understanding is that there are commercial bonds generated by companies that are underwritten by a variety of insurance and other industries that want return on investment. The bonds then pay back at a fixed rate of return. Very nice for insurance companies that want steady returns but don't want to rely on banks or the stock market. The wind farms themselve were put up by utility companies and they obtained financing via the bonds from a number of entities pooling the money. The farms were on the order of 150-250 megawatt in the midwest. These are 150-250 1 megawatt turbines on ridges and wind corridors.

So I think the money is there but maybe not as concentrated as the European banks.