€10 billion financing indicates offshore wind market recovery in Europe?

As mentioned earlier, wind farms face challenges in terms of both debt and equity financing. However, interest rate hikes seem to have recently come to an end, and inflation has eased. In addition, four wind farms in Europe closed financing during March and May, with a total investment likely to exceed 10 billion euros, indicating a potential recovery in the offshore wind market from the 2022 downturn. The four wind farms are as follows:

• Dieppe Le Tréport (496 MW) and Îles d'Yeu and Noirmoutier (496 MW) in France¹ are about to start construction after securing 2.7 billion and 2.5 billion euros, respectively, through project financing and shareholder contributions.
• Moray West (882 MW) in the U.K. has achieved financial close by securing a non-recourse loan² of 2 billion pounds through project financing.
• He Dreiht (960 MW) in Germany has reached a final investment decision for a total of 2.4 billion euros, with 600 million euros borrowed by EnBW from the European Investment Bank³.

These four wind farms signal an upturn. However, they were able to secure financing in a difficult environment, not because the market has overcome the pressure of rising interest rates and inflation but because they have met certain requirements.
 

Debt acquisition

In a relatively tight funding environment, developers have to offer higher risk premiums to their syndicates. Moray West, led by Ocean Winds, reportedly obtained a cost of debt of 150 to 160 basis points above the reference rate with a maturity of 18 years. While the spreads for offshore wind between 2018 and 2021 were still within a range of between 125 and 175 basis points, the U.K.'s well-established offshore wind industry with relatively low risk has made it the region with the lowest borrowing rates for offshore wind farms in Europe. During 2018 and 2019, the average cost of debt in the U.K. stood at only 1.2%, reflecting how tighter liquidity had driven up the cost of borrowing.

On the other hand, the syndicates will favor less risky funding options or projects, especially corporate bonds issued by investment-grade rated companies. One example is the He Dreiht wind farm in Germany, which obtained financing through EnBW's balance sheet, with 600 million euros coming from a long-term loan provided by the European Investment Bank. EnBW has been rated A- and Baa1 by S&P and Moody's, respectively, suggesting a lower risk of default on its corporate bonds and allowing it to offtake and resell electricity from He Dreiht.

In terms of project financing, investors prefer projects with higher feed-in tariff rates or with Corporate Power Purchase Agreements (CPPAs) to ensure solvency. The three wind farms in which Ocean Winds participates raise funding through project financing, with the Dieppe Le Tréport and Îles d’Yeu and Noirmoutier wind farms in France enjoying a feed-in tariff rate of 150 euros/MWh. High feed-in tariff rates provide a buffer against rising steel, turbine, and vessel leasing costs, allowing these wind farms to maintain financial viability.

The Moray West wind farm in the U.K. has a mixed revenue stream. One-third (294 MW) of its capacity is covered by the U.K.'s fourth round of Contracts for Difference (CfD) at an inflation-adjusted rate of 49.26 pound/MWh; another 50% is allocated through CPPAs with various companies, of which 100 MW has reportedly been sold to Google for 12 years; and the remainder will go to the wholesale market.

CPPA prices are likely to be much higher than CfD prices. Ørsted, which secured 2.85 GW with the Hornsea 3 wind farm in the CfD allocation Round 4, said that exceptional circumstances regarding interest rates and the supply chain could force a pause in the project⁴. Still, Moray West attracted a 200 million pound non-recourse loan from 18 banks. This suggests that CfD returns could not match the risks estimated by the developer and that high inflation has severely reduced the profitability of wind farms. Moray West's hybrid sales model is recognized by the syndicates as a way to balance the risks and generate sufficient profitability. The CfD provides the most stable revenue stream, tax incentives, and a waiver of the Electricity Generation Levy introduced in January 2023 for participants. Meantime, 15% of the electricity generated enters the wholesale market and may profit handsomely in times of supply constraint. Finally, CPPAs serve as a transition between CfDs and the free market, reducing volatility through long-term contracts, accounting for the wind farm's primary source of revenue.
 

Funding sources

The three major sponsors of these four wind farms, EnBW and Ocean Winds' two 50% shareholders - EDPR and ENGIE - are all listed companies with investment grade or higher credit ratings. These companies can access funding through equity or corporate bonds, especially when an inverted yield curve occurs, meaning that capital will flow to long-term investment-grade bonds with hedging capability. For example, ENGIE's green bond issued in January this year was oversubscribed at 2.75 billion euros with an interest rate and maturity of 3.93% and 12.4 years, when the federal funds rate had exceeded 4.3%. 

However, companies cannot solely rely on issuing new shares and bonds. Issuing new shares dilutes their control, while excessive bond issuance leads to high gearing ratios, affecting credit rating. For example, EDPR has signed an investment agreement with the Singaporean sovereign wealth fund to raise one billion euros through equity financing, stressing that it will maintain a healthy balance sheet with a net debt-to-Ebita ratio within 3.2.

In addition, EDPR said it would raise seven billion euros through asset rotation. Asset Rotation, also known as farm-down, is a model in which the site owner sells a portion of its equity at different stages, with the value varying according to the degree of de-risking and the risks of the site itself. For companies with limited credibility or fund-raising ability, asset rotation and refinancing may be one of the few viable options amid a liquidity crunch. Whereas for large power producers like EDPR, asset rotation and refinancing alleviate financial pressures.

While these four wind farms represent the beginning of a recovery in investor confidence, it is also the market's willingness to pay higher spreads and the relatively low risk of projects that attract debt financing. In addition, investors are required to have good credit ratings and diversified financing options to finance wind farms in the presence of high inflation and high interest rates. 

Despite strong electricity demand boosting financing for wind farms, InfoLink sees concerns among investors until the spread between the cost of debt and the reference rate narrows or until creditors switch to riskier projects, such as those lacking acquisition guarantees or commercial wind farms using new technologies such as floating foundations. Until then, governments may have to help finance renewables to ensure a stable energy transition progress.

1: Source: Ocean Winds. Dieppe Le Tréport offshore wind farm reaches final investment decision and starts construction.
2: Source: Ocean Winds. Moray West offshore wind farm reaches financial close.
3: Source: EnBW. EnBW Hohe See offshore wind farms.
4: Although CfD prices are affected by inflation, there is still a large gap between CfD prices and market prices. According to Reuters, the CfD price in March was £45/MWh, while the wholesale price was as high as 130 pound/MWh.