Activating demand determines success rate of offshore wind energy

Financing offshore wind

The financing of offshore wind energy projects looks positive, but we need to be active and tightly focused on activating demand. That is the main message of the 'Financing offshore wind' study, which PwC carried out on behalf of Invest-NL. All stakeholders must ensure that a broader transition takes shape', say Abo Rassa, senior business development manager at Invest-NL, and Robert Hensgens, energy economist at PwC. 'If you only build at sea and you are not able to sell the electricity on to the market, every business case erodes.'

Willingness to finance

The study 'Financing offshore wind' is partly the result of the question that the sector table ‘Electricity’ asked Invest-NL - in the context of the Climate Agreement - about the long-term financability of offshore wind. Previous research by the Ministry of Economic Affairs and Climate concluded that the business cases for offshore wind farms will come under pressure in the long term if developers cannot dispose of the generated energy. In addition, Invest-NL initiated this study to investigate the long-term financing perspective', outlines Abo Rassa. 'To this end, we called in the help of PwC and AMSCAP and interviewed fifteen parties in the value chain - think of developers, financiers and banks - about their willingness to finance wind energy at sea.'

Wind energy being an attractive investment

If you purely look at the willingness to finance offshore wind farms, that's quite a success story', says Robert Hensgens. 'The offshore wind industry and its financing market have matured over the past fifteen years. Many different investors and financiers are prepared to step into these developments at different times. Offshore wind energy is seen as an attractive and relevant investment. However, there is a downside. There are concerns as to whether there is still enough appetite in the market to continue developing wind farms if the developers run the full electricity price risk. Investors - and banks in particular - only really want to step in when there are hardly any risks left. If you could enter into many more power purchase agreements (PPAs) for the long term, you could reduce the risks and this would have a positive impact on financing. With these agreements, the electricity has actually already been sold and you know how much you get paid for it.'

Improving opening up potential demand

'What you would have to do, is to unlock the existing very large potential demand', Hensgens continues. 'In the industrial sector in particular, more and more processes are being made sustainable and it is expected that more and more large quantities of green electricity will be needed. But the tricky thing is that both developments are not progressing at the same pace. The wind farms are being developed, a PPA is now needed, but the industry is still discussing issues such as "can I get a subsidy to make my processes more sustainable or to electrify them? And if I do receive that subsidy, will the infrastructure be in order?" The industrial sector is dependent on government policy in areas such as subsidies, CO2 control and infrastructure. If you really want to realize steps forward and enable the industry to become more sustainable, you will see that the demand for PPAs will increase and it will become easier for investors and financiers to cover the intended risks of wind farms. And then they are only too happy to finance.'

Ecosystems and innovation clusters

'Wind farms at sea are becoming increasingly attractive to all kinds of large institutional parties and financiers', adds Rassa. 'About ten years ago, offshore wind energy began to accelerate; at the time, the technology still needed a boost. Nowadays, the chain that develops offshore wind projects at sea is so professional that the risks are increasingly manageable. That inspires confidence and interest among investors. Almost every country in the world is looking at what is currently happening in the North Sea. The technology is still taking steps forward, the value chain is becoming more professional, ecosystems and innovation clusters are being created. It is indeed important to speed up now and ensure that sales are being realized. We need to ensure that we purchase much more electricity from wind at sea jointly.'

'The offshore wind industry and its financing market have matured over the past fifteen years. Many different investors and financiers are willing to step into these developments at different times. Offshore wind energy is seen as an attractive and good investment.'

Robert HensgensPwC

Shaping a broad energy transition

Leaving the activation of demand entirely to the market is a step too far for Rassa and Hensgens. Hensgens expects that 'if you leave it to the market alone, there is a very good chance that it will fall back. On the contrary, you want steps to be taken to give the activation of demand and system integration a good push. It is precisely now that we need to work very actively on this stimulation of demand and this system integration'. Rassa: 'Make sure that demand from the industrial sector increases through electrification, for example. And keep innovating in the field of storage, conversion to hydrogen and other options. Everyone can contribute to this. Just building at sea, while you are not able to sell the electricity to the market, erodes every business case.'

Hensgens nods approvingly: 'On the one hand, you have to get the industry moving. On the other hand, the government should have a plan B, in case it doesn't succeed quickly enough with the PPAs. If you want to achieve your wind-on-sea goals, you may not make it through the next few years without subsidies. Then you need a plan B. Work that out and make it explicit in advance, because ultimately the further development of the financing market will benefit from not letting the subsidy run out for very long. The intention should be for the market to come up with efficient solutions itself as much as possible.'