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The Impact of the RO Extension and the 2 nd Round on the Financing of Offshore Wind

The Impact of the RO Extension and the 2 nd Round on the Financing of Offshore Wind. Andrew Perkins Assistant Director, Ernst & Young Renewable Energy Group. Offshore Wind: UK in a world leading position. October 2003 RO extension: ( 15.4% target in the fiscal; year 2015/16)

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The Impact of the RO Extension and the 2 nd Round on the Financing of Offshore Wind

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  1. The Impact of the RO Extension and the 2nd Round on the Financing of Offshore Wind Andrew Perkins Assistant Director, Ernst & Young Renewable Energy Group

  2. Offshore Wind: UK in a world leading position • October 2003 RO extension: • (15.4% target in the fiscal; year 2015/16) • Effect on Market Place for Renewable Energy • Power Purchase Agreement • Finance Providers • December 2003 Round 2 announcement: • (Leases for 5.4-7.2GW) • Participants • Projects • Opportunities and Threats

  3. RO Extension: Market Place for Renewable Energy • Security for UK Suppliers • - Longer term market • - Increased liquidity anticipated • - Market risk and supplier default remain • Government is committed • - Listening to industry requirement for more certainty • - Wants to encourage investment • - Verbally stated that 2005 consultation will not disrupt this positive development • The RO extension increases the medium term demand for Renewable Energy

  4. RO Extension: Power Purchase Agreements (1) • Power Purchase Agreements (“PPAs”) have a significant effect on financing • Higher RO target will attract equity • - Improved ROC curves • - Prediction that a 20% target may follow • Increased security facilitates project financing • - Longer PPAs (12-15 years) increases the potential debt term • - Higher fixed or floor prices improves the lender’s base case • However, a sudden shift in PPA terms is unlikely • - PPA’s are increasingly tailored to developers’ objectives • - Supplier confidence takes time to accumulate

  5. RO Extensions: Power Purchase Agreements (2) Illustrative PPA ready reckoner before and after the RO extension (£/MWh)

  6. RO Extensions: Finance Providers } PPA tender still the crucial tool

  7. Round 2: Participants • Many members of consortia including overseas investors currently use Corporate Funds • New projects may stretch Balance Sheet capacities/desires of many of these players • There is a need for new financing structures and finance providers: • Syndication v Club • Construction terms v Operating terms • Others: Bonds, Vendor packaging • Participants are likely to change as projects evolve creating M&A activity

  8. Round 2: Projects • Surveying experience and risk allocation • Engineering design • Contracting expertise and arrangements • Construction logistics and supply chain management • Turbine technology and reliability • Project operation and access Increased project size Specialist offshore participants Experience from Round 1 - Development - Construction - Operation RISK MATRIX • Greater understanding and quantification of risk increase the availability and decreases the cost of finance

  9. RO Extension & Round 2: Opportunities & Threats • There is an opportunity for a paradigm shift in available financial options. Long term finance provided from capital markets. • Sources of finance: • - More cost effective financing from banks providing Project Finance • - Increased project size justifies greater complexibility • - Diversity of players create opportunities for tailored structured financings • RO Issues: • In the absence of an extension, Round 2 projects will be reliant on licensed suppliers taking a view beyond 2015 • To avoid a return to a boom bust industry, there is a need to regular extensions to the RO target or an equivalent long term incentive Construction 2003-2006 PPA during operation 2004-2015: 9-11 years PPA Round 1 Construction 2007-2012 Round 2 PPA during Operation 2008-2015: 3-7 years PPA 2000 2005 2010 2015

  10. Round 2: Actions NOW • Agree the financing plan within the consortia: • Financial structures • Sources and timings • Tax planning • Exit options • Development and contracting strategy must be structured to meet the requirements of the financing plan ie Turnkey v Multi-contract • Strong industry consensus to the DTI, to highlight need for long term revenue (RO extension?) or provide a satisfactory alternative

  11. Conclusion • The RO extension provides a healthy framework for the project financing offshore projects • Round 2 requires significant capital investment which creates the opportunity for the providers of finance to widen and improve their offers, however the projects need long term revenues

  12. Contact Details • Andrew Perkins • Ernst & Young • Broadwalk House • Southernhay West • Exeter • EX1 1LF • Tel: +44 (0) 1392 284394 • Fax: +44 (0) 1392 284302 • E-mail: aperkins@uk.ey.com

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