Risks and Issues Affecting Investment and Project Finance for Offshore Wind

1. Risks and Issues Affecting Investment and Project Finance for Offshore Wind European Offshore Wind Conference, Sweden, 2009 Simon Luby, Head of Due Diligence

2. Introduction • Brief overview of SgurrEnergy’s offshore wind experience • The Risks - what affects confidence levels? • Conclusions – Being Prepared

3. About SgurrEnergy • Established in 2002, over 40GW of experience • Leading independent consultancy specialising in renewable energy • International • Based in UK, Ireland, France. China, India, Canada and the US • Experienced; over 100 professional first-tier staff • Professional; ISO 9001, 14001 and 18001 accredited • Provider of the cutting edge Galion LIDAR device; ideal for offshore wind projects, independently tested by RISO • Award Winning • Glasgow business award for International Activity 2007 • Best business achievement Green Energy Awards 2007 • Best new business, Green Energy Awards 2004

4. SgurrEnergy’s Offshore Wind Experience • Lenders Engineer for: • Lynn & Inner Dowsing, London Array (with K2) • Borkum West II, two further confidential German projects, and Omonde (pre-acquisition) with Metoc Plc • Critical part of LE teams for Q7/Princess Amalia, Thornton Bank and Thanet (with MM ltd) • Interface, programme and project management review for Thanet lenders, with Metoc Plc • TSA negotiations and contract preparation for Cape Wind (US) • Advised Vattenfall (Ormonde), Masdar (20% stake in London Array), and RWE (50% stake in Greater Gabbard) • Led tendering process for North Hoyle post warranty O&M contract • Supported TSA negotiations for Nord See Ost • Two major resource and constraints studies for the Chinese authorities, funded by the World Bank and EU respectively

5. A Quick Overview of Offshore Wind… • Existing projects have proven offshore wind works • BUT! Many existing projects characterised by: • poor availability and lower than forecast access levels • Serial defects and actual O&M costs higher than budgets • They have also provided invaluable lessons for the industry • Current situation is less favourable: • High capital costs combined with finance constraints • Supply chain constraints • European offshore wind is dominated by utilities • A small number of capable and experienced independents are getting projects financed and built • BUT – recent issues with inexperienced and/or under-resourced sponsors and unbankable TSA terms

6. The Risks – What Affects Confidence? • Completion Risks • Issues that could affect project milestones, specifically energisation • Operational Risks • Issues that could affect project revenue over the debt term or life of the project Courtesy of Centrica Renewables

7. Completion Risks • Capabilities and Resources of Key Project Participants • Site Characterisation • Contract Structure • Turbine Supply Availability • Not an issue for the utilities • Is an issue for the independents (because the utilities have all the turbines…) • Significant impact on whether you get sensible terms and a sensible reaction from suppliers

8. Participant Capabilities • This is one of the most critical aspects • Do the sponsors and contractors have sufficient expertise and experience? • Do they have access to sufficient technical, and managerial support? • Financial strength? • Does the Project hinge on the expertise and drive of a single person or small number of individuals? • Are the project management resources and structure in place for successful development and execution of the Project? • Expertise and experience of both Sponsor and Lender advisors is a key factor

9. Completion – Site Characteristics • The sea is not as empty as it looks • The environment can be harsh and unforgiving • A detailed understanding of the weather and sea currents is essential • Site Investigation: remove the risk of unwanted surprises

10. Completion – Contract Structure • EPC versus Multi-Contract • Both have their benefits and drawbacks • How are design and construction interfaces handled, and by whom? • Agree realistic programme with contractors: • Consider weather risk and long lead items (cables, transformers and turbines) • Adequacy of Liquidated Damages and Caps • Both need to be significantly higher than onshore • Get expert insurance advice

11. Operational Risks • Capability and Experience of the Project Operators • Site Characterisation • Technology Selection • Energy Yield Prediction • Design Life • Technology Risks • Availability & Access

12. Operational – Capability & Experience • Background of Operators • O&M Strategy • Use of permanent accommodation platforms or seasonal hotel ships • Increasing options for using third-party contractors post-warranty • More serious consideration of building up own maintenance teams • Choice and availability of access vessel • Use of helicopters is expanding and will play a key role as projects get larger and further out • Use of condition monitoring • Use of forecasting

13. Operational – Site Characterisation • Failure to adequately characterise the site could result in an unacceptable underperformance risk • Wind data quality - measure on site rather than remotely • Modelling - employ state of the art techniques • Suitability of turbines for the site and role of certification • Turbines perform differently to specified power curve • Scour protection inadequate • Cable burial issues • Understand impact on design life • High production uncertainty will reduce the percentage of debt that a project can attract

14. Operational - Technology Risks • Is the technology proven? • Is it proven in this specific application? • Existing projects have very mixed track records • Future projects using 3MW and above MUST demonstrate better availability • What contractual or physical mitigants are available? • Turbines getting bigger – lack of track record affects long-term confidence • Poor availability has been an issue offshore and for new turbine models • Access Courtesy of Centrica

15. Conclusions – Be Prepared • Demonstrate relevant experience • Realistic financial model, with contingencies • Realistic construction programme, with contingencies • Cost and time contingencies significantly higher than for onshore wind projects • Problems will occur: • identify plans and resources for tackling different scenarios, and choose realistic sensitivity tests for the financial model • Ultimately, sponsors need to demonstrate a water-tight business plan – due diligence is there to both find any leaks AND help remove them • Project finance requires a lot of effort - Are you ready? • New projects (3MW turbines and above) MUST meet expectations for lenders and investors to stay involved

16. Contact us Simon Luby, Due Diligence Team Leader SgurrEnergy Corporate Headquarters 225 Bath Street Glasgow G2 4GZ UK Tel +44 (0) 141 277 1739 Email: simon.luby@sgurrenergy.com Info@sgurrenergy.com www.sgurrenergy.com Renewable Energy Consultancy of Choice