Senior Partner & Managing Director
The €110 Billion Financing Challenge
The European Union (EU) is pursuing an ambitious roadmap to reduce carbon emissions across all sectors. As part of this push, renewable-energy sources are set to account for a rapidly growing share of electricity consumption: some countries have established an overall 20 percent binding target for renewable energy by 2020, translating into approximately 35 percent for electricity production. For 2050, the EU is considering scenarios of up to 97 percent renewable electricity.
Offshore-wind power (OWP) will play an essential role in meeting the targets of major European countries such as Germany and the U.K. The European Wind Energy Association expects that by 2020, 40 gigawatts (GW) of capacity will have been installed, which is approximately ten times the current base of 4.9 GW across the European Union. At €110 billion, the required capital expenditures are also enormous. For comparison, leading European developers invested between €6.0 billion and €12.5 billion collectively in each year of the 2009 through 2011 period.
Three key starting points are necessary to understand the challenges facing the development of OWP in EU countries:
This means that it will take several years before utility balance sheets and new external-capital sources can be expected to be available at the required scale. Thus, utilities must assess the amount of capital they expect to have available for OWP through 2020. More importantly, utilities need to think hard about how capital availability translates into risk capacity—that is, given the various risk profiles of the utilities’ OWP portfolios, how much OWP capacity will they be able to finance without jeopardizing their credit rating?
Utilities need to start thinking about financing now. In five to ten years, when the risk capacity of a utility’s balance sheet is stretched to the limit, it will be too late to reduce the risk in ongoing projects, particularly projects that have reached the operation stage. Utilities must be financially and strategically prepared well in advance of reaching this point—the time lag from investment decision and contracting to completion and proven uptime is significant, and making changes is difficult once the process has begun. A proactive strategic approach is more likely than a wait-and-see attitude to attract financing for OWP. Similarly, governments need to provide predictable, attractive, and efficient regulation; targeted subsidies; and reliable grid developments to support the industry. These are essential preconditions for accelerating the allocation of capital toward OWP from large capital providers such as institutional investors.