Offshore Wind Developers to Face Financing Problems, Moody’s Says

While recent growth in offshore wind capacity and plans for future expansion to meet EU renewable energy targets are fuelling demand for credit in the sector, the assets come with distinct challenges for investors, says Moody’s Investors Service in a Sector In-Depth report published recently.

“A new offshore wind project, when compared to an onshore equivalent with the same counterparties, contracts and expected financial performance could have heightened construction and operating risk, presenting new challenges for investors. However, these credit risks can be mitigated,” says Christopher Bredholt, a Moody’s Assistant Vice President — Analyst and author of the report entitled “Offshore Wind Projects: New Investment Opportunities Present New Credit Challenges, But These Can Be Mitigated.”

Moody’s notes that construction risk for investors in offshore wind projects is greater than for equivalent onshore projects, as a result of more unpredictable weather and geophysical conditions at sea. Additional risks come from unproven technologies and construction techniques used to adapt to deeper waters further offshore, as well as the need for careful supply chain management and logistical planning, particularly in respect of vessels. In addition, the operating risk profile of offshore wind projects is greater than for onshore counterparts, reflecting technology risk as systems and turbines evolve, and the complexity of operating and maintaining the assets due to access issues.

Construction and operating risks could be addressed by the level of float and contingency in the budget, sources of construction phase liquidity, contractor’s and sponsor’s relevant experience, dedicated liquidity reserves, and a robust contractual operations and maintenance framework.

While recent growth in European offshore wind capacity could generate new deals for debt investors as utilities seek to recycle capital, the pace of build-out may be slower than anticipated in part because debt and equity investors may take time to get comfortable with new subsidy mechanisms. The size of installations may also put pressure on the electricity transmission grid and delay connections. Moreover, commercial investors may be slow to accept offshore risk alone, as the majority of financings to date have involved government-supported banks, export credit agencies and multilateral banks.