As you know, I'm firmly (and rightly or wrongly) in the camp of those who are seriously disappointed with our current crop of leftwing politicians and who are quite pessimistic about the short term economic outlook. One of my diaries from this summer (Judging Obama) still sums up my views on the divide within the community and the positions of both sides.
One of the results of this mood of disappointment has been an inability to get worked up lately about politics, and to write anything much.
Another reason for my silence has been that I've been inordinately (and thankfully) busy at work. As you may remember, I created my own company earlier this year, after 15 years in the banking world, to help developers find money to build their renewable energy projects, in particular in the offshore wind sector where I've been involved in the past 5 years.
Well, I'm pleased to announce that the first transaction to happen with my new company's help was signed last week last week.
I explained last year, when I wrote about my previous deal, what project finance is about:
A project financing, as I explained in earlier diaries is a stand alone operation that must live without the financial support of its owners once they have put in all the agreed equity. Which means that all the tasks (building it, then operating and maintaining it, and selling the power) must be allocated to the party best able to do them under binding contracts, and the various risks and potential downsides must be similarly allocated clearly to the various parties. Offshore wind farms 'enjoy' particular challenges as they must be built in difficult environment (where do you find a crane able to hoist a 100 ton nacelle 100 meters in the air, and where do you put it when the "ground" you need it to stand on is, well, waves? How do you bring people to make even basic repairs when it's a 4-hour boat trip to get there, and it can only be done when the weather's not too rough? Who carries the burden of lost production in the meantime? etc...). So the job is first, naturally, to understand the risks and find who can best solve them, then agree on a tentative allocation between the parties, as well as a remuneration for each, and then draft detailed contracts to formalise each party's role. The difficult part is that all parties must agree on the same thing at the same time, and to negotiate extraordinarily detailed contracts that must meet the approval of each party's decision bodies, legal departments and various specialised advisors (for technical issues, tax, insurance matters, etc...).
The first phase of the C-Power project being built in the course of 2008
Offshore wind finance has been hit particularly hard by the financial crisis, for two separate reasons:
- the closure of debt syndication markets has hit all large projects. Traditionally, large transactions would be negotiated with a small number of banks, which would commit to providing all the debt (what's called underwriting the financing) and then would syndicate the risk, ie share it with a wider group of banks in a second step. This allowed clients to negotiate with a only a few parties, and to have certainty, once the underwriters committed, to have the funds. Now, with little or no syndication capacity, banks will only commit to the amounts that they are willing to keep, as they won't be able to sell down their share afterwards. For large transactions (and offshore wind farms are typically going to cost the better part of a billions euros or more, and debt finance would be expected to cover two thirds or three quarters of that), that means you need to bring together a much larger group of banks before signing the deal. That makes negotiations a lot more complicated, as a lot of parties need to approve any changes, and subject to potential blackmail from banks that know they are indispensable and can dictate their terms;
- the second problem for offshore wind finance is that it is a new sector of activity. While wind project finance is now a mature, well-understood, competitive sector to which many banks participate, it is not the case for offshore: only two transactions had been done so far, and thus the universe of banks with understanding of, let alone familiarity with, the associated risks, is still very small. Now, one of the consequences of the financial crisis is that banks have narrowed their activities - to preferred clients, core countries and strategic sectors, and more generally to well-accepted risks. Offshore wind is not a strategic sector, and it is largely unknown. So few banks are able to deliver commitments, even if key clients are now pushing them in that direction.
So an offshore wind farm financing is basically a big pile of unfamiliar risk that needs to be swallowed in many simultaneous small bites by reluctant banks.
The sad part is that these obstacles still largely apply today, and indeed, no project was financed between my previous project and this new one (the refinancing of an already built offshore wind farm took place in the UK, but banks took no construction risk there). This is a worry as the industry builds up and is going to need billions in financing in the coming years. The nicer part, of course, is that I have a de facto monopoly on the financing of new projects and can claim to be doing more than anyone else to make the offshore wind finance actually happen. Deals will happen as banks see successful precedents, are able to copy them and get comfortable with the underlying risks, and can make more things happen as they know more and can more easily justify their investment.
C-Power Borrows Record $1.16 Billion for Offshore Wind-Power Project
C-Power NV, a Belgian wind farm developer, signed a $1.16 billion loan agreement for its Thornton Bank wind power project off the nation’s coast, the largest ever for the offshore industry.
A group of seven commercial banks will provide non-recourse construction financing together with the Danish export credit agency Eksport Kredit Fonden, its German counterpart Euler Hermes Kreditversicherungs AG and the European Investment Bank, according to a statement released today by C-Power.
"While offshore wind asset finance will not anytime soon be characterized by frequent project financings, this deal is the closest the sector has to a template," Charlie Hodges, a wind industry analyst at Bloomberg New Energy Finance, said in London.
The deal brought together 23 contractual parties, 10 financing institutions and required more than 20,500 pages of agreements and closed in a record five months, according to C- Power Chief Executive Officer Filip Martens,
The accord is for the 295-megawatt second and third phases of Thornton Bank that will cost 1.29 billion euros ($1.72 billion) to build. This includes the cost to refinance the first 30-megawatt phase of the plant, located 30 kilometers (18.6 miles) into the Belgian North Sea which has operated since 2009.
Energy Bankers a Paris, a financial advisory focusing on renewable energy project finance in Europe and the U.S., advised on the transaction.
as an aside, as you may have noticed, the name of my company is directly derived from my moniker here on dKos, so you never know where these things can take you...
Putting together a billion-euro deal in this liquidity constrained world is a nice achievement, especially as we managed to do it with a number of attractive features for the industry:
- this is the first project ever to be financed with 6MW turbines (and one of the first to be built with such - today only a couple prototypes are operational in Northern Germany, and one other offshore windfarm will be built with them in the meantime, but it won't be financed by banks);
- the overall cost of debt is barely above 5% over 18 years, which is very important to keep power costs down (with all investment done upfront, the cost of capital is one of the key drivers of the average cost of the kWh produced in the long run);
- the financing was negotiated in just a few months, with banks invited in June and money put on the table now
This may sound like advertising (and of course it is), but it also means that the next deals will be that much easier, and the industry will be able to go ahead with its plans to do industrial-scale wind farms (ie $2 billion, 500MW power plants) in the knowledge that it is going to be increasingly easy to find financing at decent conditions for the necessary investments.
And while offshore wind is still somewhat more expensive than onshore wind or than traditional power generation sources (12-15c/kWh, vs 6-8c/kWh for onshore and 5-15c/kWh for gas-fired plants depending on the price of gas), it has the manifold advantages that it is (i) providing a long-term fixed price (ie it will cost the same as today in 20 years time), (ii) completely independent from supplies of fuel from troubled parts of the world, (iii) carbon-emissions free and requiring no water input, and, additionally, more jobs-intensive.
So I'm downright proud.
Which brings me back to my initial sentence, and to the atmosphere of doom on the site. It is understandable to feel depressed about the current political situation, and to lose hope about activism at the national level. However, there is nothing more uplifting than getting involved in activism, or useful work, in your community or your field of action. That's where each of us can make a difference, make the world a little better for us, our neighbors or our children, and keep hope.