Offshore Wind in Europe 2010 Market Report

ENERGY & NATURAL RESOURCES Offshore Wind in Europe 2010 Market Report

ADVISORY 2 Offshore Wind in Europe

Preface KPMG

KPMG´s last report, “Offshore wind farms in Europe”, was published in 2007 when Europe´s offshore wind industry was still in its infancy. Since then, the industry has experienced dynamic growth. Over the past year, installed offshore wind capacity has doubled to 2.2 Gigawatts (GW).

In Germany, wind turbine generators (WTGs) were initially installed close to shore, but now the first “real” offshore wind project (OWP) – alpha ventus – has been commissioned. Two additional offshore wind projects – BARD Offshore 1 and Baltic 1 – are currently under construction. Advancements in offshore wind projects have been largely triggered by amendments to Germany´s Renewable Energies Act (EEG) in 2009.

Now, as more projects become ready for construction, public awareness of offshore wind in Germany is growing and it is increasingly perceived as an established industry. Nonetheless, closer analysis of the market reveals that many OWP projects fail to reach the significant milestones that are necessary to obtain investment approval or financial close as a prerequisite to starting construction. For this reason, further delays to the expansion of offshore wind projects are probable.

This report provides analysis and guidance on the framework and status of the German offshore wind market and addresses the most significant obstacles to implementing projects.

In cooperation with the German Offshore Wind Energy Foundation, Stiftung OFFSHORE-WINDENERGIE, and the participation of numerous offshore wind developers, banks and other market participants in a market survey and individual interviews, this report is a comprehensive analysis of the current state of the German offshore wind industry. It is augmented by developers´ willingness to share with us their confidential earnings and cost projections from offshore wind projects. By inputting this proprietary information into a financial model, we are able to analyse the return-profiles of offshore wind projects in Germany using actual data.

The results of our analysis reveal potential obstacles to the expansion of offshore wind in Germany, but also highlight possibilities for building an attractive framework for the industry´s future development.

We thank the companies, banks and Stiftung OFFSHORE-WINDENERGIE, for their support in compiling this report.

We trust it provides valuable insight. We welcome the opportunity to discuss the results of our report or the status and trends of the offshore wind market with you in greater detail.

Olaf Köppe Karsten Schulze Partner, Senior Manager, Sector Coordinator Energy & Natural Resources Energy & Natural Resources KPMG AG KPMG AG Wirtschaftsprüfungsgesellschaft Wirtschaftsprüfungsgesellschaft © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, eine Konzerngesellschaft der KPMG Europe eine LLP Konzerngesellschaft und Mitglied des KPMG-Netzwerks unabhängiger Wirtschaftsprüfungsgesellschaft, KPMG AG © 2010 sind. Mitgliedsfirmen, angeschlossen die Rechts, KPMG International Cooperative („KPMG International“), schweizerischen einer Person juristischen KPMG vorbehalten. und Printed Alle in das Rechte Germany. KPMG-Logo von sind KPMG eingetragene International. Markenzeichen 3

Preface Stiftung OFFSHORE-WINDENERGIE

In August 2010, the German Federal Government approved the National Action Plan for Renewable Energies and submitted it to the EU Commission in Brussels. The plan provides for 10 GW of installed offshore wind capacity in the German North and Baltic Seas as early as 2020. This corresponds to an investment volume of more than EUR 30 billion over the next ten years. An additional 10 to 15 GW of capacity is targeted by politicians between 2025 and 2030.

Offshore wind will be integral to the Federal Government´s future energy and climate protection policies, offering enormous growth. By integrating the shipping, ports and shipyard industries, it will be possible to create sustainable long-term economic growth. In coastal areas, more than half a billion Euros has already been invested in production sites and in other infrastructure necessary for the expansion of offshore wind projects. Growth realised in these regions will not only benefit industries directly involved in offshore wind, but also other industries along the value chain in other parts of the country.

The increasing relevance of the offshore wind industry to Germany´s energy and industrial policy will also make it more significant within the context of the country´s overall economy. At the same time, considering the massive efforts undertaken by neighbouring European countries, notably the United Kingdom, it is increasingly important to set Germany´s course as a leading offshore wind market.

We asked KPMG to analyse whether Germany´s current general framework and conditions are suitable for the ongoing financing and profitable operation of offshore wind projects.

As in the 1990s, which saw the development of onshore wind, today´s offshore wind industry requires systematic government support during its development phase. Dynamic and self-supporting growth will depend greatly on the rapid implementation of planned projects in Germany, resulting in a substantial domestic market and preventing the potential shift of investment and production sites into other countries.

Further adjustments to the EEG, possibly prior to the publication of the next EEG review in December 2011, are needed. We strongly recommend that the insights from this report are considered within the political decision-making process, as they fully confirm our assessment of the current status and future potential of the German offshore wind industry.

Jörg Kuhbier Chairman of the Board, Stiftung OFFSHORE-WINDENERGIE © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, eine Konzerngesellschaft der KPMG Europe eine LLP Konzerngesellschaft und Mitglied des KPMG-Netzwerks unabhängiger Wirtschaftsprüfungsgesellschaft, KPMG AG © 2010 sind. Mitgliedsfirmen, angeschlossen die Rechts, KPMG International Cooperative („KPMG International“), schweizerischen einer Person juristischen KPMG vorbehalten. und Printed Alle in das Rechte Germany. KPMG-Logo von sind KPMG eingetragene International. Markenzeichen 4 Offshore Wind in Europe

Contents

1 Key results 10

2 Survey sample and report format 14

3 Offshore wind projects in Europe 16

3.1 Offshore wind projects in the United Kingdom 17

3.2 Offshore wind projects in Germany 18

4 General policy considerations 21

4.1 European energy policy and renewable energy targets 21

4.2 National energy policy and renewable energy targets 24 4.2.1 Belgium 25 4.2.2 Denmark 26 4.2.3 Germany 28 4.2.4 France 30 4.2.5 United Kingdom 31 4.2.6 Ireland 33 4.2.7 Netherlands 34 4.2.8 Sweden 35

4.3 Assessment of general conditions 37

5 2010 Market survey 39

5.1 Why offshore wind? 39

5.2 Attractiveness of European markets 40

5.3 Foundation technology 42

5.4 Impact of financial and economic crisis 43

5.5 Key obstacles to implementation 45

5.6 Conclusion 46

6 The manufacturing market 47

6.1 A look back at 2007 47

6.2 Present status 48

6.3 Manufacturers´ market shares 49

6.4 Development of production capacity 49

6.5 Conclusion 51 KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 5

7 Financing offshore wind 52

7.1 Competition for funding 52

7.2 The investors´ perspective 56

7.3 The lenders´ perspective 58 7.3.1 Overview 58 7.3.2 Project financing 59 7.3.3 On-balance sheet financing 63

7.4 Current financing for offshore wind projects 66

7.5 How to improve bankability 70 7.5.1 Overview 70 7.5.2 Change in FIT regime 71 7.5.3 Risk allocation 74

8 Commercial viability analysis 76

8.1 Data basis and approach 76

8.2 Analysis of basic data 77 8.2.1 Development costs 77 8.2.2 Investment costs 77 8.2.3 Operating costs 80 8.2.4 Wind yield 81 8.2.5 Summary of analytical results 81

8.3 Development of the model scenarios 82 8.3.1 Calculation model for equity financing – 2009 EEG 84 8.3.2 Calculation model for equity financing – Accelerated EEG model 84 8.3.3 Calculation model for project finance 87

8.4 Conclusion 89

Image references 90 KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 6 Offshore Wind in Europe

Abbreviations

BSH Bundesamt für Seeschifffahrt und Hydrographie (Federal Maritim and Hydrographic Agency) COM European Commission ct Euro cent DKK Danish Krone DSCR Debt Service Cover Ratio EBITDA Earnings before Interest, Tax and Depreciation EEG Gesetz für den Vorrang Erneuerbarer Energien – Erneuerbare-Energien-Gesetz (Renewable Energies Act) EEZ Exclusive Economic Zone EIB European Investment Bank EKF Eksport Kredit Fonden, Danish government export insurance ENS Energistyrelsen (Danish Energy Agency) EnWG Gesetz über die Elektrizitäts- und Gasversorgung – Energiewirtschaftsgesetz (Law on Electricity and Gas Supplies) EU European Union EUR Euro EWEA European Wind Energy Association FIT Feed-in tariff GBP British Pound GW Gigawatt GWEC Global Wind Energy Council i.. a inter alia KfW KfW Bankengruppe kWh Kilowatt hour LEC Levy Exemption Certificate MEP Milieukwaliteit van de Elektriciteitsproductie, Dutch support mechanism for renewable energies, expired 2006 MW Megawatt MWh Megawatt hour n/a not applicable NFPA Non-Fossil Purchasing Agency nm Nautical mile O & M Operation & Maintenance Ofgem Office of Gas and Electricity Markets OFTO Offshore Transmission Operator OWP Offshore wind project PPA Power Purchase Agreement RO Renewable Obligation Order (Order Incentivising Sustainable Energy Production in the United Kingdom) ROC Renewable Obligation Certificate SDE Besluit stimulering duurzame energieproductie (order incentivising sustainable energy production in the Netherlands) SPV Special Purpose Vehicle TWh Terawatt hour TSO Transmission System Operator WTG Wind turbine generator KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 7

Figures

Figure 1: Overview of European support mechanisms 10 Figure 2: Project returns with accelerated EEG 12 Figure 3: 2010 market survey participants 14 Figure 4: Overview of offshore wind projects in Europe, as at June 2010 (Figures in MW) 16 Figure 5: Overview of offshore wind projects in the UK (numbers in MW) 18 Figure 6: Overview of offshore wind projects in Germany 19 Figure 7: Offshore wind projects in the German North Sea 20 Figure 8: Offshore wind projects in the German Baltic Sea 20 Figure 9: Share of renewable energies in EU electricity consumption 22 Figure 10: Share of renewable energies in EU gross domestic energy consumption 23 Figure 11: Comparison of support mechanisms in Europe 25 Figure 12: EEG feed-in tariff model 29 Figure 13: Company motivations behind offshore wind activities 39 Figure 14: Ranking of offshore wind markets by expected returns 40 Figure 15: Willingness to provide financial support to offshore wind projects 41 Figure 16: Use of foundation types depending on water depth 42 Figure 17: Effects of the economic crisis 43 Figure 18: Expected normalisation of financial markets 44 Figure 19: Key issues for the offshore wind market in Germany 45 Figure 20: Expected additional offshore wind park capacity under construction and available capacity by offshore WTG manufacturers (2007) 47 Figure 21: Planned offshore wind park construction (as at 31 December 2009) 48 Figure 22: Number of installed offshore WTGs in Europe (as at 31 December 2009) 49 Figure 23: Overview of planned market introduction for offshore WTGs 50 Figure 24: Costs developments for offshore WTGs 50 Figure 25: Offshore wind roadmap 53 Figure 26: Ownership structures – Offshore wind projects 54 Figure 27: Installed offshore WTGs by manufacturer (Germany and United Kingdom, as at 31 December 2009) 55 Figure 28: Assumptions for sample calculation 62

Figure 29: Sample calculation – Risk assumed by EIB, EKF, KfW 62 Figure 30: Sample calculation – Risk assumed by EIB 63 Figure 31: Financing offshore wind projects Q7, C-Power and Belwind 1 66 Figure 32: Financing Zephyr and Boreas 67 Figure 33: Financing offshore wind project BARD Offshore 1 68 Figure 34: Financing offshore wind project London Array 69 Figure 35: Financing offshore wind project Lincs 69 Figure 36: Financing offshore wind project Borkum-West II 69 Figure 37: Requested information for offshore wind projects 76 Figure 38: Investment costs per MW 77 Figure 39: Specific investment costs depending on distance from shore 78 Figure 40: Specific investment costs depending on water depth 79 Figure 41: Comparison of specific investment costs per MW for years 2007 and 2010 79 Figure 42: Operating costs per MWh (2010 price basis) 80 Figure 43: Net capacity factors 81 Figure 44: Assumptions of the calculation model 82 Figure 45: Overview of calculation models 83 KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 8 Offshore Wind in Europe

Figure 46: Comparison of electricity price development and the EEG tariff 83 Figure 47: Assumptions for the tax calculation 84 Figure 48: Project return after taxes, 2009 EEG basis 84 Figure 49: Effects of the EEG acceleration 85 Figure 50: Overview of acceleration senarios 86 Figure 51: After-tax project returns in acceleration model 86 Figure 52: Project financing assumptions 87 Figure 53: Development of DSCR 2009 EEG base case compared with 2009 EEG downside case 88 Figure 54: Development of DSCR 2009 EEG compared with acceleration scenarios 88

1 Key results

At the end of June 2010, As previously illustrated in Europe´s OWPs had a nominal KPMG´s 2007 report, “Offshore capacity of 2.2 GW. This corre- wind farms in Europe”, there is sponds approximately to capac- a risk that the German offshore ity in onshore wind of 2.5 GW in wind industry will increasingly 1995. Now, as with onshore wind fall behind its European competi- in 1995, offshore wind is on the tors in terms of growth, and that cusp of moving from a niche mar- exploitation of the ecological and ket to an established independent economic potential of the off- industrial sector. shore wind industry will remain limited. The UK leads the expansion of offshore wind, with an installed From an ecological and energy capacity of one GW. By award- policy viewpoint, further delays ing licenses for the development could compromise the medium- of OWP, up to 44 GW, and mak- term target of expanding offshore ing further improvements to its wind to 10 GW by 2020, as well support mechanism, the British as impinge on OWPs contribution government has set the stage for to national and European climate the comprehensive expansion of objectives. the offshore wind sector. As at summer 2010, the market price- based compensation scheme in the UK is the most financially attractive within Europe (see

Figure 1).

Figure 1 Overview of European support mechanisms1 Country Current support Term Sub- Grid Tax (ct / kWh) sidies connection incentives Source: KPMG analysis Belgium 14.7 up to 216 MW 20 years PD / TSO 9.0 > 216 MW * Denmark 8.43 (Rødsand 2) 50,000 full load hours TSO Tender process Germany 15.0 (including 12 years plus TSO sprinter bonus) possible extension France initially 13.0 Two ten year periods PD then 3.0 to 13.0 Note: granted / provided United Kingdom 18.01 * Certificates until 2037 PD not granted / not provided Ireland 14.0 15 years PD PD Project developer TSO Transmission system operator Netherlands Tender process 15 years PD * Market price-based compensation, prices as of June / July 2010 Sweden 6.76 * 15 years PD

1 Conversion rates: EUR 1.222 / GBP 1; EUR 0.104 / SEK 1; KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. EUR 0.134 / DKK 1 11

From an economic and indus- These concerns are shared by trial policy perspective, the geo- market participants to KPMG´s graphic location of the expanding survey and are highlighted in offshore wind industry is signifi- detailed data compiled on current cant. In the near future, manu- German offshore wind projects. facturers and suppliers will have It seems that despite an improve- to invest extensively in produc- ment in general conditions since tion capacities in order to meet the 2009 amendment to the demand for offshore WTGs and Renewable Energies Act (EEG), other industrial components, Germany continues to face signif- given projected market growth. icant implementation obstacles: Taking the evolvement of the onshore wind industry as a guide, • Low profitability it is probable that industrial pro- Based on current German off- duction capacities will be estab- shore wind project data, a lished in those markets with the model wind park that is fully highest demand. It is possible, financed with equity will pro- therefore, that further delays will vide a project return of 7.1 per- pose a risk to the establishment cent after taxes according to of a robust German offshore current EEG. GGiivveenn tthhee tteecchhnnoo-- wind industry. logical and logistical challenges, and as yet minimal experience of constructing and operating OWPs at distances from the shore and in water depths required in Germany, this project return does not appear to adequately cover the specific higher risks associated with

offshore wind projects.

• Access to financing • Capital requirements Currently, a number of measures In Germany, more potential With an additional installation designed to improve basic condi- investors are dependent on of 38.1 GW2 nominal capacity in tions for offshore wind projects project financing than in the Europe from 2010 to 2020, cap- in Germany are under discus- UK. In addition, the level of ital requirements will increase sion. The target is to accelerate financing required to fund typi- to EUR 141.0 billion, based on the construction of a first wave cal OWPs in Germany, where calculated average investment of commercial offshore wind investment costs are commonly costs of 3.7 million EUR/MW – projects. It appears reasonable, between EUR 1.0 and 1.5 bil- before consideration of cost- therefore, to set time or capacity- lion, is very difficult to obtain. saving potential. As a result, related limits to supporting This is partly due to changes in there is considerable competi- measures. the project financing market tion for financing funds. because of the financial crisis, These measures include amend- and the fact that commercial • Delayed grid connections ments to the EEG for offshore banks are not yet ready to Because of bottlenecks likely wind projects as well as meas- finance offshore wind projects to be experienced by supplier ures to facilitate financing, without extensive assurances companies, grid connections whereby public institutions take from government, public fund- may not be established in a on some of the risks associated ing institutions and export timely manner despite obliga- with offshore wind projects. credit agencies for the specific tions laid down in the German offshore risks. law on gas and electricity sup- • By reducing the time period ply (EnWG) to transmission in which the higher EEG initial system operators (TSOs). In feed-in tariff is granted (cur- the event of supply bottle- rently 12 years without conside- necks, project developers will ration of site-specific extension bear the risks associated with of the initial FIT period), and delayed connection. by increasing the tariff, project returns (after taxes) from off- Figure 2 shore wind projects could incre- Project returns with accelerated EEG

ase from 7.1 to 12 percent. The Source: K PMG analysis calculated returns vary according to the extent to which Difference to current revenues 15 % 11 % 9 % this acceleration is applied (see Figure 2) 16 % • Considering the comparatively 12 % 12.0 demanding site requirements 10.5 for German OWPs and the 9.7 associated higher risks, impro- 8 % 7.1 vements in investment returns could help to ensure that politi- 4 % cal expansion targets are achieved within the defined period.

Project return after taxes 0 % 2009 EEG Scenario 1: 67 % Scenario 2: 75 % Scenario 3: 80 %

Note: Scenario 1 / 2 / 3 Acceleration of feed-in tariff (FIT) period to 67 / 75 / 80 percent with constant FIT sum (in absolute amounts) KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 2 European Wind Energy Association (EWEA) 13

• Furthermore, a first wave of To achieve its ambitious offshore offshore projects could be real- wind expansion targets, Germany ised if public institutions agree has to compete with the UK for to cover part of the risk for European investors, banks, man- investors in offshore projects, ufacturers and other offshore pending the set up of an inde- wind suppliers. The UK has a sig- pendent project financing mar- nificant competitive advantage ket. In this context, national over Germany, based on its con- export credit agencies as well siderable experience in operat- as federal and national guaran- ing OWPs. Furthermore, it has tee schemes could participate, awarded extensive additional in addition to the continued offshore wind licenses, made engagement of the KfW Banken- improvements to the compensa- gruppe (KfW). tion scheme and has successfully created an environment that will Currently, measures to resolve attract manufacturers and suppli- the risk of delayed grid connec- ers. From an energy and indus- tions look to long-term solu- trial policy perspective, Germany tions, namely a comprehensive needs to adjust its own frame- plan to expand the national grid work for offshore wind if it is in the North Sea. Developers to build a strong position in this and offshore wind associations emerging market. claim that four large OWP clusters in the North Sea should be connected to the onshore grid instead of connecting each single offshore wind project when it is ready. Such a coordinated approach would ensure that the majority of German OWPs are

connected to the grid in a timely manner. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 14 Offshore Wind in Europe

2 Survey sample and report format

To analyse developments in the The market research, described in financing capacity and profitability Section 4.2, includes analysis con- of OWPs in Germany since KPMG´s ducted in the German marketplace 2007 report, the following activities as well as in: were conducted: • Belgium • Market research in selected • Denmark European countries, • France • Europe-wide survey with key • United Kingdom market participants, • Ireland • Twelve interviews with project • Netherlands developers, WTG manufacturers • Sweden and banks, • Collation and analysis of data from The countries were selected on the seven German OWPs and the basis that they either already have development of a financial model OWPs in operation or that changes based on information provided (on to the prevailing general conditions an anonymous basis). for offshore wind were recently introduced.

For this reason, Belgium and Ireland are new additions, compared with KPMG´s 2007 report, whereas Spain Figure 3 is no longer considered a major off- 2010 market survey participants 7 % shore wind market, having remained Source: KPMG 2010 market survey 10 % 31 % stagnant despite the introduction of Project development a support mechanism in 2006. Financing 11 % Operation and maintenance In addition to an analysis of general Other conditions, Section 5 of this report Manufacturing 12 % details the key results of a Europe- Logistics and construction 29 % wide market survey. More than 100 companies, associations and other institutions received surveys and 38 were returned. Figure 3 shows the structure of survey participants by activities in the offshore wind sector. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 15

WTG manufacturers received an Section 7 presents possible models additional tailored survey to help cre- for financing OWPs in Germany and ate a picture of medium-term devel- is based, amongst others, on dis- opments in available WTG capacity. cussions with six European banks, Furthermore, in-depth interviews as possible lenders to offshore wind took place with three manufacturers. projects in Germany.

Section 6 of this report illustrates the Section 8 analyses the profitability results of these surveys and analy- and financing capacity of offshore ses the extent to which the availabil- wind projects in Germany under the ity of WTGs continues to create (as current EEG 2009 and assesses the anticipated by market participants in impact of amendments that are cur-

the 2007 KPMG report) considerable rently being discussed. The cost and bottlenecks to the expansion of Euro- revenue structures of offshore wind pean OWPs. projects were evaluated, using data received (in confidence) from seven offshore wind projects undertaken by different project developers. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 16 Offshore Wind in Europe

3 Offshore wind projects in Europe

At the end of June 2010, the total early stage of development.4 Off- installed capacity of European OWPs shore is, however, at the brink of was 2.2 GW 3 – more than double transitioning from niche market to the 1 GW reported in 2007. In recent an independent industry. The cur- years, growth has taken place almost rent level of offshore wind can be exclusively in the UK, Denmark, compared to the 1995 level of the Netherlands and Sweden. onshore wind market. At that time, onshore capacity in Europe was Compared with the onshore wind 2.5 GW.5 Corresponding with the industry, which had a global installed growth that the onshore wind indus- capacity of 157 GW by the end of try has seen, the offshore wind 2009 (73 GW in Europe) of which an industry is therefore just about to additional 37 GW (9 GW in Europe) move from a niche market to an was attributed solely to 2009, the independent industry. offshore wind industry is still at an

3 Only fully completed OWPs which already feed electricity 4 Global Wind Energy Council (GWEC) Figure 4 into the grid 5 EWEA Overview of offshore wind projects in Europe, as at June 2010 (figures in MW)

Source: KPMG analysis

Denmark Norway 664 in operation 2 in operation 207 under construction 0 under construction 400 approved 2 350 approved

United Kingdom Finland 1,040 in operation 24 in operation 1,638 under construction FI 0 under construction 4 2,610 approved NO 0 approved

SE Ireland Sweden 25 in operation 163 in operation 0 under construction DK 0 under construction 1,575 approved 1,420 approved

IE GB NL France DE Germany 0 in operation BE 72 in operation 0 under construction 448 under construction 105 approved FR 8,056 approved 1

Belgium Netherlands 30 in operation 247 in operation 165 under construction 0 under construction 651 approved 3,250 approved 3

Note: 1 Takes into account currently planned WTG type or 3 To date, only two projects totalling 600 MW have 4 Only fully approved projects in the UK are included; WTG type as per permit where no other information received grant approvals; in total, the „Besluit already 49 GW pre-approved (see Figure 5) is available stimulering duurzame energieproductie (SDE)“ 2 License (fully approved) has been tendered system is to provide funds for up to 950 MW KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 17

Figure 4 depicts installed capacity, for implementation. Depending on capacity under construction, as well the specific national framework, a as approved projects in key European number of additional regulatory and markets. In general, the approval economic requirements have to be process is divided into countries – met before construction can start. those with an application-based Where these conditions are not met, system (e.g., Germany) and those the construction of an OWP may be with a tender process (e.g., UK and blocked, even though it has received Belgium). prior approval.

The two-stage British tendering pro- These requirements include, for cedure initially awards exclusive instance, unconditional grid connec- licenses for the development of wind tion commitments necessary in Ger- park projects in defined areas. It then many (see Section 4.2.3), secure issues approvals for the construc- financing (see Section 7) and a pos- tion of offshore wind projects. Cur- itive investment decision on the rently, the construction of OWPs part of the approval holder. In Ger- with a capacity of 2.6 GW has been many, there is a blatant discrepancy approved in the UK, and develop- between the potential for implemen- ment licenses have been issued for a tation and actual progress. Of the further 44 GW. implementation potential defined in KPMG´s 2007 report (5,906 MW), It is worth pointing out, however, only 65 MW had been commissioned that the capacity of approved OWPs by the end of June 2010 (including only actually represents potential test sites).

3.1 Offshore wind projects in the

United Kingdom

To date, the UK is credited with the the first tender round (Round 1) are largest expansion in the offshore already commissioned or under con- wind market. During the first six struction. Likewise, many projects months of 2010, the UK offshore from Round 2 are currently under wind market exceeded an installed construction. capacity of 1,000 MW for the first To give developers, manufacturers time, following the completion of and suppliers a longer-term perspec- the offshore wind project Gunfleet tive, significantly more licenses were Sands 1 and 2 (172 MW) and Robin issued during Round 3 – at 32 GW – Rigg (180 MW). With around half than in Round 1 and 2. Implemen- of Europe´s installed offshore wind tation of these projects, as well as capacity (as of May 2010), the UK additional projects in Scottish ter- is now the global leader in offshore ritorial waters, is anticipated from wind. 2013, initially in pilot phases. To With the exception of the Tees- ensure that project developers main- side project, all projects approved in tain the speed of implementation at KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 18 Offshore Wind in Europe

a high level in the short and medium The table below provides an over- term, extensions to Round 1 and 2 view of the status of the different projects, totalling 1.7 GW, were also tender rounds in the UK. approved in May 2010.

Figure 5 Overview of offshore wind projects in In operation Under Approved Pre-approved Total United Kingdom (numbers in MW) construction Source: KPMG analysis Round 1 962 150 90 – 1,202 Round 2 64 1,488 2,520 3,420 7,492 Round 1 Extension – – – 285 285 Round 2 Extension – – – 1,401 1,401 Round 3 – – – 32,200 32,200 Scottish Territorial – – – 6,438 6,438 Waters Others 14 – – – 14 Total 1,040 1,638 2,610 43,744 49,032

3.2 Offshore wind projects in Germany

The first German OWP – alpha ven- In the EEZ, it was expected that tus – with a total capacity of 60 MW, the higher costs of building at a fur- was completed on 16 November ther distance from the shore and at 2009. Twelve 5 MW-class WTGs a greater water depth would gener- were installed at a distance of 45 kil- ally favour 5 MW class turbines. The

ometres from Borkum, at a water higher wind yield, compared with depth of approximately 30 metres, the 3.X MW class should, in theory, during a seven-month construc- compensate for the higher construction period. Including the 5 MW test tion costs, especially when compared site near Hooksiel, commissioned with OWPs in the UK. in 2008, German waters are now During the past 12 months, however, home to 15 WTGs with a capacity a new trend has emerged for the of 72 MW. Furthermore, the OWPs first wave of projects to be imple- BARD Offshore 1 (400 MW) and mented between 2010 and 2012. Baltic 1 (48.3 MW) are also under Orders were placed for 96 WTGs construction. with 3 MW nominal capacity (Vestas) In addition to OWPs in operation for the Sandbank 24 project, as well and under construction, another as 80 WTGs with 3.6 MW nominal 24 OWPs, with 1,758 WTGs, have capacity (Siemens) for the Baltic 2 been approved for the German Exclu- project. In October 2010, Siemens sive Economic Zone (EEZ), and a also received an order for 80 tur- further two OWPs, with 23 WTGs, bines with 3.6 MW nominal capacity within the 12 nautical mile zone. for the DanTysk project, which will KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. be implemented between 2012 and 19

2014. It is observed that the lower alpha ventus, Beatric, Thornton Bank) the wind yields, compared with and, consequently, accrued the 5 MW turbines, the lower the invest- required operational offshore expe- ment costs for 3.X MW WTGs. How- rience. Moreover, manufacturers of ever, as manufacturers of 3.X MW 5 MW turbines are also increasing WTGs already have more experi- their nominal capacity. For the RWE ence in offshore wind, this, accord- project Nordsee Ost, 6 MW turbines ing to investors and developers, are to be installed for the first time. reduces the risks in the construction If approved, the Veja Mate OWP can and operating phases. Furthermore, even accommodate WTGs with a by introducing modified WTGs (e.g., nominal capacity of up to 7 MW. larger rotor diameter) in 2010/2011, Figure 6 illustrates that the accumu- Vestas and Siemens improved the lated approved project pipeline for power curves of their 3.X MW WTGs Germany is between 5.3 to 8.9 GW, and, consequently, increased their depending on the WTG class. A fur- earnings-related competitiveness. ther 71 wind park projects, with 26.4 However, in the medium term, the to 31.9 GW, are currently undergoing construction of larger WTG classes approval. The analysis highlights that is still anticipated in Germany. This the planned capacities are not defini- is supported by the fact that man- tive, and are dependent on the selec- ufacturers of 5 MW turbines con- tion of WTG type. structed their first WTGs (test site

Figure 6 In operation Approved * Planned * Overview of offshore wind projects in Germany or under WTGs Low High WTGs Low High Source: KPMG analysis; BSH; response from the Federal Gov- construction (number) (in MW) (in MW) (number) (in MW) (in MW) ernment on the state of offshore wind projects in the North (in MW) and Baltic Seas (March 2010)

EEZ 460 1,758 5,274 8,790 5,178 25,890 31,068 12 nm zone 60 23 69 115 164 492 820 Total 520 1,781 5,343 8,905 5,342 26,382 31,888

Note: * Planned capacities are not definitive, since developers are able to use WTGs of different performance classes. The effects of the selected turbine class on planned capacity were illustrated using two scenarios. Low scenario: approved projects with 3 MW (12 nautical mile zone and EEZ), planned projects with 3 MW (12 nautical mile zone) and 5 MW (EEZ) turbines High scenario: approved projects with 5 MW (12 nautical mile zone and EEZ) planned projects with 5 MW (12 nautical mile zone) and 6 MW (EEZ) turbines KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 20 Offshore Wind in Europe

Figures 7 and 8 illustrate approved OWPs and OWP applications in the North and Baltic Seas (up to and including 2009).

Figure 7 Offshore wind projects in German North Sea

Source: FMHA, KPMG analysis

Note: The names of the OWPs have been added Nördlicher Grund by KPMG.

Hochsee-Windpark He Dreiht

BARD Offshore 1

Veja Mate

Deutsche Bucht

Borkum Riffgrund West Borkum-West II Borkum Riffgrund

Figure 8 Offshore wind projects in German Baltic Sea

Source: FMHA, KPMG analysis

Note: The names of the OWPs have been added by KPMG. Baltic 1

GEOFREe KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 21

4 General policy considerations

The attractiveness of renewable increase in global energy con- energy sources for private sector sumption. Energy from renewable investors mainly hinges on the will- sources is key to reducing depend- ingness of societies and govern- ency on energy imports, particularly ments to promote renewable energy for states with very few or no fossil sources. Political will is affected by resources. commitments made in supranational agreements, such as the Kyoto Pro- tocol or the EU Framework Concept for the promotion of renewable energies, along with the requirement to develop alternative sources of energy to cope with the continued

4.1 European energy policy and renewable energy targets

The European Union defined its were agreed at an EU level in short-term energy policy targets to 2001/2003 for the first time. Therein, 2010 for electricity and fuels in two individual targets were specified for directives (2001 and 2003):6 each Member State. These took into account the country-specific share • At least 21 percent of electricity of renewable energies in electricity consumed to be from renewable consumption (1997 as the base year), energy sources as well as the availability of specific • At least 5.75 percent of energy natural resources (e.g., hydropower). consumed in the transportation

sector to be from renewable Figure 9 depicts the share of renew- energy sources able energies in electricity consumption for the EU-15 Member States, Binding targets for the EU commu- and the EU-27 group from 2008, nity and individual Member States compared with the 2010 target. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 6 See Directive 2001/77/EC and Directive 2003/30/EC 22 Offshore Wind in Europe % 80 78

70 %

60 62 %

% 49

50 46 %

40 39 %

% % % 32

% % 29 29 29

30 %

26 26 25 % %

% %

21 21 20 20 % % %

20 %

% % 16 16 16

% 15

13 13 12 % 10

10 9 8 % % %

% %

6 6 6 5 5 %

3 0 Austria Belgium Germany Denmark Spain Finland France Greece Ireland Italy Luxem- Nether- Portugal Sweden United EU-27 bourg lands Kingdom

Figure 9 Target share of renewable energies in 2010 electricity Share of renewable energies in EU electricity consumption consumption Share of renewable energies in 2008 electricity consumption (preliminary, according to EurObserv’ER) Source: EurObserv’ER, KPMG analysis

Germany is the only EU-15 coun- In December 2008, the 27 EU Mem- try to reach its individual 2010 tar- ber States approved a climate and get as early as 2008. In total, the energy package with so-called share of renewable energies in the 20-20-20 targets:8

EU-27 Member States for 2008 • Reduction in greenhouse emis- was 16.4 percent, compared with sions by 20 percent by 2020 14.9 percent in 2007 and 14.3 per- (compared with 1990), cent in 2006. • Renewable energies to make Based on 2007 annual figures, the up 20 percent of gross domestic European Commission concluded in energy consumption, with a 2009 that Europe was likely to miss minimum share of 10 percent its renewable energy targets for for renewable energies in the 2010.7 It now seems that the EU as transportation sector, a whole will only marginally miss its • Increase in energy efficiency targets, but Austria (– 16 percent in by 20 percent 2008), Greece (– 14 percent), Portu- gal (– 13 percent), Spain (– 9 percent) Figure 10 shows the targets in rela- and Italy (– 9 percent) present signifi- tion to gross domestic energy con- cant shortfalls. sumption for the EU-15 states by 2020, compared with 2008 levels. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 7 See COM (2009) 192 8 See Directive 2009/28 EC 23 % 50 49

45 %

40 38 % 35 34 %

32 %

30 30 % %

25 25

25 %

23 % %

20 20

20 % % %

% %

18 18 18 %

17 17 %

16 %

15 %

14 13 %

10 11 % % % % %

8 8 8 8 8 %

6 % % 5 4 4 % %

3 3 %

2 0 Austria Belgium Germany Denmark Spain Finland France Greece Ireland Italy Luxem- Nether- Portugal Sweden United EU-27 bourg lands Kingdom

Target share of renewable energies in 2020 energy Figure 10 consumption Share of renewable energies in EU gross Share of renewable energies in 2008 energy consumption (preliminary, according to EurObserv’ER) domestic energy consumption Source: EurObserv’ER, KPMG analysis

Compared with the 2010 targets, (basis 1.1 GW by the end of 2007) the 20-20-20 targets no longer relate by 30 to 40 times by 2020 (hence at solely to the share of electricity and least 30 GW), and then by another fuel consumption, but also the share 100 percent by 2030 (at least

in gross domestic energy consump- 110 GW).9 tion. This was lower for all Member In addition to calling on Member States in 2008. The EU aims to more States to expand their offshore wind than double the share of renewable development, the European Com- energies from 8 percent in 2008 to mission also highlighted the impor- 20 percent in 2020. tance of an efficient joint European Given the new climate change tar- approach to infrastructure expansion. gets, the European Commission This relates particularly to the devel- first highlighted the contribution that opment of transmission systems into offshore wind can make towards an integrated European grid. This achieving the objectives in 2008. In a would enable the connection of mul- memo dated 13 November 2008, the tiple OWPs, creating a more sta- Commission calls for an expansion ble electricity feed-in and increased of installed offshore wind capacity security of supply.

9 See COM (2008) 768 Offshore Wind Energy: Action needed to deliver on the Energy Policy Objectives for 2020 KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. and beyond 24 Offshore Wind in Europe

To discuss the technical, economic In principle, given its 2020 climate and legal conditions required for a change targets, the EU has created European offshore power transmis- the political framework to ensure the sion system and promote its imple- continued expansion of renewable mentation, several countries that energies. Member States must now border the North Sea formed an off- develop strategies to meet the bind- shore grid initiative at the behest ing 2020 targets. However, given the of the Pentalateral Energy Forum10. current economic situation in some Following Norway´s accession in EU Member States, varying degrees February 2010, the initiative now of success now seem likely, as with includes all countries bordering the the 2010 climate targets. National North Sea.In September 2009, the objectives, in conjunction with suit- European Commission appointed able support mechanisms, will con- Georg Wilhelm Adamowitsch, former tinue to be key to driving renewable state secretary for the German Fed- energy capacity expansion. eral Ministry of Economics and Tech- nology, as coordinator for the connection of offshore wind in northern Europe.

10 Members are Germany, France, Belgium, the Netherlands and Luxembourg

4.2 National energy policy and renewable energy targets

Many Member States have already also differ widely in terms of the incorporated the European Unions type of structure employed and the

targets into their national strategies level of support it offers. Figure 11 for renewable energies to become a below illustrates current expansion percentage of gross domestic energy objectives and support mechanisms consumption by 2020. However, the for electricity fed into the grid by significance attributed to offshore selected countries. wind expansion varies by individual Expansion targets and the general Member States. support framework for each country Support mechanisms for the pro- are explored in further detail below. motion of offshore wind projects KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 25

Country 2020 Current support Term Subsidies Grid Tax target (ct / kWh) connection incentives Belgium 2.1 GW 10.7 ct / kWh up to 216 MW per OWP 20 years PD / TSO 1 9 ct / kWh for each additional MW in same OWP 4 ct / kWh market price for electricity = 13.0 to 14.7 ct / kWh 4 Denmark 4.6 GW 2 6.94 ct / kWh (Horns Rev 2) 50,000 full load hours TSO 8.43 ct / kWh (Rødsand 2) Tender process Germany 10.0 GW 3.5 ct / kWh basic tariff Initial tariff TSO 13.0 ct / kWh initial tariff 12 years 2 ct / kWh sprinter bonus (plus extension, (start up until 1 January 2016) depending on location) France 6.0 GW 13.0 ct / kWh for 10 years 20 years PD 3.0 ct / kWh up to 13.0 ct / kWh for another 10 years Tender process: 10.0 ct / kWh (Côte d‘Albâtre) United 25 GW 12.22 ct / kWh certificate price for 2 ROCs 20 years PD Kingdom 5.79 ct / kWh market price for electricity including LEC = 18.01 ct / kWh 4 Ireland – 14.0 ct / kWh reference price 15 years PD (PPA plus basic tariff) Netherlands 6.0 GW FIT less market price 15 years PD/TSO Tender process Sweden 10.0 TWh 4.36 ct / kWh market price for electricity 15 years PD (4.0 GW) 3 2.4 ct / kWh certificate price = 6.76 ct / kWh 4

Figure 11 Comparison of support mechanisms in Europe 11 4.2.1 Belgium report on the optimum energy mix Source: KPMG analysis for Belgium in 2020 and 2030.13 At the end of 2009, Belgium had Based on this report, the Belgium Note:

WTGs with a capacity of 563 MW 1 The TSO is required to assume one-third of the government expects to just meet the in operation.12 Of these, 30 MW connection costs, up to a maximum EUR 25 million EU target for a 13 percent share of 2 Until 2025 are attributable to OWPs (Thorn- 3 Based on a capacity factor of 40 percent renewable energies in gross domes- 4 Tariffs with market price components (UK, market price ton Bank). A second OWP – Bel- tic energy consumption. This share for electricity: Elexon dated 24 June 2010, ROC prices: wind 1 – is currently under construc- NFPA auction of 24 June 2010; Sweden, market price corresponds with an energy con- for electricity: Nord Pool spot average for July 2010, tion (165 MW) and is expected to go certificate prices: Svenska Kraftnät average sumption of 57 TWh from renewable for July 2010) into operation by the end of 2010. energy by 2020, of which 17 TWh PD Project developer Belwind 2 and the projects Elde- TSO Transmission system operator relates to electricity. The electric- pasco and Thornton Bank 2 and 3, ity share will mainly be composed which total 651 MW, have also been of biomass (8.5 TWh), offshore fully approved while licenses have wind (5.4 TWh) and onshore wind been issued for the development of (2.8 TWh). This scenario assumes three additional projects, with up to that Belgium´s OWPs will have a 894 MW. total installed capacity of 2.1 GW In October 2009, the Belgium gov- by 2020. ernment published the GEMIX

11 Conversion rates: EUR 1.222 / GBP 1; EUR 0.104 / SEK 1; 13 GEMIX report: "Quel mix énergétique idéal pour la Belgique: EUR 0.134 / DKK 1 Analyse aux horizons 2020 et 2030?", 30 September 2009 KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 12 GWEC 26 Offshore Wind in Europe

In contrast with onshore wind parks, share of renewable energy, which is which are approved by regional gov- defined on an annual basis, based on ernments, the Belgian government certificates. itself approves OWPs, according In addition to the quota system, Bel- to the electricity market law.14 The gian legislators have defined differ- regulatory authority for the energy ent minimum and maximum prices market (Commission de Régulation for certificates for different technolo- de l´Electricité et du Gaz, CREG) is gies. In cases where market prices responsible for managing the various for certificates fall short of or exceed stages of the approval process: the minimum or maximum prices, • License by the Ministry for the Belgian TSO Elia purchases the Climate and Energy Building certificates from the producers. Cur- permit by the Ministry of the rently, OWP operators are not able to Environment, based on an sell their certificates, but receive the environmental assessment study fixed minimum price from the TSO. for the construction and operation In addition to revenues obtained of the wind park and grid from the sale of certificates, the connection OWP operator also receives pro- • Approval by the Ministry for ceeds from marketing the electricity Climate and Energy for the that is generated. The average elec- installation of the cables tricity price in Belgium over the last • Approval of the onshore cable twelve months was approximately connection 44 ct/kWh.16

The project developer is responsible 4.2.2 Denmark for the grid connection costs. How- ever, the TSO, in this case Elia Sys- Denmark´s long-term target is to tem Operator S.A. (Elia), is required achieve complete independence to reimburse one-third of these costs from fossil energy sources. Den-

(up to a maximum EUR 25 million). marks 20-20-20 target from the EU is According to Elia, there are plans for a 30 percent share of renewable to jointly connect all approved and energies in gross domestic energy currently planned projects over a consumption by 2020, up from an 380 kilowatt line and a transformer actual 18 percent share in 2008.17 station at Zeebrugge (Stevin project, In February 2008, the Danish par- commissioning expected in 2015). liament approved the key national The current support mechanism for objectives for 2008 to 2011.18 These renewable energies in Belgium is include: based on a quota system and was • Share of renewable energies in set in place by way of regulation in gross domestic energy consump- 2002.15 Accordingly, energy suppli- tion of 20 percent by 2011 ers are required to provide evidence that energy consumption contains a

14 Article 6 of the “Act on the Organisation of the Electricity of 31 October 2009 Market” dated 29 April 1999, 6 May 2009 version 16 Belgian Power Exchange (Belpex) 15 Article 14 of the "Royal Decree on the Introduction of 17 EurObserv’ER Mechanisms Promoting the Generation of Renewable 18 Agreement on Danish Energy Policy 2008 – 2011, KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. Energy Sourced Electricity" dated 16 July 2002, version February 2008 27

• 1.5 percent increase in energy The responsibility and costs for con- efficiency per year, measured necting OWPs to the grid rests with against 2006 gross domestic TSO Energinet.dk. energy consumption To date, three projects have success- • 4 percent reduction in gross fully undergone tender processes in domestic energy consumption by Denmark: Horns Rev 2 with 209 MW 2020, compared with 2006 (in operation); Rødsand 2 with

207 MW (construction completed in As wind projects have vastly ex- July 2010) and Anholt with 400 MW. panded across Denmark, suitable Along with a license, the successful areas for onshore wind projects bidder also receives planning permis- are becoming increasingly scarce sion, a building permit and an operat- (although 334 MW were still being ing license for 25 years. The environ- installed by 2009)19 and so Denmark mental impact assessment is carried is counting on the development of out by Energinet.dk. Projects are OWPs and, to a lesser extent, on awarded to the bidder offering the repowering onshore wind projects lowest price per kWh. to reach its national and European climate objectives. For the first two projects, Horns Rev 2 and Rødsand 2, the FIT was Priority areas for the development limited to electricity production of offshore wind projects in Den- equivalent to 50,000 full load hours. mark were first identified in 2007, For the OWP Horns Rev 2, the FIT with plans to install OWPs with up to is 51.8 Øre/kWh (6.94 ct/kWh), and 4.6 GW by 2025. Since then, devel- 62.9 Øre/kWh (8.43 ct/kWh) for Rød- opers have been able to partici- sand 2. For the OWP Anholt, the pate in tenders, organised by Dan- only bidder, Dong Energy, offered a ish Energy Agency Energistyrelsen FIT of 105.1 Øre/kWh (approximately (ENS), for licenses to operate within 14 ct/kWh) for the first 20,000 TWh, these priority areas. Alternatively, and was awarded the license in June developers may propose their own 2010. Once the respective upper projects outside of the priority areas. limit is reached, the FIT no longer ENS is responsible for approving off- applies. shore wind projects. Project imple- Developers that propose their own mentation is dependent on: projects (rather than tendering for • Planning permission projects within the priority areas) • Building permit are responsible for obtaining the • Operating license and an environ- required approvals and conducting mental impact assessment (under an environmental impact assessment certain conditions) (where necessary). For these types of projects, a bonus of 10 Øre/kWh (1.3 ct/kWh) is applied for a period of 20 years, in addition to the market electricity price. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 19 GWEC 28 Offshore Wind in Europe

4.2.3 Germany approvals or extensions to existing approvals. Germany is the only EU-15 country to be two years ahead of sched- The Infrastructure Planning Accelera- ule in terms of meeting its 2010 tar- tion Act came into effect in Decem- get for the proportion of renewable ber 2006, requiring German TSOs energy in electricity consumption. to connect OWPs to the grid where Germany´s 20-20-20 target calls for construction of wind parks began its 10 percent share of renewable before 31 December 2015. Connec- energies in gross domestic energy tion costs are shared among all TSOs consumption in 2009 to rise to at in Germany. Until now, TSOs made least 18 percent by 2020.20 grid connection commitments con- tingent on secured financing. Banks, Targets set by the German govern- meanwhile, would not approve lend- ment in 2002 for the expansion of ing without such commitments being offshore wind to 0.5 GW in 2006 and in place. In October 2009, following to 2 to 3 GW by 2010, were or will several years of discussions and pres- not be reached. Even so, in 2007, sure from the Stiftung OFFSHORE- the Federal Government underlined WINDENERGIE and other offshore its long-term objective to increase wind associations, the Federal Net- the proportion of offshore wind in work Agency published its position electricity consumption to 15 per- paper on grid connection obligations.23 cent by 2030 (basis year 1998).21 According to a report by the Federal The position paper specifies the cri- Ministry for the Environment on the teria for project developers to obtain expansion of renewable energy, the (un)conditional grid connection com- intention is to install offshore wind mitments. The main objective of the capacities of 10 GW by 2020, and position paper is to ensure the timely 23 GW by 2030.22 connection of OWPs to the grid (by the TSOs). Project developers must The majority of planned OWPs are meet the following criteria: located in the EEZ and must be approved, therefore, by the Bundes- 1. Required approvals or promise of amt für Seeschifffahrt und Hydrogra- such approvals by the responsible phie (BSH). OWPs within 12 nautical authority miles of the shore are approved by 2. Feasible construction schedule the ministries in the relevant Federal 3. Geotechnical site survey report states. Regulations governing devel- 4. Procurement contracts for the opment plans for EEZs in the North WTGs and Sea and Baltic Sea came into force a) Secured financing (possibly in September and December 2009 subject to provision of connec- respectively. Among other things, tion commitment) or these plans define priority areas for b) (Pre)contracts for the procure- offshore wind generation. These new ment of key components provisions do not alter any existing

20 Renewable energies in figures. National and international 22 2008 pilot study by the Federal Ministry for the developments, June 2010 Environment, Nature Conservation and Nuclear Safety 21 Development of offshore wind power use in Germany, 23 Position paper regarding the Federal Network Agencys grid January 2007 connection obligation as per Section 17 Subsection 2a KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. EnWG, October 2009 29

Where the TSO has evidence that envisaged. This may result in delays criteria 1, 2 and 3 or 1, 2 and 4 are to grid connections even though all met by the closing dates of either deadlines and criteria are met. In 1 March or 1 September in the such cases, where the TSO is not at respective year, a conditional grid fault, developers have no claim for connection commitment must be damage compensation. Both devel- submitted within two months. The opers and lenders face significant TSO must start a tender process investment risk in this context. for grid connection immediately and The promotion of renewable ener- commission the grid connection gies in Germany is based on FITs within 30 months. since the first EEG in 2000. With proof that all four criteria are When the amended EEG came into satisfied by the subsequent clos- force in January 2009, FITs for off- ing date, the TSO must award bind- shore wind increased from 9.1 ct/ ing contracts for the grid connection kWh to 13.0 ct/kWh, for an initial within two months. Transitional period of 12 years. A further increase provisions exist for the first two of 2 ct/kWh applies during the initial closing dates. period for WTGs that enter opera- Despite the increased transparency tion before 1 January 2016. This so- created by the Federal Network called “sprinter tariff” is designed Agency´s position paper, the con- to accelerate the implementation of nection to the grid continues to Germany´s first wind projects. The pose significant investment hurdles support mechanism is also designed for offshore wind developers. Fur- to speed up implementation with the thermore, given the high number of tariff decreasing by 5 percent per connections that will be simultane- year from 1 January 2015, until com- ously required in 2012/2013, short- missioning. term supply bottlenecks are already

16 Revenue curve Figure 12 EEG feed-in tariff model 14 Sprinter bonus Source: KPMG analysis 12 Exten- 10 Initial tariff sion 8

6 Market price Market price curve 4

2 Basic tariff kWh

ct 0 up to 12 years X Residual term KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 30 Offshore Wind in Europe

4.2.4 France

On 15 December 2009, the French government published its new multi- year programme for investment in electricity generation capacity.24 This defined expansion targets for renewable energies for the period 2009 to 2020. The French government aims to expand installed wind power capacity to 25 GW by 2020, of which 19 GW are supposed to be onshore and 6 GW offshore. At the end of 2009, France had a total installed wind power capacity of 4.4 GW, all of which was onshore.25 Considera- ble expansion in offshore wind capabilities is therefore required to meet the targets.

In France, the promotion of renewable energies is based on the 2000 electricity law. This sets out the basis for FITs and for tendering. The responsibility and costs for connect- Depending on the distance of the ing OWPs to the grid rests with the WTG from the shore and the water TSO.26 depth, the initial FIT period is There is an initial period of ten years extended by an extra 0.5 months with a FIT of 13.0 ct/kWh for all for each nautical mile in excess OWPs, and a subsequent ten-year of twelve nautical miles, and by period in which the applicable FIT is 1.7 months for each full meter below calculated according to the measured a water depth of 20 metres. Once wind yield in the initial FIT period. the initial FIT period expires, a basic The FIT increases from 3.0 ct/kWh tariff of 3.5 ct/kWh is applied until for OWPs with more than 3,900 full the twentieth year of operation (plus load hours to 13.0 ct/kWh for OWPs the year of start-up). with less than 2,800 full load hours.27 As an alternative to FITs, direct mar- By tendering licenses, the French keting, as per Section 17 of the EEG, governments seek to actively influ- may be used. The electricity producer ence investments in offshore wind is required to give the grid operator in the hope that OWP capacity will one month´s notice if this option is be expanded to achieve the targets exercised. It is possible to revert to defined in the multi-year programme. the FIT system at any time.

24 Pluriannual investment programme (Programmation 27 Order establishing conditions for the purchase of pluriannuelle des investissements de production electricity generated from wind energy (Arrêté fixant les d’électricité) for the period 2009 – 2020 conditions d´achat de l´électricité produite par les 25 GWEC installations utilisant l´énergie mécanique du vent), 26 Act 2000-108 on the modernisation and development 17 November 2008 of public electricity supply (Loi relative à la modernisation et au développement du service public de l'électricité), KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 10 February 2010 31

The government first put licenses In 2009, the British government for- for OWPs with a combined capac- mulated a renewable energy strat- ity of up to 500 MW out to tender in egy to achieve its long-term climate 2005. This saw seven onshore wind change objectives.29 This stipulates licenses, totalling 278 MW, as well an increase in renewable energies as one offshore wind license (Côte as a share of electricity consump- d’Albâtre) at 105 MW, awarded. tion to 30 percent by 2020. It is the A FIT of 10 ct/kWh, for a period expansion in offshore wind capacity of 20 years was set for the Côte that is expected to largely contrib- d’Albâtre OWP but, following several ute towards attaining this objective. delays in the approval process, the By granting development licenses developer has been forced to delay for 32 GW as part of a third tender- construction to 2010. ing round in January 2010, the government has set the stage for large- With a low FIT by international stand- scale deployment. In total, OWP ards and a cumbersome approval licenses totalling 49 GW have been process, the expansion of offshore awarded in the UK (see Section 3.1). wind in France has so far lagged behind expectations. However, with The Crown Estate owns most of a new environmental legislative pro- the foreshore and all of the sea- posal (Grenelle II), the government bed to 12 nautical miles and awards intends to streamline and simplify lease agreements for OWPs in these the approval process and start a new areas. Since 2004, the Crown Estate tender process as early as 2010. In has also had the right to award this context, several regional depart- leases for areas in the so-called ments were asked to define priority Renewable Energy Zone (REZ), areas for OWPs in April 2010. A ten- which is, in parts, identical to the der for 3 GW is set to be launched Exclusive Economic Zone.30 in autumn 2010, but few information In 2001 and 2003, the Crown Estate has been disclosed on the tender conducted two tenders (Round 1 process.28 and Round 2) for OWP development licenses. In Round 1, devel- 4.2.5 United Kingdom opers were free to propose sites In 2008, renewable energy made up for OWPs, whereas in Round 2, the 5 percent of the UK electricity con- Crown Estate defined development sumption and the UK is likely to miss zones. In total, the Crown Estate or only narrowly meet its EU-target qualified 18 projects in Round 1 and of 10 percent by 2010. The 20-20-20 15 projects in Round 2. climate targets require the UK to in- Once awarded a development crease its share of renewable ener- license, developers must obtain a gies in gross domestic energy con- variety of approvals before a lease sumption, which stood at 2 percent agreement can be concluded.31 How- in 2008, to 15 percent by 2020. ever, not all projects in Round 1 (e.g., Scarweather Sands, Cromer and

28 Press Release by the French Ministry of the Environment, 31 Key approvals are associated with the Electricity Act 1989 – 6 May 2010 Section 36, Food and Environment Protection Act (Part II) 29 The UK Renewable Energy Strategy, 2009 1985, Coast Protection Act 1949 – Section 34 (not required 30 Statutory Instrument 2004 / 2668 The Renewable Energy after commencement of section 36B EA under the Energy KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. Zone (Designation of Area) Order 2004 Act 2004), Transport and Works Act 1992 32 Offshore Wind in Europe

Shell Flats) were given lease agree- work tariffs based on a cost esti- ments. This was either because mate. One of the main purposes of the required approvals were not the tender procedure is to promote granted or because the developers competition and, consequently, the suspended their planning activities implementation of cost-effective grid due to commercial considerations. connections. offshore wind develop- In Round 2, where development ers are also freed from the consid- zones were defined, based on prior erable investment costs associated strategic environmental reviews by with building the grid connection. At the Crown Estate, the risk of non- the same time, OFTO can engage in approval was reduced.32 Given the bilateral negotiations with the project success of this model, it has since developer to reduce investment risk been applied to Round 3 tenders, to by providing guarantees. projects in Scotland´s 12 nautical- The UK support mechanism is based mile zone and to the expansion of on quotas, so-called “headroom”, Round 1 and Round 2 projects. for a share of renewable energies in In June 2009, the UK introduced a electricity consumption since 2002. new tendering procedure for the Electricity suppliers must prove their construction and operation of grid compliance with these quotas with connections for OWPs. Now, compa- Renewable Obligation Certificates nies authorised by the Office of Gas (ROCs). Quotas are announced by and Electricity Markets (Ofgem), can the government on 1 October of apply for a construction and opera- each year, for the period starting on tion license for OWP grid connec- 1 April and ending 31 March of the tions. In principle, there is a distinc- following year. The quota announced tion between transitional projects for the 2010 / 2011 time period is and enduring projects. 0.111 ROCs/MWh. This equates to approximately 11 percent of total Transitional projects are those where electricity consumption.33 the grid connection was already

under construction at the time that Since the introduction of the Renew- the new procedures came into effect, able Obligation Order (RO) in 2002, or where specific works had already one ROC/MWh was granted for all been undertaken. In such cases, the renewable energy technologies. So- tender is based on the applicant´s called “ROC banding” was intro- estimated costs for the financing duced from 1 April 2009, mean- and operation/maintenance of the ing that ROCs/MWhs were granted connection. In the case of enduring according to the technology´s level projects, the tender for the future of maturity and expansion poten- Offshore Transmission Operator tial. Offshore wind was placed in the (OFTO) also includes the design and post-demonstration category, and construction of the grid connection. the number of ROCs increased from 1.0 to 1.5 per MWh. The operator license for a grid connection is initially limited to a term However, soon after its introduction of 20 years. Ofgem sets the net- in 2009, this amendment to the RO KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 32 Strategic Environmental Assessment (SEA) 33 Department of Energy and Climate Change 33

was reviewed. It followed objections carry, therefore, price fluctuation risks. from project developers that OWP Market risk is contained by setting were no longer commercially viable quotas for the share of renewable due to increased costs and difficul- energy in electricity consumption. ties in obtaining finance because of Moreover, in addition to the attrac- the economic crisis. Independent tive level of support, developers who evaluation confirmed this perception participated in the KPMG survey also and the British government approved emphasised the British government´s further adjustments to the RO, effec- straightforward and flexible attitude tive 1 April 2010: to dealing with potential or actual • Increase to 2 ROCs/MWh for stumbling blocks. For instance, it OWPs which obtain full accredita- was quick to react to rising invest- tion between 1 April 2010 and ment costs by conducting an early 31 March 2014 review of the RO only a year after • Extension of the RO term from it was introduced. It subsequently 2027 to 2037 (maximum subsidy approved a targeted increase in avail- period: 20 years) able support. • Increase in quotas for the share of renewable energy in electricity 4.2.6 Ireland consumption, from 8 to 10 percent In 2007, the Irish government set as of 1 April 2011 (securing the a target for renewable energies to price stability of ROCs) form 33 percent of electricity genera- • Removal of 20 percent upper limit tion by 2020 (compared with 12 per- for energy that falls under the RO cent in 2008).34 In 2008, this target subsidy was increased to 40 percent.35

In addition the government intro- Such ambitious growth is required if duced a FIT for micro-generators Ireland is to meet its commitment to up to 5 MW, which replaces the RO- increase its share of renewable ener-

based support. However, no struc- gies in gross domestic energy con- tural changes were announced for sumption from 4 percent in 2008 to the support mechanism for medium- 16 percent by 2020 (20-20-20 tar- sized and large projects. get). The expansion of installed wind power capacity is key to attaining In addition to RO support, OWP these objectives. operators also benefit from tax relief in the form of levy exemption cer- At the end of 2009, Ireland had tificates (LECs). These certificates installed WTGs with a capac- grant an exemption from the climate ity of 1,260 MW (compared with change levy (CCL) on electricity, coal 1,027 MW in 2008).36 Of these, and gas, etc. only 25 MW can be attributed to Ireland´s sole OWP, Arklow Bank 1 The UK continues to offer the most (start-up 2004). OWPs with another attractive conditions for investment 1,575 MW have been approved. in OWP, even though revenues are dependent on market prices and

34 National Climate Change Strategy 2007 – 2012 36 GWEC KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 35 Carbon Budget for 2009 34 Offshore Wind in Europe

The approval procedure for OWPs 4.2.7 Netherlands is the same as for onshore wind In the Netherlands, the share of projects. The exception, however, renewable energies in gross dome- is that an additional approval is re- stic energy consumption is to rise quired from the Ministry for Agricul- from 4 percent in 2008 to 14 percent ture, Fishery and Food – a so-called by 2020. “foreshore lease agreement” – for the economic use of coastal seas. Wind power is to play a key role in Requirements include: achieving this target, with installed capacity to increase to 12 GW by • Planning permission from the 2020 (evenly distributed over regulatory authority of the energy onshore and offshore).37 market • Grid connection commitment from The Netherland´s total installed wind the TSO capacity was 2,229 MW at the end • Building permit and operating of 2009, with 250 MW at sea.38 license from the regulatory However, no WTGs were installed authority of the energy market at sea during 2009, and only 39 MW • Foreshore lease agreement were installed on land (compared with 120 MW at sea and 380 MW OWPs and projects with other re- on land in 2008). This is due to the newable technologies do not have Dutch government allowing the so- priority rights for grid connections. called “MEP tariff system”39 for rene- While the TSO – EirGrid – is respon- wable energies to expire in August sible for constructing and operating 2006. Consequently, only projects the connection, developers are re- with existing subsidy commitments sponsible for obtaining the approval were implemented. and for the costs associated with The Dutch TSO, TenneT TSO B.V., construction and operation. is responsible for building and ope- Ireland introduced a FIT system

rating OWP connections. However, called REFIT in 2006 and added current law also prescribes that the a tariff for offshore wind in 2009. costs for the construction and opera- Under REFIT, power purchase agree- tion of such connections is the res- ments (PPAs) between power plant ponsibility of the OWP operator. To operators, based on renewable promote synergies – for example, the energy sources, and utilities are sub- construction of multiple connections – sidized. For an OWP, the REFIT is the government plans to commit the designed to enable the operator to TSO to assume these costs. achieve revenues of 14 ct/kWh and The SDE programme – successor takes into account the terms of the to the MEP programme – came into PPA as well as market prices. The force on 1 April 2008. Unlike a FIT energy market´s regulatory authority (as in the case of MEP), SDE pays a in Ireland awards licenses for partici- bonus for a time period of 15 years. pation in the REFIT programme. An adjustment is made to account for the difference between the SDE

37 SenterNovem 39 Milieukwaliteit van de Elektriciteitsproductie (MEP) KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 38 GWEC 35

tariff and market prices. The Dutch 4.2.8 Sweden Ministry for the Economy defines the Given its geographic location, tariff and adjustment on an annual Swedens electricity mix contains basis. Since 1 January 2010, SDE 48.8 percent hydroelectric power.42 also applies to OWPs. Accordingly, Sweden´s 20-20-20 After obtaining a construction per- objectives are very ambitious. Swe- mit, project developers apply to the den is to increase its share of renew- authority in charge – Noordzeeloket – able energies in gross domestic to participate in the SDE programme. energy consumption from 32 per- The first round of bids started in cent in 2008 to 49 percent in 2020. January 2010. SenterNovem, the In addition to further expansion of responsible authority, requested bid- hydroelectric power, the government ders to apply for SDE participation plans to use wind power to achieve on the basis of a minimum tariff its climate targets. per kWh (15-year term). Taking into In 2009, electricity generated from account, varying distances to the wind was 2.5 TWh, less than 2 per- shore and water depths for OWPs, cent of overall generated electricity the authority stated that it would of 138.3 TWh. In total, the country consider the most competitive bid- had WTGs with a combined capac- ders, up to a maximum subsidy of ity of 1.5 GW in operation, thereof EUR 5.3 billion.40 163 MW in five OWPs. By 2015, Twelve applications, totalling 3.2 GW wind capacity is set to increase to of planned capacity, were admitted 10 TWh per year. The target for 2020 for the first SDE bid. In May 2010, is 30 TWh per year, of which 20 TWh two Bard Group projects (BARD Off- will come from onshore wind, and shore NL 1 and GWS Offshore NL 1), 10 TWh from offshore wind.43 In with a planned total capacity of addition to obtaining a building per- 600 MW were selected to participate mit for the OWP, developers also in the SDE programme.41 No informa-

require a permit to build and oper- tion about the applicable tariff has ate connection to the grid. The TSO, been disclosed. Svenska Kraftnät, passes on connection costs to project developers by Two months from the announce- way of fees for using the grid. ment, successful applicants must provide bank guarantees of EUR Sweden´s support mechanism for 20 million per project as security. renewable energies is based on Where construction does not start quotas, and was set out in a 2003 until after 1 August 2013, the govern- law for electricity certificates.44 For ment is entitled to use the guarantee. every year until 2030, energy suppliers are required to provide evidence According to press reports, there that they meet their specified quotas could be changes to the awarding for renewable energies in electricity system and moves towards the Bri- consumption. They use certificates, tish model, which invites bids for issued by the Swedish TSO, Svenska development licenses.

40 Ordinance No. WJZ/9203919, 18 November 2009 43 Bill no. 2008 / 09:163: A Coordinated Energy and Climate 41 Press Release of the Dutch Ministry of the Economy, Policy – Energy 10 May 2010 44 Act no. 2003:113 on Electricity Certificates KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 42 Swedish Energy Agency 36 Offshore Wind in Europe

Kraftnät, which can be traded within this produces an overall tariff of just Sweden and only lapse once offset 6.76 ct/kWh, which is low by interna- against a quota obligation. Between tional standards. 2003 and 2005, the supply of cer- In addition to the quota system, the tificates was decidedly higher than expansion of onshore and offshore demand. This has resulted in an over- wind is supported by a government hang of certificates in the market, subsidy programme, which has a

which had decreased only slightly EUR 350 million budget.46 The gov- by 2008. ernment energy agency acts as the In the period ending 2003, and again approving authority for these sub- in 2007, the price per certificate sidies, which are for research and (which corresponds to one MWh) development projects related to wind was between 150 and 250 Swed- power. They focus on environmental ish Krona. This rose to 300 and protection measures, procurement of 400 Swedish Krona in 2008 and technology and developments prior 2009 respectively.45 Since April to market introduction, etc. In the 2010, the price for certificates has case of OWPs, it is possible to sub- begun to fall again, down to an aver- sidise up to 40 percent of additional age price of 230 Krona in July 2010 costs, compared with the costs for (2.4 ct/kWh). Based on an aver- a conventional power plant of the age electricity price of 4.36 ct/kWh, same capacity.

45 The electricity certificate system 2009, Swedish Energy 46 Förordning 2003:564 KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. Agency 37

4.3 Assessment of general conditions

The support mechanisms used to enced in the UK. Furthermore, due promote offshore wind differ consi- to the transfer of cost pressures to derably by country. In general, sup- the developer, the tender process is port mechanisms can be divided into not competitive in the context of a tender-based systems (Denmark, Europe-wide competition for limited Netherlands); market-price based financial resources. systems (UK, Sweden) and fixed FIT In general, fixed FIT systems offer systems (Belgium, Germany, France, offshore wind developers a higher Ireland). degree of investment security, but In addition to the support mecha- the success of the fixed FIT is mainly nism itself, the general framework, dependent on the level of subsidy notably provisions for grid connec- and other framework conditions. tions or existing infrastructure, such Measured by the expansion of the as ports, are also significant for pro- offshore wind sector, none of the ject developers. Since resources for countries with a fixed FIT can be the development of OWPs are limi- classed as successful. ted, especially with regard to finan- Following extensive adjustments to cing, efforts by countries to expand the EEG, Germany has successfully onshore and offshore wind through entered the market, albeit with con- the private sector, where national siderable delay. Yet despite comple- support mechanisms provide genu- tion of the alpha ventus test site and ine competition for investment, is the two OWPs under construction, evident. There are advantages and future market development remains disadvantages to all systems. uncertain. Against the backdrop of Take the tender-based system. Even significantly higher cost expecta- though Denmark is the second- tions, the profitability of OWPs is

largest offshore wind market in regarded as too low. The provision Europe, with an installed capacity of for connections to the grid, as out- 664 MW as at June 2010, the FIT lined by the EnWG, is another sig- tender-based process has so far only nificant hurdle despite being desig- shown limited value for the compre- ned to relieve the burden on project hensive development of offshore developers. wind. Tenders for new offshore wind Based on the Federal Network power capacity are limited in Den- Agency´s position paper, project mark to a few select individual pro- developers face the risk that supply jects (Stop-and-Go policy). Other pro- bottlenecks, which are not the fault jects, meanwhile, are not currently of the TSO, will not be compensa- considered commercially viable due ted even though all other deadlines to the low FIT applied to them. This and criteria are met. Offshore wind means that despite an extensive pro- developers and offshore wind associ- ject pipeline, it is not possible to ations are therefore demanding that achieve the dynamic growth experi- KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 38 Offshore Wind in Europe

the German government develops on market prices and, consequently, a grid expansion plan to ensure that contain price fluctuation risk. Moreo- the four large OWP clusters in the ver, the British government´s willing- North Sea (SylWin, HelWin, BorWin, ness and flexibility to remove obsta- DolWin) receive grid connections in cles helps to maintain the speed of time. implementation and makes the UK an attractive investment destination The UK continues to offer the most for wind projects. attractive conditions for investment in offshore wind projects, even though revenues are dependent © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, eine Konzerngesellschaft der KPMG Europe eine LLP Konzerngesellschaft und Mitglied des KPMG-Netzwerks unabhängiger Wirtschaftsprüfungsgesellschaft, KPMG AG © 2010 sind. Mitgliedsfirmen, angeschlossen die Rechts, KPMG International Cooperative („KPMG International“), schweizerischen einer Person juristischen KPMG vorbehalten. und Printed Alle in das Rechte Germany. KPMG-Logo von sind KPMG eingetragene International. Markenzeichen 39

5 2010 Market survey

What did the 2010 market survey reveal and how do the results compare with previous surveys conducted in 2006 and 2007?

5.1 Why offshore wind ?

The 2010 market survey reveals that ties, while 66 percent are motivated companies involved in offshore wind by the exploration of future markets. activities are increasingly likely to be Only one third of participants quote motivated by strategic factors than high expected returns as a reason in 2007. In fact, 89 percent of parti- for participating in offshore wind cipants refer to strategic opportuni- activities. Figure 13 Company motivations behind offshore wind activities

Source: KPMG 2010 market survey

89 % Strategic opportunities 72 %

66 % Exploration of future markets 48 %

42 % Green image 19 %

32 % High expected returns 21 %

11 % Offshore wind activities of peers 3 %

5 % Limited growth prospects for onshore wind 12 %

0 10 20 30 40 50 60 70 80 90 100

2010 Survey Note: Applicable and definitely applicable motivations. 2007 Survey Multiple choices possible.

As in 2007, limited growth opportu- pants are becoming increasingly nities for onshore and offshore wind professional. activities by peers, are not signifi- For the most part, the results sug- cant considerations for survey parti- gest that offshore wind is still not cipants. considered a core business activity Overall, however, the variation in res- and that the strategic decisions that ponses is smaller, compared with will underpin a long-term commit- 2007, suggesting stronger consensus ment to offshore wind still need to and an indicator that market partici- be made. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, eine Konzerngesellschaft der KPMG Europe eine LLP Konzerngesellschaft und Mitglied des KPMG-Netzwerks unabhängiger Wirtschaftsprüfungsgesellschaft, KPMG AG © 2010 sind. Mitgliedsfirmen, angeschlossen die Rechts, KPMG International Cooperative („KPMG International“), schweizerischen einer Person juristischen KPMG vorbehalten. und Printed Alle in das Rechte Germany. KPMG-Logo von sind KPMG eingetragene International. Markenzeichen 40 Offshore Wind in Europe

5.2 Attractiveness of European markets

As part of the 2010 market survey, Germany´s strong ranking indicates we asked participants to rank off- that, based on the amended EEG of shore wind markets in relation to 2009, legislators have been able to expected returns. Expected returns create a generally attractive market are a key determinant of the overall despite the difficult geographic con- attractiveness of a market for OWPs. ditions faced by OWPs. However, Furthermore, attractiveness is a the current level of expansion does gauge for the probability and speed not yet reflect this positive assess- with which national plans for off- ment. This may be because the gap shore wind expansion will be imple- between actual and expected returns mented. for Germany and the UK is, in fact, greater than suggested by the rank- The survey result confirms that the ing. In addition, expansion depends UK offers the best conditions, fol- on a number of other factors. For lowed by Germany, Belgium and the example, offshore wind developers Netherlands. Based on a compari- in Germany perceive grid connec- son of general policy considerations, tions as great hurdles to implemen- this ranking matches our expecta- tation. tions (see Section 4.2). These four countries are therefore well placed The rating for Spain (ranked fifth) to achieve their ambitious expansion was unexpectedly positive. Given targets. the Spanish support mechanism and other general policy considerations, as well as the stagnation of its offshore wind deployment, a ranking behind Denmark or Ireland might

have been expected. We assume, Figure 14 Ranking of offshore wind markets by expected therefore, that market participants returns are expecting conditions to improve Source: KPMG 2010 market survey considerably in the short term.

1. United Kingdom Very attractive A relatively unfavourable assessment of expected returns puts the expan- 2. Germany sion plans for offshore wind in Ire- 3. Belgium land, Denmark, France and Sweden 4. Netherlands into question. 5. Spain As in the 2007 survey, participants 6. Ireland assessed the willingness of individ- 7. Denmark ual countries to provide support to 8. France offshore wind projects. The results, compared with 2007, are consider- 9. Sweden Least attractive ably different, especially given the rankings attributed to the offshore wind markets. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 41

Germany receives the highest be attributed to the amended EEG in approval ratings for its willingness 2009. In addition, the result for Ger- to provide support to offshore wind many may also reflect expectations projects (89 percent). The increase in about further amendments to the positive ratings (+ 53 percent), com- EEG, which are currently under dis- pared with 2007, can, in our opinion, cussion.

100 Figure 15 % Willingness to provide financial support

90 89 to offshore wind projects

Source: KPMG 2010 market survey % 80 76 % 70 67

60 % 50 47 %

% %

40 %

37 36 36 %

34 %

32 %

% %

30 29 28 % %

26 26 % %

24 24 20 21 21 2010 %

2007 13 10 Note: Share of participants that rated individual countries’ willingness to provide support as very high or high. 0 Multiple choices possible. Germany United Nether- Denmark Belgium Sweden France Ireland Spain Kingdom lands

Following the amendment to the RO Spain´s willingness to provide sup-

in April 2010, the UK´s willingness to port (down 12 percent and 21 per- provide support is ranked highly. cent, respectively). This suggests that these countries have not ade- The Netherlands have also made quately responded to sluggish devel- considerable gains in this respect. opment in the offshore wind market. The market therefore appears to Spain´s ranking is within expecta- be receptive to the introduction of tions, and contrasts with previously a modified support mechanism, discussed survey results (see Fig- despite its cumbersome introduction ure 14). However, in our view, there process. exists a general sense of uncertainty In contrast, market participants are regarding the Spanish market for off- losing confidence in France and shore wind. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 42 Offshore Wind in Europe

5.3 Foundation technology

To date, OWPs have been mainly For this reason, survey participants constructed near (i.e., less than assessed the suitability of different 20 kilometres) to the shore and at foundation types in relation to water low depths (up to 20 metres). Coun- depth. Other factors, such as the tries such as the UK, Belgium and weight of the WTGs, ground condi- the Netherlands still own many sites tions and load distribution were not that offer these favourable geo- considered to avoid over complica- graphic conditions and will be able tion. In total, six current foundation to continue to deploy OWPs in these concepts (monopile; tripod; jacket; locations in the medium term. gravity; bucket and floating concept) as well as alternative foundation By contrast, most of Germany´s pos- concepts were considered. Figure sible OWP sites are at greater dis- 16 shows the results of this survey. tances from the shore and at greater depths. Irrespective of the WTG type, monopiles (44 percent) are the preferred While distance from the shore has a foundation concept for water depths Figure 16 particular influence on construction Use of foundation types depending on of up to 20 metres. Monopiles were and operating logistics, water depth water depth predominately used for the first plays a key role in the selection of Source: KPMG 2010 market survey OWPs in the UK and Denmark, and the foundation type and design for Other are considered tried-and-tested mod- the OWP. Since foundations repre- Floating els. Gravity foundations, which are sent 25 to 30 percent of an OWPs Bucket particularly suitable for heavy WTGs, Gravity capital expenditure, they have a were also cited (25 percent). Jacket significant influence on the invest- Tripod ment calculation and, consequently, Survey participants cite a vari- Monopile profitability. ety of foundation types for water Note: Multiple choices possible depths between 20 and 40 metres. 100 Together, tripods and jackets made up 58 percent of the responses. The jacket foundation is the most 80 frequently named foundation type for OWP locations that exceed 40 metres in depth (49 percent), with 60 tripods mentioned as possible alter- natives (25 percent). According to the survey respondents, monopile 40 foundations are not considered suitable for depths of 40 metres or more.

Number in percent 0 < 20 m 20 to 40 m > 40 m KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 43

Innovative foundation concepts, such pile, jacket, tripod) currently domi- as the bucket and floating concept, nate. Alternative foundation concepts are not considered appropriate for (floating concept, bucket, others) depths up to 20 metres, according to only become relevant for depths at the survey participants. These newer which conventional foundations cur- foundation concepts (17 percent) rently appear less suitable. Neverthe- only come into play for water depths less, the development and testing that exceed 40 metres, for which of alternative foundation concepts there currently exists only one test promises significant cost reduction site (OWP Beatrice with two WTGs). potential, which could increase their overall attractiveness. The survey results show that conventional foundation types (mono-

5.4 Impact of the financial and economic crisis

The financial and economic crisis has to less well established markets. The considerably restricted the financing results of our 2010 market survey options available to companies. Many show that the offshore wind sector banks are currently focusing on their has been adversely affected. key business and reducing exposure

Availability of loans for offshore wind projects Risk premiums for offshore wind projects Figure 17 Effects of the economic crisis 3 % 0 % Source: KPMG 2010 market survey

5 % 5 % High 10 % 19 % Significant 34 % Noticeable 37 % Not significant None

45 % 42 % KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 44 Offshore Wind in Europe

In fact, 82 percent of our survey par- Since it is not possible to conclude ticipants state that the financial crisis key supply contracts (e.g., WTGs) has had a medium to strong impact without secured finance, the survey on the provision of loans and, conse- results indicate that in the absence quently, the financing of OWPs. Fur- of additional political measures, thermore, 76 percent of survey parti- delays to projects by medium-sized cipants experience medium to strong developers are to be expected. changes to risk premiums for loans. Higher risk premiums increase financing costs and influence banks´ risk assessments for OWPs. Figure 18 Financing OWPs is therefore con- Expected normalisation of financial markets

siderably more difficult in current Source: KPMG 2010 market survey market conditions. The German offshore wind market is badly affected, 3 % 0 % since, compared with other Euro- 5 % pean markets, it has many medium- sized developers holding approvals 30 % for OWPs (see Figure 26). Due to the 24 % absence of a strong equity partner, these developers depend on project finance to implement projects that generally require capital expenditure in excess of €1 billion. Recovery in 38 % the financial markets therefore influences the ability of investors to 2010 move forward with projects currently 2011 2012 in the pipeline. 2013 For this reason, we asked survey Later Not at all participants to predict when financial markets might normalise. Results show that participants are not expecting the current financing environment to improve in the short term. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 45

5.5 Key obstacles to implementation

Survey participants´ opinions of the more positive (availability of finance effects of the economic crisis are was ranked the sixth biggest issue, mirrored in their perceptions of the see Section 7) given a series of suc- key obstacles to the implementation cessful project financings. of OWPs in Germany. Other significant issues are antici- Accordingly, the majority of those pated during the OWP construction surveyed (76 percent) consider the phase. Sixty-eight percent of partici- availability of external finance as the pants view transport and logistics as largest single problem currently fac- a major obstacle to the implementa- ing the German offshore wind mar- tion of offshore wind projects. ket. In 2007, the story was decidedly

Figure 19 Key issues for the offshore wind market in Germany

Source: KPMG 2010 market survey

1 Debt financing 76 % Availability of WTGs 63 % Approval for grid connection 66 % 2 Transport / Logistics 68 % Availability of cables 50 % Debt financing 35 % 3 Operational costs 62 % Raw material prices 48 % Approval of OWP 32 % 4 Availability of qualified personnel 54 % Transport / Logistics 41 % Capacity to feed into grid 28 % 5 Maintenance / Repairs 51 %

Availability of qualified personnel 39 % Insurance during operation 27 %

0 10 20 30 40 50 60 70 80 90 100

2010 Note: Ranking of main issues (very large and large problems). 2007 Multiple choices possible. 2006

Bottlenecks in transport and logistics were designed primarily for the oil are attributed to: and gas industry. There are currently 44 jack-up barges and ves- • Availability of suitable ports – in sels with cranes available across particular, ports with storage and the globe, but only 35 can lift more production facilities at the water- than 400 tonnes. Furthermore, front, and sufficient water depth this limitation also applies to for sea-going ships. 80 percent of the 25 jack-up barges • Availability of technically suitable and vessels with cranes that are installation vessels and cranes for currently in the planning stage.47 WTGs – currently available vessels KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 47 4C Offshore Heavy Lift Vessel Database 46 Offshore Wind in Europe

On the other hand, participants in Furthermore, due to limited expe- the market survey no longer foresee rience (particularly with long dis- major problems with the availability tances from the shore), there has of WTGs and other key components. been a tendency to underestimate In 2007, bottlenecks were expected the operating costs in the early in this area due to optimistic rollout years of project development in Ger- plans (see Section 6.1). many. Since operating costs repre- sent a larger cost factor for offshore In the 2010 market survey, issues wind projects than for onshore wind related to the operating phase are projects, they play a key role in the now perceived as more significant commercial assessment and, con- than in 2006 and 2007. More than sequently, the investment decisions half of the participants cite operat- made by developers. Another indi- ing costs, the availability of quali- cation of the growing maturity of fied staff and maintenance/repairs the industry is the low variance in as major issues. In our view, this responses, compared with the 2006 reflects the progress made by many and 2007 survey results (see Sec- OWPs towards the operating phase tion 5.1). of their projects and indicates that the industry is becoming increasingly professional.

5.6 Conclusion

Progress in the development of the For this reason, we will take a closer offshore wind market is currently look at current financing models and overshadowed by the impact of the conditions that apply to offshore financial crisis. Even though the sur- wind activities, and assess the sui- vey results show that market parti- tability of the currently discussed cipants view the already implemen- amendments to the EEG and other ted amendment to the EEG support measures. mechanism favourably, other issues, such as acute financing bottlenecks, dominate. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 47

6 The manufacturing market

In KPMG´s 2007 “Offshore wind cant bottleneck to the expansion of farms in Europe” report, market res- offshore wind activities. How have pondents and manufacturers cited things changed and what are the the availability of WTGs as a signifi- likely future trends?

6.1 A look back at 2007

In 2007, when KPMG produced its tion on the development of annually second offshore wind report, there available capacities provided by WTG were 24 OWPs installed in six Euro- manufacturers (see Section 5.4). pean countries, with a total capacity Planned production capacities were of 1,012 MW. Using interviews with forecast to increase from approxi- survey respondents (e.g., project mately 600 MW in 2008 to between developers, manufacturers, associ- approximately 2,700 and 3,500 MW ations), as well as desktop research by 2012. Meanwhile, the planned we made a forecast of OWP capacity implementation of WTGs was set for the years 2008 to 2012. to rise from 500 MW in 2008 to 10,100 MW in 2012. Consequently, We found that there was a consi- the report signalled likely bottlenecks derable gap between the planned in the availability of WTGs from 2009. expansion in capacity by offshore wind developers and the informa-

Figure 20 12,000 Expected additional offshore wind park capacity under construction and available capacity by offshore WTG manufacturers (2007) 10,000 Source: KPMG report “Offshore wind farms in Europe” (2007)

8,000 Belgium Germany Denmark 6,000 Spain France 4,000 United Kingdom Ireland 2,000 Netherlands Norway year

/ Sweden

MW 0 Maximum manufacturing capacity 2008 Forecast 2009 Forecast 2010 Forecast 2011 Forecast 2012 Forecast Minimum manufacturing capacity KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 48 Offshore Wind in Europe

6.2 Present status

Figure 21 illustrates the expansion scenario by 2015 on the basis of current market information.

12,000

10,000

8,000

6,000

4,000

2,000 year

MW 0 2008 Actual 2009 Actual 2010 Forecast 2011 Forecast 2012 Forecast 2013 Forecast 2014 Forecast 2015 Forecast

Figure 21 Planned offshore wind park construction (as at 31 December 2009)

Source: EWEA, KPMG analysis However, the anticipated shortfall Nonetheless, the availability of Belgium in WTGs from 2009, which would WTGs could prove problematic for Germany limit European offshore wind expan- new projects if the European off- Denmark sion, did not materialise. This is shore wind markets´ growth path Spain France largely due to delays in implement- accelerates as forecasted until 2015. United Kingdom ing projects in Germany, Spain and However, many manufacturers are Ireland France and other countries, resulting preparing to increase production Netherlands in a lower demand for WTGs. Based capacity, with General Electric and Sweden on project developers´ current imple- Siemens announcing plans to build mentation plans, the capacities of new production sites in the UK.48 WTG manufacturers should be sufficient to cover the demand for new turbines until 2012. Their estimates continue to range from between 2,700 and 3,500 MW. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 48 Neue Energie 05 / 2010, page 102 and following 49

6.3 Manufacturers´ market shares

Participants in the WTG market which offer specially developed off- have not changed significantly since shore turbines in the 5-MW-plus August 2007. Siemens and Vestas class, have failed to establish a continue to be the market leaders sustained market presence in 2008 in this segment. Competitors to the and 2009. likes of REpower, Areva or Bard,

Number of WTGs Vestas Siemens WinWinD REpower GE Areva Nordex Bard Enercon Other Total Total 407 339 18 14 14 6 2 1 1 32 834 thereof 2008 60 54 8 6 – – – 1 – – 129 thereof 2009 37 145 10 6 – 6 – – – – 204 Total 2008 / 2009 97 199 18 12 – 6 – 1 – – 333

Figure 22 Number of installed offshore WTGs in Europe (as at 31 December 2009)

The overview illustrates the dom- resources, plans to resume produc- Source: KPMG analysis inance of Siemens and Vestas, tion of WTGs. Following the con- which enjoy an 89 percent share of struction of the Arklow Bank 1 installed offshore wind capacity in project in 2004, the company initially Europe. Extensive experience with turned its focus back to the produc- the construction and operation of tion of onshore wind turbines. This WTGs has resulted in higher com- reversal shows that the offshore petitive advantages for both manu- wind market has become an attrac- facturers. tive market for turbine manufacturers, despite the technical challenges General Electric, a large indus- associated with the construction and trial conglomerate with extensive operating phases.

6.4 Development of production capacity

In addition to the return of manufac- The chart shows that several man- turers such as General Electric, it is ufacturers are already planning to possible that new manufacturers will introduce 10 MW WTGs. Most nota- create a more competitive environ- ble is the advent of Chinese man- ment for the future offshore WTG ufacturers, like XEMC which has market. The graph below provides acquired Dutch company Darwind, an overview of the status of newly and is preparing to manufacture gear- developed turbines or turbines under less 5 MW turbines in Europe. development by incumbent offshore Overall, there is a noticeable trend wind turbine manufacturers, as well towards the development of larger as by new entrants to the market. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. and higher-capacity WTGs. 50 Offshore Wind in Europe

12 Figure 23 Overview of planned market introduction Sinovel Clipper Sway for offshore WTGs 10

Source: KPMG analysis 8 Bard REpower Nordex 6 Darwind Gamesa

4 Sinovel Gamesa GE 2 Doosan

Nominal capacity in MW 0 H1 / 2010 H1 / 2011 H1 / 2012 H1 / 2013 H1 / 2014 H1 / 2015

Manufacturing of offshore WTGs predicting supply bottlenecks for is also supported by economies of individual components, such as scale with the increasing number of bearings. WTGs produced, growing standardi- These price developments take into sation in the production process, as account an increase in efficiency well as integration along the supply of 10 percent. In other words, it value chain. KPMG´s 2007 report still is assumed that costs per MW anticipated short- to medium-term will decrease by 10 percent as the price increases for WTGs. A report capacity of produced WTGs doubles. by the European Wind Energy Asso- Anticipated price decreases are ciation (EWEA), in March 2009, fore- based on the assumption that supply casts that prices will decrease by and demand will be balanced around 15 percent by 2015 suggest- by 2011, leading to lower costs ing that prices peak until then. This per WTG. comes despite WTG manufacturers

Figure 24 Cost developments for offshore WTGs Capital expenditure O&M Capacity factor (in million EUR / MW) (in EUR / MWh) (in %) Source: EWEA … Minimum Average Maximum Note: Constant prices from 2006 2006 1.80 2.10 2.40 16 37.5 % 2015 1.55 1.81 2.06 13 37.5 % KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 51

6.5 Conclusion

Developments in the past few years, its production capacities. In partic- compared with market expectations ular, demand for WTGs and other three years ago, indicate no reasons components will increase signifi- to expect WTG shortages in the near cantly in the UK as Round 3 projects term. are implemented from 2014 / 2015. These UK projects are expected to Furthermore, current developments absorb a significant share of available indicate that the market has high market resources, including finance, potential for improved profitabil- turbines and other components. Con- ity, given that production costs are sequently, other European offshore expected to decrease and new high- wind markets need to establish a capacity WTGs will be developed for competitive market environment

the offshore wind market. The return (comparable to the UK) by 2014. of General Electric and the planned entry of other manufacturers into the Capacity, expansion and investment WTG market show that manufactur- will gravitate to those countries that ers are generally taking a positive offer significant expansion poten- view of conditions in the OWP mar- tial, based on logistical considera- ket, despite the technical and eco- tions only. In conjunction with the nomic risks. country´s political backing for OWPs, this potential is deemed greatest in In the medium term, the supply the UK. industry to the offshore wind market is expected to significantly expand KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 52 Offshore Wind in Europe

7 Financing offshore wind

Offshore wind projects are capital- Offshore wind projects compete intensive projects. Depending on the with other capital-intensive invest- number of WTGs (typically around ment projects, as well as against 80) and the capacity of turbines, each other, for equity and debt. Sec- investment costs generally range tion 7.1 examines the competition from EUR 1.0 to 1.5 billion in Ger- investors face to secure financing in many. The ability to obtain finance is Europe´s largest offshore wind mar- integral to the implementation of an kets – Germany and the UK. The ambitious offshore wind pipeline. views of investors and lenders are examined in more detail in Sections The first projects in Denmark, the 7.2 and 7.3. Section 7.5 introduces UK and the Netherlands were mainly several measures that could signifi- balance-sheet financed by large utili- cantly improve the profitability and ties. By contrast, project finance only bankability of offshore wind projects applied to selected projects (see and potentially hold the key to the Section 7.4). German government´s reaching its offshore wind targets for 2020.

7.1 Competition for funding

German offshore wind projects com- The general regulatory conditions pete with offshore wind projects in for offshore wind differ in Germany other countries for equity and debt and the UK in terms of governmental financing. Considering the EWEA´s support frameworks for OWPs (FIT forecast of a 38.1 GW increase in vs. ROCs) and responsibility for con- Europe´s offshore wind capacity, to necting OWPs to the grid (see Sec- a total 40 GW between 2010 and tion 4.2). There are also differences 2020, and based on our calculation in market participants, OWP loca- of average investment costs of EUR tions and WTGs in operation. 3.7 million per MW (see Section 8.2), FITs, which are independent of mar- EUR 141.0 billion in funding is required ket price, along with the respon- by 2020, without taking any cost sav- sibility of TSOs to connect OWPs ing potential into consideration. that go into operation no later than The UK, in particular, will experience 31 December 201549 to the grid used an increased short-term demand to be advantageous for the German for funding, due to the implemen- offshore wind market, especially tation of Round 2 projects (totalling when compared with other European 7.2 GW), followed by medium-term markets, like the UK. However, the demand starting in 2014 / 2015 as British government has significantly Round 3 projects (totalling 32 GW) improved the general conditions for are implemented. the offshore wind market, making it even more attractive to investors. It

49 Compare Section 17 (2a) in connection with Section 118 (3)

© 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, eine Konzerngesellschaft der KPMG Europe eine LLP Konzerngesellschaft und Mitglied des KPMG-Netzwerks unabhängiger Wirtschaftsprüfungsgesellschaft, KPMG AG © 2010 sind. Mitgliedsfirmen, angeschlossen die Rechts, KPMG International Cooperative („KPMG International“), schweizerischen einer Person juristischen KPMG vorbehalten. und Printed Alle in das Rechte Germany. KPMG-Logo von sind KPMG eingetragene International. Markenzeichen EnWG 53

80 m 120 km United Kingdom Round 3 and Scottish Territorial Waters ~ 38.0 GW

60 m 90 km

Northern Europe Germany ~ 5.0 GW (not yet approved) ~ 25.8 GW 40 m Germany 60 km (approved) ~ 8.5 GW

United Kingdom x United Kingdom Round 2 Round 1 and 2 ~ 1.7 GW 20 m Northern Europe ~ 7.2 GW 30 km ~ 1.0 GW United Kingdom Round 1 ~ 1.8 GW Water depth, Distance from shore 2000 2005 2010 2015 2020 2025

Year of commissioning Figure 25 Offshore wind roadmap

Source: KPMG analysis introduced an increase to ROC-band- Market participants ing50 for a limited period and changed The large European utilities, particu- responsibility for grid connections larly those in Germany and the UK, using the OFTO regime. are equally active in the main Euro- pean markets for offshore wind. The UK has undergone rapid imple- However, compared with the UK, mentation of its Round 2 offshore Germany has a larger number of wind projects, and plans a further small independent developers, which 32 GW expansion when Round 3 rely on the project finance markets projects go into implementation in to get their offshore wind projects 2014 / 2015. This leaves the German underway. Unlike larger utilities, they offshore wind market with a limited do not have options such as balance window of opportunity to secure sheet financing available to them. equity and debt financing as well as production capabilities to achieve its 10 GW offshore wind target by 2020.

50 See explanations regarding the British fee system in

The consolidation of the offshore Locations wind market, through the takeover OWPs planned for Germany have of independent developers (such as different risk profiles to those already the acquisition of Eclipse Energy and implemented or under construction AMEC Wind Energy by Vattenfall in in Denmark, the UK and the Neth- 2008) or the purchase of individual erlands. In these countries, OWPs projects by large utilities, is more are already located or are being con- advanced in the UK than in Germany. structed near the shore and in shal- In Germany, only 39 percent of low waters. Meanwhile, German approved offshore wind projects are OWPs are located in the North Sea owned by large utilities, whereas 28 and Baltic Sea, further from the percent continue to be held by inde- coastline and in depths in excess of pendent developers. In the UK,72 30 metres. This is necessary to pro- percent are owned by large utilities, tect the Wattenmeer national park, whereas just 12 percent are inde- secure existing shipping routes and pendently held. to protect tourism in the area. Wind speeds at these locations are signifi- Figure 26 cantly higher, but construction and Ownership structures – Offshore wind projects operating costs are greater due to Source: KPMG analysis distances from the shore or service

United Kingdom Germany ports, and the smaller weather windows. 3 % 1 % Offshore WTG 7 % 8 % 4 % While other countries focused on 4 % 11 % a nominal WTG capacity of 2.0 to 39 % 12 % 3.6 MW, the German offshore wind industry initially focused on higher- 11 % capacity WTGs in the 5 to 6 MW

72 % class.

28 % Published forecasts for future installed capacity in Germany were based on this higher WTG capacity. Note: All approved OWPs (EEZ and 12 nautical mile zone) in International utilities There is, to date, only limited expe- Germany and all approved and pre-approved (pre-consent) Developers OWPs in the UK; multiple counts for participations by several rience of constructing and operating partners of different investor groups Financial investors higher-capacity turbines. The main WTG manufacturers purpose of the first German OWP, Municipal utilities Other alpha ventus, which officially went into operation in April 2010, is to gain experience of constructing and operating 5 MW WTGs at distances and water depths that will be typical for OWPs in the German part of the North Sea. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 55

In addition, there are wide variances at its projects OWP Baltic 1 and in the financial strength of WTG OWP Baltic 2 in the German manufacturers and the organisation Baltic Sea. of their production and service busi- While higher-capacity WTGs still nesses. This leads to different inves- need to be proven during the con- tor and lender assessments for war- struction and operation phases, ranties and influences the availability manufacturers of smaller wind tur- of guarantees offered in the market. bines, that have been adapted from In Denmark and the UK, Vestas and onshore to offshore operations, such Siemens dominate the market. By as Vestas and Siemens, have for contrast, mainly 5 MW or larger the most part mastered initial tech- WTGs from REpower 51, Areva Wind 52 nical difficulties. They are currently and Bard 53 are designated for German the manufacturers of choice among projects. At the same time, inves- investors and banks for their “proven tors in Germany are recently starting technology” with respect to new to focus increasingly on smaller and OWPs. Furthermore, Vestas and Sie- proven WTGs from established man- mens have further developed their

ufacturers. For example, the Sand- WTGs (e.g., 120 metre rotor diame- bank 24 OWP ordered 96 Vestas ter instead of the former 107 metres V90s, with a nominal capacity of 3 for the 3.6 MW Siemens WTG), with MW, while the German utility EnBW the objective of also being able to is installing Siemens WTGs with a offer competitive products for OWPs nominal capacity of 2.3 and 3.6 MW below the 5 MW capacity class. Figure 27 Installed offshore WTGs by manufacturer (Germany and United Kingdom 54, as at 31 December 2009)

Source: EWEA, KPMG analysis

Number of WTGs Vestas Siemens REpower Areva Nordex Bard Enercon Total Germany – – 6 6 1 1 1 15 United Kingdom 152 133 2 – – – – 287 Total 152 133 8 6 1 1 1 302

51 Framework contract with RWE, 48 WTGs for 53 80 WTGs for BARD Offshore 1 Nordsee Ost OWP 54 WTGs in Ireland are not included (25 WTGs by General 52 40 WTGs for Borkum-West II OWP, another 80 WTGs for Electric) KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. Global Tech I OWP 56 Offshore Wind in Europe

7.2 The investors´ perspective

The large European utilities are all group, an association of smaller and currently active in the main European medium-sized municipal utilities. Fur- markets for offshore wind, particu- thermore, SüdWestStrom and WV larly in Germany and the UK. Energie joined forces and, with the investment interests of numerous OWPs are in direct competition for smaller and medium-sized munici- funds with utilities´ other capital- pal utilities from the German-speak- intensive projects. These might ing area, they signed a purchase include new nuclear or conventional agreement for the BARD Offshore 1 power plants, modernisation of exist- project in July 2010. ing generation assets, carbon capture storage projects and oil and gas The entry of municipal utilities into exploration projects but also other OWPs demonstrates not only their offshore wind projects in different increased commitment to renew- geographies. able energies, but an opportunity to expand their own generation capaci- While OWPs can clearly play a signif- ties. This is new territory for invest- icant role in the generation strategy ments. Several German states have of all large European utilities, these already recognised this and opened utilities are not solely bound to their their public subsidy programmes for domestic markets. Government sup- renewable energies to investments port is likely to be needed to secure in OWPs. For instance, local utility the future profitability of OWP opera- GGEW received a guarantee from tions. So, when European countries the state of Hessen for the amount compete for investment, they are of equity it will invest in the BARD also judged on their support mech- Offshore 1 project. anisms and site conditions, which have a major impact on wind yield, Several municipal utilities, which

as well as on investment and oper- have not invested in offshore wind ating costs and, consequently, the projects to date, are now express- future profitability of their offshore ing interest in participating in exist- wind projects. ing wind projects or those under construction in Germany. They are In Germany, municipal utilities waiting until there is more construc- increasingly sit alongside large inter- tion and operational experience, nationally active utilities as equity which will enable them to make investors in offshore wind projects. better judgements on the actual For example, OWP Borkum-West II risks and achievable returns. Look- is backed by companies in the Trianel ing ahead, municipal utilities could KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 57

become an important source of cap- Meanwhile, other project developers ital for Germany´s offshore wind seek investors for single projects, industry. and work on financing in parallel. In both scenarios, these developers Municipal utilities greatly depend on lack the funding to pursue projects a functioning project finance market on their own and are exposed, there- for implementing large capital-inten- fore, to demand from interested sive projects. Few municipal utilities equity investors and a functioning can finance large investments using project financing market. their own debt capacities.55 Typi- cally, they can only provide a limited To date, financial investors have not amount of additional security, which been especially active in the off- is not looked on favourably by lend- shore wind sector. The exception ing banks, especially during the OWP is US financial investor Blackstone, construction phase. However, pub- which purchased a holding in the lic funding institution KfW has a spe- OWPs Meerwind Süd and Meerwind cial programme that makes project Ost in 2008. This low level of inter- finance only available to companies est is explained by the relatively low with no public entity as a majority expected returns, lack of a function- shareholder. ing project finance market (to reduce the need for equity) and the require- Other independent project development that they take on developers, the likes of wpd, Windreich, ment and construction risks. How- Prokon Nord and Energiekontor, con- ever, with greater OWP construction tinue to be active in the German and operational experience, financial offshore wind market. In the past, investors are likely to play an impor- these project developers took projects tant role in the secondary market to the FMHA approval stage on their for offshore wind projects already in own merits. Latterly, however, the operation. This will enable existing requirement that they obtain an (un) investors to free up committed capi- conditional grid connection commit- tal and invest in new projects. ment, means they need significantly more funding to finance key compo- Industrial conglomerates might also nents (WTGs, transformer station, prove to be equity providers for off- etc). For this reason, some project shore wind projects. Japanese and developers are now collaborating Korean companies such as Mitsui with established utilities, which pur- and Samsung, as well as Korean and chase the approved projects from Indian utilities such as Kepco and them. For instance, there has been GMR, have been following the Euro- a recent collaboration between wpd pean market in renewable energies and EnBW. in general and offshore wind in particular.

55 For example, Stadtwerke München GmbH or HEAG KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. Südhessische Energie AG (HSE) 58 Offshore Wind in Europe

So far, this group of investors has particularly with WTGs in the 5 MW not participated in any offshore plus capacity, and distances from the wind projects. However, they have shore and water depths typical of the engaged in research and develop- German North Sea, other potential ment joint ventures with European investors have shown limited inter- partners. For instance, Mitsubishi is est to date. working with Scottish and Southern While large European utilities are Energy. There is also interest in other mostly concerned about returns from parts of the value chain, particularly offshore wind projects in relevant in WTG manufacturers and the sup- markets, municipal utilities are more ply industry. concerned with obtaining outside In summary, the first phase of financing for individual projects. For growth for the German offshore this reason, any measures to improve wind industry is primarily driven by the general conditions for offshore large European utilities and, to a wind investment in Germany and lesser degree, by municipal utilities to achieve the 20-20-20 targets, and independent project developers. must address both the profitability Due to limited experience with the of projects and their bankability (see construction and operation of OWPs, Section 7.5 and 8).

7.3 The lenders´ perspective

7.3.1 Overview depend on project finance. This section shares the views of banks that Outside Germany, offshore wind have shown a general interest and projects are mostly financed directly willingness to provide project finance by the companies involved in their to the offshore wind sector. In addi- implementation. Project finance is tion, it considers large European utili- available in very few cases (see Sec- ties, which increasingly look for part- tion 7.4). nerships with other equity investors However, with the exception of large to fund capital-intensive projects European utilities, most investors such as OWPs.56

56 For example, the British OWP Gwynt Y Mor or the DanTysk

7.3.2 Project financing or in whole, to other banks once the loan agreements are concluded. Fur- There are currently two main issues thermore, institutional investors such hindering the financing of offshore as pension funds are no longer avail- wind projects: able for refinancing purposes, and 1. Low levels of liquidity in the project the securitisation market has virtually finance market, no syndication collapsed. and securitisation market, and For this reason, projects with larger uncertainty regarding the stricter financing requirements are only capital-asset ratio rules laid down possible through so-called “bank in Basel III. clubs”. This is where several banks take on a portion of the loan under 2. The still relatively early develop- a joint loan agreement. The compo- ment stage of the offshore wind sition and organisation a bank club, sector and lack of experience in and the negotiation of uniform doc- constructing and operating OWPs umentation, requires significantly at greater distances from the more effort than selecting and nego- shore and at greater depths, using tiating with one or more mandated WTGs of 5 MW or more. lead arranger(s) and an underwriter, where the entire loan volume is ini- These issues mean there is insuffi- tially assumed and then syndicated cient liquidity to satisfy demand for out to other banks. debt financing, even for German offshore wind projects alone. In the near future, banks will have to assume that they hold a credit Effects of the financial crisis commitment on balance until matu- Many banks, which were active in rity. On this basis, risk assessments the project finance market before (and hence risk limits) for certain the financial crisis, have significantly countries, industries and debtors reduced their loan activities. For will become increasingly impor- example, banks that received govern- tant. Banks will evaluate and limit ment bailout support in the UK, now their exposure in certain market seg- limit project finance to the “home ments, including offshore wind. Just market”. as with the equity markets, the offshore wind markets in Germany and For the most part, the syndication the UK are now competing for avail- market for large loans, particularly able debt financing. for project finance, has collapsed. In general, banks are no longer willing to secure larger loans as underwrit- ers and to transfer the loans, in part © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, eine Konzerngesellschaft der KPMG Europe eine LLP Konzerngesellschaft und Mitglied des KPMG-Netzwerks unabhängiger Wirtschaftsprüfungsgesellschaft, KPMG AG © 2010 sind. Mitgliedsfirmen, angeschlossen die Rechts, KPMG International Cooperative („KPMG International“), schweizerischen einer Person juristischen KPMG vorbehalten. und Printed Alle in das Rechte Germany. KPMG-Logo von sind KPMG eingetragene International. Markenzeichen 60 Offshore Wind in Europe

Offshore wind industry gies. As such, they do not yet qual- According to assessments by project ify for classic non-recourse project finance banks, the offshore wind financing, but require additional sup- industry is only at the very begin- port from investors, WTG manufac- ning of its development. Experience turers, government public funding gained in Denmark, the Netherlands institutions or credit insurers. and in the UK in Rounds 1 and 2 are important reference points. Limited liquidity Between 10 and 14 commercial However, the imminent expansion banks are currently engaged in of offshore wind in Germany and financing offshore wind projects.57 Round 3 in the UK, are character- Based on information provided by ised by very different conditions. these banks, the average credit The locations are different and so commitment is approximately EUR are the requirements for construct- 50 million per bank, where most of ing and operating OWPs. The Ger- the specific offshore wind risks for man offshore wind test site, alpha the construction and start-up phases ventus, already uses two of the three are already covered. currently available 5 MW WTGs, REpower and Areva Wind (previously So, for a typical OWP in the Ger- Multibrid). Now two further projects man North Sea – with 80 WTGs at are under construction in the North 5 MW nominal capacity each, with Sea and Baltic Sea (BARD Offshore 1 an investment volume of approxi- and Baltic 1), with more projects to mately EUR 1.5 billion, and assum- follow shortly. These will all expand ing a 30 percent equity contribution the German experience of operating – a consortium of 20 banks would OWPs in tough conditions, create a be required to provide the financing. benchmark for future deployments The liquidity gap can be reduced, and improve, therefore, the borrow- however, with input from public ing potential of such projects. funding institutions such as the Euro-

pean Investment Bank (EIB) or the For smaller WTGs, there is some KfW. However, taking advice from construction and operational expe- banks, some developers are reduc- rience in Denmark, the UK and the ing their financing needs by, for Netherlands. However, these have instance, dividing OWPs into Phase I limited relevance to OWPs in the and Phase II. German North Sea and Baltic Sea, or the UK´s Round 3, as distances Assumption of specific risks to the shore or suitable port and related to offshore wind the water depths are not compara- As with other project finance activi- ble. Banks view larger WTGs in the ties, risks related to offshore wind 5 MW class as non-proven technolo- are shared among project partici-

57 Number of banks involved in the most recent project KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. financing for Belwind 1 and Boreas 61

pants, including investors, lenders, construction risks were borne by the suppliers of key components and European Investment Bank (EIB) and insurance companies. Before the the Danish state-owned export credit financial crisis, project finance was insurer Eksport Kredit Fonden (EKF). characterised by the following Banks that are active in the offshore features: wind industry, and which participated • Multi-contracting with three to in this survey, believe the EIBs par- four suppliers of key components ticipation in financing is vital for a (instead of a general contractor); successful project. This input is both secured installation logistics in terms of providing the necessary • Letters of Credit for suppliers as liquidity (up to 50 percent of invest- part of the financing package ment costs) as well as a proportion • Inclusion of export export credit of the construction risk (up to EUR agencies where possible 200 million per project). • Reserve facilities provided by By providing guarantees, the EKF investors and lenders for cost makes a significant contribution overruns towards reducing the construction • Debt capacity calculation on the risk borne by commercial banks. basis of a P90 wind yield 58 The EKF is able to commit up to • Long-term PPAs with utilities and EUR 200 or even 250 million. As the certificates; alternatively fixed EKF only supports component sup- statutory regulated tariffs for pliers located or producing in Den- certificates mark (notably the WTG manufactur- • Strong guarantees for availability ers Vestas and Siemens), suppliers by WTG manufacturers located in Germany (particularly • Medium to long-term maintenance REpower, Areva Wind and Bard) are and service contracts with WTG at a competitive disadvantage. This manufacturers or developers applies not only to German projects, • Comprehensive medium to long- which in any case would not be con- term insurance packages sidered for export credit insurance, • Loan terms which were congruent but also to projects in other Euro- with the term of PPAs and main- pean countries. tenance and service contracts; de facto decrease in term through German offshore wind projects, cash-sweep clauses which are not under majority public ownership, can also draw on KfW´s Belwind 1 is the only European off- special project finance programme. shore wind project finance deal to This enables commercial banks to be concluded since the start of the commit to reduced-interest refinanc- financial crisis. It does not adhere to ing of up to 35 percent of approved the structure define above, however loans, with a 50 percent indemnity.

58 Corresponds with the wind yield that will be achieved with KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. a 90 percent level of probability 62 Offshore Wind in Europe

Alternatively, KfW can act directly KfW´s special programme for project as a lender and award loans up to finance is set to expire in 2010. It EUR 200 million per project – under is not currently clear whether the the same terms as the commercial Federal Government will extend or banks. Both instruments can reduce restart this programme. the liquidity gap described above. Direct credit approvals for offshore Sample calculation wind projects carry a high assump- Simplified versions of possible tion of risk. financing structures for offshore wind projects of the size likely in the German North Sea (80 WTGs with 5 MW or 3.6 MW nominal capac- Figure 28 Assumptions for sample calculation ity) are illustrated in Figure 29 below.

Source: KPMG analysis Figure 28 provides the assumptions upon which the calculation is based. EUR million 80 x 5 MW 80 x 3.6 MW Assuming that KfWs special pro- Capital expenditure (including contingency) 1,500.0 1,100.0 gramme for project finance is main- Specific investment costs (EUR million / MW) 3.7 3.7 tained and that EKF guarantees are Financing still available, it would be possible to Equity (assumed: 33.3 %) 500.0 366.7 cover 62.5 percent of the entire debt Debt (assumed: 66.7 %) 1,000.0 733.3 financing 59 for OWPs using a 5 MW risk assumed by WTG or 82.5 percent for a 3.6 MW EIB (maximum amount) 200.0 200.0 WTG offshore wind project through EKF guarantees (maximum amount) 225.0 225.0 public funding institutions and export KfW (maximum amount) 200.0 200.0 credit agencies. This would leave 37.5 percent (5 MW) or 14.8 percent Total 625.0 625.0 (3.6 MW) of risk 60 to be borne by commercial banks.

However, if neither KfW´s special Figure 29 Sample calculation – Risk assumed programme for project finance or by EIB, EKF, KfW EKF´s guarantee were available, only Source: KPMG analysis 20 percent (5 MW) or 27.3 percent

80x 5 MW 80x 3.6 MW (3.6 MW) of the debt financing vol- ume61 would be covered by the EIB.

10 % The remaining 80 percent (5 MW) or 72.7 percent (3.6 MW) of risk would 25 % be borne by the commercial banks.62 34 % 18 % 34 % The fact remains, however, that even with the public funding institutions 13 % and export credit agencies funding

20 % 13 % 15 % 18 %

Equity EUR 500 m Equity EUR 367 m 59 Corresponds with 41.7 percent (5 MW) or 56.8 percent (3.5 MW) of total financing volume, including equity Debt – EIB (risk assumed by EIB) EUR 200 m Debt – EIB (risk assumed by EIB) EUR 200 m 60 Corresponds with 25.0 percent (5 MW) or 9.8 percent Debt – EIB (risk assumed by EKF guarantee) EUR 225 m Debt – EIB (risk assumed by EKF guarantee) EUR 225 m (3.6 MW) of total financing volume, including equity 61 Corresponds with 13.3 percent (5 MW) or 18.2 percent Debt – KfW EUR 200 m Debt – KfW EUR 200 m (3.6 MW) of total financing volume, including equity 62 Corresponds with 53.3 percent (5 MW) or 48.5 percent

options, commercial banks will still 80x 5 MW 80x 3.6 MW have to provide a significant portion of debt finance (37.5 percent for 5 MW OWPs or 14.8 percent for 3.6 MW WTGs), without external risk 33 % 33 % insurance, for offshore wind projects on the scale typical of the German 49 % North Sea. 54 %

KPMG has identified that banks 13 % 18 % active in financing OWPs are willing to assume risks at the level of approximately 20 to 25 percent of Equity EUR 500 m Equity EUR 367 m the entire debt finance volume. Debt – EIB (risk assumed by EIB) EUR 200 m Debt – EIB (risk assumed by EIB) EUR 200 m Debt – Commercial banks EUR 800 m Debt – Commercial banks EUR 533 m While this is clearly adequate for a 3.6 MW WTG, it is insufficient for a 5 MW OWP, with 80 WTGs (a total Figure 30 Sample calculation – Risk assumed by EIB 400 MW), even if all currently availa- Source: KPMG analysis ble hedging instruments are used.

Unless commercial banks engaged in For utilities, classic on-balance sheet the offshore wind market are willing finance is attractive for two reasons. to take on significantly more risk, the It costs less than project finance, reality is that it will be impossible to which is not based on the creditwor- implement OWPs in Germany using thiness of the group but on the cash project finance. Currently available flows generated from the project. hedging instruments need to be continued or expanded, and new mech- It also saves time and is more flex- anisms introduced if Germany is to ible because time-consuming due have a robust offshore wind industry diligence by project finance banks is that can compete with the UK to make unnecessary. the 20-20-20 targets achievable. The capital requirements of large utilities are set to rise significantly in 7.3.3 On-balance sheet the coming years. Projects to build financing and modernise conventional power Large utilities traditionally draw on plants, as well as carbon capture and their own balance sheets to provide storage solutions, grid expansion, oil debt finance for their investment and gas exploration demands, will projects. Project finance, although simultaneously compete with their rarely used, might be an option offshore wind projects for invest- where a joint venture partner lacks ment. At the same time, utilities will capital. face decreasing margins from energy © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, eine Konzerngesellschaft der KPMG Europe eine LLP Konzerngesellschaft und Mitglied des KPMG-Netzwerks unabhängiger Wirtschaftsprüfungsgesellschaft, KPMG AG © 2010 sind. Mitgliedsfirmen, angeschlossen die Rechts, KPMG International Cooperative („KPMG International“), schweizerischen einer Person juristischen KPMG vorbehalten. und Printed Alle in das Rechte Germany. KPMG-Logo von sind KPMG eingetragene International. Markenzeichen 64 Offshore Wind in Europe

sales, cost pressures from the regu- • OWP Linc, UK: a joint venture lated network business as well as between Centrica (50 percent), electricity prices that are low by his- Dong Energy (25 percent) and torical standards. Lower cash flows Siemens Project Ventures from their operating businesses will (25 percent) therefore reduce the on-balance • OWP Walney, UK: a joint venture sheet debt financing capabilities of between Dong Energy (74.9 per- these companies. cent) and Scottish and Southern Energy (25.1 percent) Given these pressures, many utili- • Dutch OWPs from the SSE ties are now looking for new ways to Renewables portfolio (formerly develop capital for large projects and Airtricity): ownership share by to distribute project risk among sev- Dong Energy (50 percent) in eral partners. The offshore wind sec- approved and not yet approved tor has numerous examples of part- projects nerships between utilities, municipal

companies, other strategic investors The German alpha ventus offshore and, sometimes, financial investors: wind test site is another example of • OWP Horns Rev 1, Denmark: a partnership between utilities, in a joint venture between Vattenfall this case EWE owns 47.5 percent, (60 percent) and Dong Energy E.ON 26.25 percent and Vattenfall (40 percent), whereby Vattenfall 26.25 percent. is responsible for operational The German utility EnBW offered management 49 percent of its Baltic 1 OWP • OWP Greater Gabbard, UK: (totalling 50 MW) to municipal utili- originally a joint venture between ties in the domestic market. EnBW Scottish & Southern Energy (SSE) finances the construction and takes and Fluor, Fluors shares were on full construction risk. The munici- acquired by RWE Innogy following pal utilities were able to buy options an interim purchase by SSE and enter the project once commis- • OWP Sheringham Shoal, UK: sioned. According to EnBW, this joint venture between Statoil offer was well received and EnBW is Hydro (50 percent) and Statkraft planning to implement a similar par- (50 percent) ticipation structure for its second • OWPs Lynn and Inner Dowsing, OWP Baltic 2 (totalling 288 MW) in UK: refinancing of OWPs in oper- the Baltic Sea. ation, and sale of 50 percent by Centrica, to US investor TCW In June 2010, RWE Innogy an- • OWP London Array, UK: a joint nounced that Stadtwerke München venture between E.ON (50 per- (30 percent) and Siemens Project cent), Dong Energy (30 percent) Ventures (10 percent) would co- and Masdar, a state-owned invest- invest in its Gwynt Y Mor OWP in ment company of the United Arab the Irish Sea.63 Emirates (20 percent)

63 See press release of RWE Innogy GmbH, 4 June 2010 KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 65

In July 2010, Vattenfall (51 percent) Rating agencies assess the debt and Stadtwerke München (49 per- capacity of companies using qualita- cent) followed up with a declaration tive and quantitative criteria. of intent regarding the joint construc- Quantitative criteria include key fig- tion of the DanTysk OWP in the Ger- ures such as equity ratio, net debt man North Sea.64 to EBITDA or net debt to funds from Meanwhile, the Chairman of German operations. Rating agencies first use utility EWE is quoted in the press, the companies´ consolidated financial saying that his company is actively statements, and may make adjust- looking for a partner for its OWP ments for joint projects, depending Riffgat in the 12 nautical mile zone on the rating method used. As the of the German North Sea.65 consolidated financial statements are the starting point for analysis by rat- There are typically two legal and eco- ing agencies, the treatment of a joint nomic structures for these types of venture under commercial law and partnerships: its financing is very significant to the • Legally independent project parties involved. company or unincorporated joint Qualitative criteria include the stra- venture. tegic significance of the project to • Financing for partners through the company and the identity, stra- equity or shareholder loans; tegic direction and financial strength financing at the level of the project of the partner(s). It is worth noting company or hybrid financing that a utility with a 51 percent share structures.66 in a project could be allocated the entire financing for an offshore wind Increasingly, the structure of these project, if that partner would be able partnerships is determined by their to continue the project on its own in consolidated financial statements the event that a 49 percent partner and rating considerations. Tax mat- defaulted. Ratings agencies apply ters are also important. this type of business assessment to It is not just the lending banks, but holding structures in which partners also the rating agencies that are with similar strategic directions and keenly monitoring the development financial power are working together of net debt and the ability of compa- (e.g., two large utilities for which nies to service their financial debts. the expansion of renewable energies For example, in its publication “Euro- forms a key part of their corporate pean Electric Utilities and the Quest strategy). for Debt Capacity” (March 2010), rating agency Moodys explicitly analyses innovative financing structures for large projects such as OWPs and also discusses standardised legal and economic structures.67

64 See press release of Vattenfall Europe AG and Stadtwerke 67 For example Standard & Poor´s: Major Continental European München GmbH, 20 July 2010 Utilities – Defensive but not immune, November 2009; 65 See Powernews, 30 April 2010 Moody´s: European Electric Utilities and the Quest for Debt KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 66 See Section 7.4, explanations regarding OWP London Array Capacity, March 2010 66 Offshore Wind in Europe

7.4 Current financing for offshore wind projects

The first projects in Denmark, the UK Project finance was concluded, how- and the Netherlands were mostly on- ever, for Princess Amalia, Thornton balance sheet financed by utilities ini- Bank and Bligh Bank at the construc- tially. Project finance was the exception phase. For the other projects tion rather than the rule. (North Hoyle, Lynn and Inner Dows- ing), project finance was not used • Zephyr (including North Hoyle), until the operating phase, replacing UK (2004) the groups´ balance sheet financing • Q7 (today: Princess Amalia), used during the construction phase. Netherlands (2006) • C-Power (today: Thornton Bank), Q7 (today Princess Amalia) was the Belgium (2007) world´s first offshore wind project to • BARD Offshore 1, Germany (2008) use non-recourse project financing. • Belwind 1 (Bligh Bank), Belgium The breakthrough in project finance Figure 31 Financing offshore wind projects Q7, C-Power (2009) for OWPs came in 2006 for Q7 and and Belwind 1 • Boreas (including Lynn and Inner in 2007 for Thornton Bank. At the Source: KPMG analysis; press release Q7, 13 March 2007; Dowsing), UK (2009) time, these structures set the prec- Infrastructure Journal, Q7 – Dutch Offshore Wind; Dexia Off- shore Wind Presentation, 21 October 2008; Infrastructure Journal, Belgium’s Thornton Bank offshore wind project, edent for future projects as finance 30 May 2007; Dexia press release, 23 May 2007; EIB press release, 24 July 2009; Infrastructure Journal, Belwind Off- for both was syndicated without dif- shore Wind Project, August 2009 ficulty.

Project Q7 (Princess Amalia), C-Power (Thornton Belwind 1 (Bligh However, then came the financial cri- Netherlands Bank), Belgium Bank), Belgium sis in the summer of 2008, and the Distance from shore / 23 km / 27 – 30 km / 47 km / willingness of commercial banks to Water depth 19 – 24 m up to 28 m up to 35 m finance OWPs virtually disappeared. Installed capacity 120 MW 30 MW (Phase I, 165 MW (Phase I, It was not until summer 2009 that

planned extension to planned extension to Belwind I was awarded finance for 300 MW) 330 MW) its Bligh Bank OWP. Here, however, WTG 80x 2 MW Vestas V80 6x 5 MW REpower 53x 3 MW Vestas V90 the EIB and EKF played the key role Capital expenditure EUR 383 m EUR 153 m EUR 613.9 m plus in providing finance, rather than the contingency 80 m commercial banks. Lender Dexia, Rabobank Dexia, Rabobank EIB, Dexia, Rabobank, (for Mezzanine) ASN Bank, PMV Debt financing EUR 219 m EUR 111 m plus EUR 482.5 m plus EUR 20 m Mezzanine EUR 63.4 m Mezzanine Gearing 43 % Equity / 27.5 % Equity / 30.5 % Equity 57 % Debt 72.5 % Debt plus Mezzanine / 69.5 % Debt Loan term 11 years 15 years 15 years Involvement of public EUR 69 m n / a EUR 300 m EIB, funding institutions / EKF export guarantee EUR 212.4 m export credit agencies EKF export guarantee Contingency total of EUR 47 m total of EUR 31 m EUR 80 m for cost overruns reserve facility reserve facility reserve facility (including Mezzanine) (including Equity) Closing 25 October 2006 23 May 2007 24 July 2009 KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 67

The EIB not only provided Belwind 1 Project Zephyr (i. a. North Hoyle), Boreas (i. a. Lynn and Inner with the majority of its funding, but United Kingdom Dowsing), United Kingdom also accepted part of the risks dur- Onshore sites 17 wind projects in England, Scotland Glens of Foudland, Scotland ing the construction phase, which and Wales was unique for an offshore wind Offshore sites North Hoyle, Lynn and Inner Dowsing, project. Furthermore, the project 4 to 5 nautical miles 5 to 9 km distance from coast, also had backing from insurer EKF. from north Wales coast approximately 10 metres depth As EKF can only support companies Installed capacity 331 MW 26 MW, 20x 1.3 MW Bonus that are located in or manufacture onshore (now Siemens) in Denmark, Belwind 1 used WTGs Installed capacity 60 MW / 30x 2 MW Vestas V80 194.4 MW / 54x 3.6 MW Siemens from Danish company Vestas. EKF offshore SWT-3.6-107 issued guarantees, similar to previ- Refinancing GBP 300 m, of which approximately approximately GBP 341 m ous projects, however, here it pro- GBP 70 m for North Hoyle vided 44 percent of the entire senior Lenders BNP Paribas, ABN AMRO, Bank of Club of 14 banks: Tokyo-Mitsubishi, Fortis Bank, Bank of Tokyo-Mitsubishi, Santander, debt, making its risk exposure much Bayerische Hypo und Vereinsbank, HSBC, Lloyds TSB, Rabobank, Dexia, higher than for Q7 which was just Bank of Scotland, Royal Bank of Calyon, BayernLB, Bank of Ireland, BNP 32 percent. Canada (as mandated lead arranger Paribas Fortis, National Australia Bank, and underwriter) KfW, BBVA, NIBC Bank In addition to Dutch and Belgian Loan term 15 years 15 years OWPs, which were already able to obtain non-recourse project financ- Construction risk Start up of North Hoyle OWP in 2003; Lynn and Inner Dowsing: construction risk rests with RWE, start up in March 2009; ing during the construction phase, only projects in operation all projects in operation other OWPs were refinanced on the PPAs 15 year PPA for electricity and ROCs 15 year PPA for electricity, LECs and banking market once commissioned. with RWE npower 50 % of ROCs with Centrica These include the first British OWP Closing 29 January 2004 5 November 2009 North Hoyle, as well as two OWPs

from the Boreas portfolio of Centrica, Figure 32 the Lynn and Inner Dowsing projects. Financing Zephyr and Boreas Source: KPMG analysis; RWE press release, 29 January 2004; Infrastructure Journal: Beaufort Wind, 20 April 2004; As early as 2004, RWE and Zephyr RWE Fact Book Renewable Energy from July 2010; Infra- Investment Ltd. created a spe- structure Journal, Boreas: Refinancing Centrica‘s UK Wind

Assets, 11 November 2009 cial purpose vehicle to refinance At the same time, Zephyr also used onshore and offshore wind projects non-recourse debt. Financing was already in operation. Among oth- mainly based on a long-term PPA ers, RWE placed the North Hoyle with RWE npower, which meant OWP (60 MW of installed capac- RWE bore the counterparty risk. ity) and approximately 130 MW of onshore wind projects into Zephyr, In 2009, Centrica developed a similar and committed to bring in additional structure called Boreas. It placed one onshore wind projects once commis- onshore wind project, Glens of Foud- sioned, up to 430 MW. RWE, along land, as well as two offshore wind with Englefield Capital, First Islamic projects, Lynn and Inner Dowsing, Investment Bank, and two other into a special purpose vehicle (SPV). financial investors each hold one- third of the shares in Zephyr. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 68 Offshore Wind in Europe

Centrica raised approximately GBP the debt finance enabled BARD to 341 million of non-recourse debt for further develop its technology and to the Boreas SPV and sold a 50 per- start construction on the BARD Off- cent stake to US investor TCW. This shore 1 project, the first commercial transaction was largely based on a OWP in Germany following the alpha long-term PPA, Levy Exemption Cer- ventus test site. tificates (LECs) and 50 percent of July 2010 also saw the successful the ROCs, meaning Centrica bore conclusion of negotiations for the the counterparty risk. The long-term acquisition of a 70 percent share PPA was structured to achieve a pro- in the Bard Offshore 1 project by portionate deconsolidation of the SüdWestStrom, a group of munici- projects on Centrica´s consolidated pal utilities from Germany, Austria, balance sheet, placing some com- Liechtenstein and Luxembourg. The mercial upsides and risks with the remaining 30 percent is expected to SPV. be taken over by WV Energie AG, a joint venture by BASF and more than Project BARD Offshore 1, Germany 200 municipal utilities. As part of the acquisition of shares in BARD Off- Location German North Sea, EEZ, 90 km northwest of Borkum, shore 1, the financing for the project approximately 40 metres water depth will be renegotiated. It intends to use Installed capacity 400 MW some EIB financing. WTG 80x 5 MW Bard In the UK, Round 1 and Round 2 off- Capital expenditure approximately EUR 1.5 billion shore wind projects of, which are (excluding Windlift I installation vessel) still under development and under Investor Ocean Breeze GmbH & Co. KG (100 % UniCredit) construction, continue to be mainly Lender HVB / UniCredit financed with on-balance sheet debt. Financing approximately EUR 1.0 billion in debt At the same time, even large utili- Closing 2008 ties are now approaching the EIB for potential co-financing. For instance, Figure 33 Financing offshore wind project BARD Offshore 1 in February 2010, Vattenfall received

Source: KPMG analysis; SüdWestStrom press release, an EIB commitment for financing 15 July 2010; 2008 consolidated financial statements for the UniCredit Group, 2008 financial statements for Ocean its Thanet OWP. Few projects use Breeze Energy GmbH & Co. KG; Project list of European Investment Bank project financing:

In the German offshore wind market, • London Array, UK there is currently only one offshore • Lincs, UK wind project with non-recourse financing. In 2008, HVB/UniCredit The London Array OWP uses a legal provided approximately EUR 1 billion structure that allows each share- in debt finance to build the BARD holder to provide a share of finance Offshore 1 OWP. The original plan that is independent of the financ- was to place a bond on the capital ing structures used by other share- markets. Following the financial cri- holders. So E.ON (50 percent share- sis, however, HVB/UniCredit with- holder) and Dong Energy (30 percent drew from these plans. Nonetheless, shareholder) will finance the first KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 69

650 MW phase with on-balance Project London Array, United Kingdom sheet debt. Masdar, which holds

20 percent, intends to raise its share Location Thames estuary, from east coast of the United Kingdom by way of project financing. Dong Installed capacity 630 MW (Phase I, planned extension to 1,000 MW) Energy has also obtained an EIB loan WTG 175x 3.6 MW Siemens for GBP 250 million, which is partly Capital expenditure approximately GBP 2.0 bn secured with EKF guarantees for Gearing Masdar: expected approximately 43,75 % equity / Siemens WTGs. 56,25 % debt Following the successful refinanc- Involvement of public Dong Energy: GBP 250 m senior EIB loan ing of Boreas, Centrica also sought funding institutions / (secured by EKF guarantees) to secure finance for the Lincs OWP export credit agencies on the banking market. In Novem- Legal structure Unincorporated joint venture ber 2009, Centrica announced that Figure 34 50 percent of the Lincs OWP is to Financing offshore wind project London Array

be sold to Dong Energy and Siemens Source: KPMG analysis; EIB press release, 10 June 2010; Infrastructure Journal: London Array to sign next week, Project Ventures. Again, the objec- 22 June 2010 tive is to use EIB and EKF financing support for Siemens WTGs. Project Lincs, United Kingdom Given that the EIB and EKF will provide much of the investment volume Location 8 km from east coast of the United Kingdom and secure some of the risk by, the Installed capacity 270 MW Lincs will serve as a good test of WTG 75x 3.6 MW Siemens SWT-3.6-120 the financing markets. It will demon- strate the ability and willingness of Capital expenditure GBP 750 m (without OFTO grid connection) commercial banks to assume risks Involvement of public Planned involvement of EIB and EKF funding institutions / during the construction phases of export credit agencies offshore wind projects and the necessary safeguards. Figure 35 Financing offshore wind project Lincs Based on information provided by Source: KPMG analysis; Centrica press release, 23 December commercial banks that are active in 2009; Infrastructure Journal: Boreas: Refinancing Centrica's UK wind assets, 11 November 2009 the offshore wind sector, there are currently more than ten offshore Project Borkum-West II, Germany wind projects in the project financing market in Germany. All rely on the Location German North Sea, EEZ, 45 km northwest of Borkum, EIB to provide necessary funding and approximately 40 metres water depth to assume the construction period Installed capacity 200 MW (Phase I, risk. EKF guarantees are generally planned extension to 400 MW) only available to projects using Ves- WTG 40x 5 MW Multibrid M5000 tas or Siemens WTGs. Figure 36 At present, there is no comparable Financing offshore wind project Borkum-West II

support for other manufacturers such Source: KPMG analysis; Trianel press release 7 September as REpower, Areva Wind or Bard. This 2009; EIB project list programme is due to expire in 2010. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 70 Offshore Wind in Europe

The Borkum-West II OWP, which is Furthermore, as Trianel is under planned by Trianel, illustrates the dif- majority public (municipal) owner- ficulties in obtaining project financ- ship, it cannot access KfWs special ing under these constraints. Trianel, project finance programme. a group of municipal utilities, has Project finance experience since the secured the first 40 WTGs for the financial crisis, reveals moderate Borkum-West II OWP, with an origi- reluctance on the part of financing nally planned capacity of 400 MW. banks to provide funding and assume It is seeking EIB financing. However, risks, particularly during the con- its choice of WTGs (which are not struction phase of OWPs. Danish) rules out EKF guarantees.

7.5 How to improve bankability

7.5.1 Overview as industry associations, are currently discussing a number of struc- Germany´s offshore wind industry tures designed to improve the bank- is transitioning from a niche market, ability of the first group of offshore characterised by project developers wind projects.68 and pilot projects, into one in which WTGs are produced, installed and Various measures can be adopted to operated on a large industrial scale. enhance the bankability of first OWPs. They can be divided into two types: Now that the alpha ventus test site is completed and commissioned, • Measures that start with the the market can draw on this consid- structure of the FIT erable construction and operational • Measures where governments experience of commercial OWPs to assume a portion of the risk develop the industry. The UK has already made signifi- Real data will soon become avail- cant improvements to the economic able for the first five to ten OWP in framework for investors through a Germany. The industry will be bet- temporary adjustment to the ROC ter able to assess initial budgets banding and the introduction of the and schedules for the construction OFTO regime where responsibility phase, as well as wind turbine availa- for grid connections is delegated to a bility during the initial years of opera- grid operator. tion. Investors and lenders, which to date have been reluctant to fund the The UK has also sought to close the offshore wind sector, are expected financing gap, which is obstructing to become increasingly active once the planned expansion of the off- real data and experience is available shore wind industry, by setting up to inform their investment decisions. the Green Investment Bank (GIB). Federal and state politicians, as well

68 Hamburger Abendblatt; Interview with federal environment Daily: Röttgen stellt Bürgschaften für Meereswindparks KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. minister Norbert Röttgen, 28 July 2010; Dow Jones Energy in Aussicht, 27 July 2010 71

Details of its tasks and financial projects will be commissioned resources are still to be defined. before the end of 2014, i.e., before the degression period starts.69 The Germany, therefore, is in direct com- reality is that without the sprinter petition with the UK for investors premium, any offshore wind projects whose decisions are influenced by currently in the planning phase available support mechanisms, grid cannot meet the returns that are connections as well as government required by investors. Furthermore, financing. Bluntly, if Germany is to debt financing as part of the project be competitive, Federal Government finance will be lower. Given the cur- will need to introduce improvements rent problems in connecting OWPs and systems that will create a more to the grid, the scheduled expiry attractive environment for investors. of the sprinter premium creates significant challenges for these compa- 7.5.2 Change in FIT regime nies.70

Sprinter premium There are currently discussions The current EEG feed-in tariff pro- underway to extend the sprinter vides a “sprinter premium” (an addi- premium, move the date parame- tional compensation on top of the ters or even remove the degression increased initial tariff) of 2 ct / kWh period altogether. for OWPs which start operation by 31 December 2015. From 1 January As the regulation currently stands, 2015, the initial tariff as well as the it increases pressure on companies sprinter premium will reduce annually and TSOs to work towards comply- by 5 percent (a degression period) ing with the original time sched- until start-up. ule. Of course, an extension to the sprinter premium, and shifting the As part of the EEG amendment in degression period, would relieve 2009, this incentive mechanism was that pressure. Instead, if the sprinter designed to accelerate the expansion premium was extended only to a

of the German offshore wind indus- certain number of OWPs, or if it try. However, given considerable had a defined upper capacity limit, delays in constructing the first com- this would incentivise companies mercial OWPs, the currently sched- to implement their offshore wind uled expiry period for this sprinter projects as quickly as possible. premium will only benefit a few select projects. The very purpose Conversely, this would create addi- of the incentive is, therefore, largely tional planning uncertainty for some redundant. projects, since eligibility for the sprinter premium would depend not This presents a major problem for just on compliance with their own companies that made investment construction schedule, as is the case decisions in favour of OWPs, or today, but also on how quickly other which will be making these shortly, OWPs are implemented. assuming in their return calculations and financing models that the KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 69 See also Section 8 70 See Powernews: Zähes Ringen auf See, 23 June 2010 72 Offshore Wind in Europe

Undoubtedly, this uncertainty would EEG acceleration model frustrate decision-making by inves- The current EEG provides for an tors and financing banks. They will increased initial tariff of 13 ct/kWh inevitably assume non-availability of for 12 years of WTGs operation, the sprinter premium in their down- and a possible extension depending side scenarios. However, to increase on the distance from the shore and planning security for companies water depth. The period for which and lenders, an option might be for the increased initial tariff is granted an independent institution, such as also represents the maximum loan the FMHA or the Federal Network tenor for project finance. Banks are Agency, to provide confirmation of currently unwilling to assume market eligibility for the extended sprinter price risks, and assume 15 years as bonus? This is a similar approach to the technical service life of WTGs. the accreditation of offshore wind In addition to wind yield, availability, projects in the UK and the definition investment and operating costs, the of applicable ROC banding71 by the level and term of the increased ini- Ofgem regulatory authority. tial tariff plays a key role in the debt More generally, questions remain capacity and profitability of offshore whether the increased initial tariff of wind projects. 13 ct / kWh for offshore wind projects The so-called acceleration model in Germany is sufficient to obtain the introduces a certain level of flexibil- equity and debt capital that will ena- ity into the increased initial tariff. ble the intended expansion of off- OWP developers should be able to shore wind. It will be easier to make decide whether the increased initial a judgement once planned versus tariff will be used over the statutorily actual investment costs are available defined term of operation, or accel- from OWPs constructed at greater erated over a shorter period. The distances from the shore and in total amount of FIT, earned over the deeper water. Statements from par- shortened period, would remain the ticipating banks reveal that Dutch same. Once the increased initial tar- and Belgian projects have so far iff expires, electricity is sold at mar- always exceeded planned investment ket prices, which are expected to be costs. However, cost buffers (con- above the remaining basic tariff of tingency) and reserve facilities were 3.5 ct/kWh. not completely used. A limited extension to the sprinter premium, and a By shortening the period of the ini- corresponding shift in the degression tial tariff at a higher level, returns period, would provide some leeway for investors (assuming no project to achieve this kind of balance. finance) will be improved. And, depending on the structure of the KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 71 See Section 4.2 on the UK 73

acceleration model, it will increase initial tariff period, coupled with an debt capacity while reducing the increase in the value of the initial tar- tenor of the loan to the shortened iff itself, could enhance the willing- initial tariff. ness of banks to lend, even if debt capacity is not increased. Project finance agreements provide for cash-sweep clauses, particu- Similarly, the acceleration model larly for newly developed industries. should also have positive effects on Where generated cash flows for debt the investment decisions of large service72 exceed planned cash flows, utilities, which generally finance off- excess cash is used entirely or par- shore wind projects through their tially for early repayment of loans. own balance sheets, rather than with This leads to a de facto reduction in project finance. the loan tenor, while investors can- As discussed in Section 7.1, Ger- not profit from increased flows dur- man OWPs compete for investment ing that time. with other large projects and with According to information provided by OWPs in other countries, particularly the banks, projects currently in the the UK. Besides strategic considera- project finance market feature EEG tions and assuming comparable risk initial tariff periods of 14 to 16 years. profiles, achievable return levels will A reduction of the period to, say, be a key driver of investment. With two thirds of the statutory period, improved profitability, it seems prob- would lead to reduced loan tenor of able that utilities will increasingly nine to ten years, before considera- decide to invest their limited financial tion of the effects of the cash-sweep resources in German offshore wind clauses. projects.

Usually, availability guarantees and It may also be possible to impose manufacturers full service agree- certain parameters on the accel- ments are in place for the first five eration model, say for the first

years of the loan tenor. This means 10 projects, or 5,000 MW of install- that the unsecured portion of the ed capacity, to create a clear incen- loan term, in this case, two-thirds, tive for the rapid implementation would be approximately halved. of projects that are at an advanced stage. Currently, there is little appetite for long-term debt facilities in the project finance market; meanwhile Basel III is likely to demand higher capital-asset ratios for long-term debt. However, a reduction in the

72 So-called cash flow available for debt service, income less operating costs and taxes, before interest and loan KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. repayment and before payments to investors 74 Offshore Wind in Europe

7.5.3 Risks allocation Representatives of municipal utilities and medium-sized project developers, Financing banks still do not view the as well as the Stiftung OFFSHORE- offshore wind industry as mature. WINDENERGIE, back the idea of a They consider the technology largely federal state guarantee programme. unproven, while there is little expe- This could be used to cover risks dur- rience of constructing and operating ing construction and during year one OWPs at distances from the shore and, possibly, year two of operation. and at water depths common to Federal environment minister Norbert Germany. Röttgen, during his visit to compa- Construction risk is important, but nies in the offshore wind industry in it is not the only obstacle to project July 2010, raised the possibility of finance during the construction government guarantees for a limited phase. As explained in Section 7.3.2, number of OWPs.73 it is impossible to fully cover con- In this context, there are two possi- struction risks, not even by tapping ble models (see box below). all the hedging instruments (EIB, KfW, EKF) currently available. Risk assumed by public sector – Models for guarantee programmes

Guarantees at pari passu Applied to ten OWPs (assuming 400 MW Assuming that reserve facilities are secured Pari passu guarantees conform with cur- each), the Federal Government and federal for the full amount, an OWP with 400 or rent legislation for federal and federal states would have to provide guarantees of 288 MW would require subordinate guaran- state guarantees. Based on assessments EUR 6.0 to 6.4 billion in 2010 and 2011. tees of EUR 140 or 100 million – again based by project-finance banks, 75 to 80 percent on the investment costs and financing struc- of the entire debt capital (including reserve Subordinated guarantees ture assumptions shown in Section 7.3.2. facilities) would have to be secured. Avail- These guarantees are subordinate to other For ten OWPs (assuming 400 MW each), able hedging instruments, such as those debt capital facilities not provided for in the

the Federal Government and federal states available from public funding institutions Federal Government´s current guarantee would have to provide subordinate guaran- and export credit agencies, need to be con- guidelines. Therefore, the guarantees take tee limits of EUR 1.4 billion. However, this sidered when assessing the required guar- on the character of subordinate loans (or would also require a change to the guaran- antee volume.74 mezzanine debt) and may be used to secure reserve facilities of banks, or possibly, those tee guidelines. Based on the assumptions shown in Sec- of investors. As with possible solutions to the current tion 7.3.2 for investment costs and a financ- EEG situation, it may be possible to issue ing structure, an OWP with 400 MW and In this case, the required guarantee volume temporary guarantees, or to limit these to without EKF guarantees and KfW financing, would be significantly lower than in the first a certain number of projects or to a defined would require a guarantee of EUR 600 to model. The reserve facilities of lenders and installed capacity. Within the defined limits, 640 million. An OWP with 80 WTGs of the investors in offshore wind projects usually guarantees could be used after the intended 3.6 MW class, would require a guarantee of amount to 10 percent of the investment vol- guarantee period, say during the construc- EUR 400 to 430 million. ume. In some cases, banks and investors will divide reserve facilities between them. tion phase, plus one or two years of operation, for other offshore wind projects.

73 Hamburger Abendblatt; Interview with federal environment 74 See Section 7.3.2 minister Norbert Röttgen, 28 July 2010; Dow Jones Energy Daily: Röttgen stellt Bürgschaften für Meereswindparks in KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. Aussicht, 27 July 2010 75

Special project finance programme Information from the lending banks by the KfW indicates that the German credit The special programme on project insurer, Euler Hermes, has not so far financing, undertaken by the KfW, insured exports of WTGs manufac- is set to expire in 2010 and is only tured in Germany, or other key com- available to private companies, as ponents, in this way. previously explained. The funding This is probably because WTG manu- limit is currently set to EUR 200 mil- facturers REpower, Areva Wind and lion per project. Bard have so far mainly serviced A number of changes to the pro- projects in the German offshore wind gramme might be considered: market. However, since summer 2010, Bard now owns two licenses • Extension or re-start of the for OWPs in the Netherlands. It programme in 2011 seems likely that REpower and Areva • Setting-up a long-term programme Wind will also develop other signifi- rather than being limited to an cant offshore wind markets, once annual programme they have established reference • Access to the programme by projects in Germany. public-sector companies • Increase the exposure limit It needs to be established whether beyond EUR 200 million per Euler Hermes could potentially sup- project port German component suppliers with projects in other European With political backing and implemen- countries as EKF does in Denmark. tation of the measures described Furthermore, some market partici- above, the KfW would be in a posi- pants are asking whether the exclu- tion to provide project finance to sive economic zone of the Federal OWPs and to assume additional Republic of Germany could be con- risks. As a German public funding sidered as a foreign public funding institutions ountry for the pur-

institutions, it would therefore sup- plement the role of the EIB. poses of export credit insurance. This would give projects that use Export export credit agencies WTGs, from manufacturers located The Danish EKF has made a signifi- in Germany, access to similar fund- cant contribution to reducing invest- ing sources those using Danish man- ment risks in offshore wind projects. ufacturers. It applies only to WTGs from Ves- tas or Siemens, or other key components manufactured in Denmark. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 76 Offshore Wind in Europe

8 Commercial viability analysis

8.1 Data basis and approach

In order to analyse the profitabil- Information provided by the partici- ity and debt capacity of OWPs on pating companies is treated con- a quantitative level, a calculation fidentially and, for that reason, is model, based upon project informa- presented in an anonymous and tion, has been developed. The model aggregated form that cannot be represents a typical OWP with a traced back to individual projects. nominal capacity of 400 MW (here- Seven project developers supplied after described as the “model wind basic data for one OWP each. Each farm”). OWP is at an advanced stage of To make the assumption for the development and will be ready for model wind farm as realistic as pos- construction shortly. For the first sible, the Stiftung OFFSHORE- time, the quality of this data enables WINDENERGIE asked German off- us to create a representative analy- shore wind developers to provide sis of the profitability and financing data from their current projects. capacity of offshore projects in To enable comparison of the data, Germany. developers provided information on Revenues for this 400 MW model a standard input form. wind farm are calculated according to the currently applicable 2009 EEG. Then, by applying the accel- Figure 37 Requested information for offshore wind projects eration model described in Section

Source: KPMG analysis 7.5.2, we were able to predict how a change in the EEG compensation Assumptions Costs / Revenues 75 scheme would affect the profitabil- Number of WTGs Development costs ity and financing capacity of offshore wind projects. Nominal capacity per WTG Capital expenditure Start of construction phase Contingency Duration of construction phase Operational costs Commissioning Wind yield Net capacity factor Dismantling costs Technical availability KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 75 On an annual basis 77

8.2 Analysis of basic data

The purpose of analysing the basic data is to derive the assumptions on which the model wind park is based.

8.2.1 Development costs 8.2.2 Investment costs

The costs for developing an OWP Investment costs include all expen- are small relative to total investment diture incurred in the construction cost. The development phase of a and commission of an OWP. In the project comprises the following key data input form, costs were catego- expenditure: rised into:

• Soil examination • Foundation • Environmental assessment • WTGs • Design studies • Cabling within the park • Appraisals (e.g., hydrographic • Transformer station site analysis, collision analysis, • Accommodation platform wind assessment, wind yield (where applicable) calculations, etc.) • Other investment cost • Personnel • Project management costs • Certification • Approval processes In addition, many project developers include a contingency reserve to The amount and structure of the address unexpected overruns in the development costs depends on whe- investment budget. ther the company develops a pro- Specific investment cost (including ject from scratch, or purchases the contingency reserves where appli- project from a developer that has cable) per MW are illustrated below. already obtained FMHA approval. For These figures are derived from the this reason, there is significant vari- data sets provided to us by different ation in the data sets provided. In offshore wind developers. The num- some data sets, no developments ber and rated capacity of WTGs costs were disclosed at all. differ. The model wind park used in the financial analysis calculationis based, therefore, on average development costs for wind farms developed by 3.3 3.8 their owners from scratch. The average costs amount to EUR 35 million per OWP.

3.0 3.5 4.0 4.5 EUR million / MW Figure 38 Investment costs per MW

Source: KPMG analysis KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 78 Offshore Wind in Europe

Specific investment costs (including The regression line shows a correla- contingency) range from EUR 3.3 mil- tion between distance to the shore lion to EUR 3.8 million per MW, at an and the planned investment costs average EUR 3.6 million per MW. As of an OWP. The correlation coeffici- a result, investment costs (including ent of 0.51 has decreased from 0.63 contingency reserve) for an OWP since KPMG´s 2007 report. This is with a nominal capacity of 400 MW, due to the inclusion of a specific data ranges from approximately EUR set with significantly lower invest- 1.3 billion to EUR 1.5 billion. ment costs compared with other OWPs. Furthermore, as the majority There are several possible reasons of specific investment costs appears for variances in specific investment to be independent of distance, dis- costs. KPMG´s 2007 report, “Off- tance-related additional costs only shore wind farms in Europe”, found play a minor role in total investment a correlation between an OWPs dis- costs. Nonetheless, distance to tance from the shore and investment shore does affect construction logis- costs, as well as between water tics and, by association, investment depth and investment costs. costs too. Figure 39 illustrates the affect of dis- Figure 40 shows the dependence of tance from the shore on investment specific investment costs upon water costs. depth.

The correlation coefficient for the dependency of investment costs on water depth is 0.71, up from 0.4 in the 2007 report. This increase may be due to the influence of water depth on the selected type of foun- Figure 39 dation (see Section 5.3). Foundation Specific investment costs depending on distance costs continue to make up a signifi-

from shore

Source: KPMG analysis cant portion of investment costs.

3.7 3.6 3.5 3.4 3.3 3.2 MW

/ 3.1 3.0

EUR million 2.9 near far Distance from shore

Capital expenditure per MW Note: Details of distances to shore are not provided to ensure (not including contingency) that information cannot be traced back to individual OWPs. Regression line KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 79

Overall, the analysis shows a corre- Figure 40 lation between investment costs and Specific investment costs depending on water depth geographic conditions. For this rea- Source: KPMG analysis son, proposals to extend the duration 3.7 of the initial feed-in tariff, defined in the EEG, to compensate for cost- 3.6 related disadvantages caused by dis- 3.5 tance to shore and difficult access 3.4 to sites, seems reasonable. At the 3.3 same time, higher costs may be off- 3.2 MW

set by higher wind yields. This also / 3.1 needs to be taken into account as 3.0 part of a comprehensive assessment

EUR million 2.9 of the EEG mechanism. shallow deep Figure 41 compares specific invest- Water depth

ment costs for OWPs with WTGs Note: Details of water depth are not specified to ensure that Capital expenditure per MW up to a rated capacity of 3.6 MW, information cannot be traced back to individual OWPs. (not including contingency) Regression line and WTGs with a rated capacity of at least five MW. Furthermore, currently expected costs are compared with those found in the 2007 KPMG report. Figure 41 Since KPMG´s 2007 report, average Comparison of specific investment costs per MW for years 2007 and 2010 planned investment costs per MW Source: KPMG analysis for WTGs with a nominal capacity of up to 3.6 MW have increased by 4.0 3.71 3.66 56 percent to EUR 3.71 million. By 3.5 contrast, the increase for WTGs with a nominal capacity of at least 5 MW 3.0

is 49 percent, leading to expected 2.5 2.38 2.46 costs of EUR 3.66 million per MW. The cost increases cited in the 2007 2.0 report were mainly caused by incre- 1.5 ased prices for raw materials. The 2010 increase is most likely explai- 1.0 ned by the quality of data used for 0.5 Investment costs per MW – 2007 budgeting. In 2007 the budgets were Investment costs per MW – 2010

based on projected figures, whereas Capital expenditure in EUR million 0 (not including contingency) the 2010 budgets are now largely up to 3.6 MW at least 5 MW based on indicative offers for the individual components and experience from other projects. In addition, project developers generally include KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 80 Offshore Wind in Europe

a contingency of 10 percent of esti- 8.2.3 Operating costs mated investment costs for unexpec- Operating costs include operating ted cost overruns, such as increases and maintenance costs, as well as in raw material prices and weather insurance premiums. Some costs risks. are variable and depend, therefore, In line with the 2007 findings, the on the electricity capacity generated analysis of project data reveals that by the WTGs. Figure 42 shows the specific investment costs for WTGs expected operating costs per MWh with a rated capacity of 3.6 MW are for the offshore wind projects consi- now slightly higher than for WTGs dered in our analysis. with a rated capacity of 5 MW. This Similar to investment costs, planned confirms the assumption that the operating costs (based on 2010 pri- higher the nominal capacities of ces) also display a significant vari- WTGs, the lower the specific invest- ance around the average value of ment costs per MW and, therefore, 25.5 EUR/MWh. The maximum the lower the production costs for expected value of 36.7 EUR/MWh is offshore wind. This assumes that the approximately 82 percent above the suppositions relating to wind yield minimum value of 20.17 EUR/MWh. and operating costs do not change. The analysis did not reveal any sig- Given that WTGs with a nominal nificant correlation between opera- capacity of at least 5 MW are most ting costs and distance to shore. This likely to be used in Germany in the may be because planned operating medium term, specific investment costs are highly dependent on the costs of EUR 3.7 million per MW respective operating concept. There- were recognised in the model wind fore, a comparison of individual pro- farm. jects is not feasible.

Most projects plan their operating

costs for the first year of operation, allowing for inflationary cost increases of 2 percent per year in subsequent years. Some manufacturers

Figure 42 will commit to maintain WTGs for Operating costs per MWh (2010 price basis) the first five years after commissio- Source: KPMG analysis ning, for a fixed fee. Typically, there is a significant increase (on average 11 percent) in maintenance costs on once the maintenance agreement 20.17 36.7 expires.

For the model wind farm, average operating costs of 25.5 EUR/MWh

0 10 20 30 40 50 60 70 (2010 price basis) were applied, with annual inflationary increases of 2 per- EUR million per MW cent going forward. Average KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 81

8.2.4 Wind yield

The theoretically achievable wind yield for an OWP – the so-called 41 % 52 % gross wind yield – is determined by measured wind speed at the location and the specific power curve of the planned WTGs. Long-term forecasts 20 % 40 % 60 %

for wind yield may vary significantly Average Note: Five P50-scenarios; two profects without quote on from actual wind yields measured in probability a given year. Figure 43 For this reason, different probabi- Net capacity factors lity calculations for achieving a cer- Source: KPMG analysis tain gross wind yield are factored into OWP planning. A wind yield that can be achieved with a probability of 50 percent is described as the P50 The net capacity factors for these scenario (P for Probability). Scenarios OWPs range between 41 and 52 per- with probabilities of 75 percent (P75) cent. The collected data did not or 90 percent (P90) are also calcula- provide any indications as to the ted. These calculations are primarily possible reasons for the relatively to satisfy providers of debt capital. wide spread.

Gross wind yield is further reduced Since it was not possible to find any by technical availability, shadowing significant correlation between the effects, own power consumption and nominal capacity of a WTG and the power transfer losses. These factors capacity factor, the basic model took are subtracted to arrive at the net into account a flat net capacity fac- wind yield for an OWP. tor of 44 percent. This corresponds approximately to 3,850 full load

The ratio between the theoretically hours (after taking into account tech- achievable wind yield, assuming full nical availability, shadowing effects, load over a certain period without own power consumption and power any losses, and net wind yield, is transfer losses). described as the “net capacity factor”. The nominal capacity of a 8.2.5 Summary of wind farm (in MW), multiplied by analytical results 8,760 hours in a year, multiplied by the net capacity factor, gives a net The main assumptions for the model wind yield, expressed in MWh per wind farm are based on data sets year. Figure 43 shows the bandwidth from seven actual offshore wind of net capacity factors for the wind projects. Figure 44 shows the main projects for which we received data assumptions of the calculation sets. model. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 82 Offshore Wind in Europe

General assumptions Dismantling costs have also been and do not factor them into their cal- derived from the received data sets. culations. To this extent, dismantling Number of WTG 80 Again, the assumptions between costs included in the model of EUR WTG class (MW) 5.0 individual projects vary significantly. 0.2 million per MW, or EUR 1 million Distance from shore (km) 40.0 Some developers even assume that for each 5 MW WTG, may be percei- Water depth (m) 28.0 dismantling costs will be compensa- ved as conservative. Assumptions for construction phase ted by the residual value of WTGs, Development costs (EUR million) 35 Total capital expenditure (EUR million) 1,464 thereof contingency 133 Start of construction phase 2013 8.3 Development of the model scenarios Duration of construction phase (years) 3 Assumptions for operating phase Year of start up 2 2014 Based on the assumptions derived For simplification purposes, we have Feed capacity in first year 50 % from the data provided by offshore not included shareholder loans in our Net capacity factor 1 44 % wind developers, a model wind farm, calculation model. with a nominal capacity of 400 MW, Operating expenditures (EUR / MWh) 25.5 The profitability of the equity-financed was developed. Different financing Annual increase in operating model wind farm is assessed by cal- assumptions were applied in this expenditures 2.0 % culating the return after taxes (on context: Operating life of WTGs (years) 20 project level).76 Dismantling costs (EUR million per MW) 0.2 • Finance from own resources Conversely, the project´s debt capac- (equity financing). Typically, large Note: ity is the primary focus in project European utilities do not depend 1 Based on P50 wind yield finance funding. In order to assess 2 Complete commissioning (100 percent capacity) assumed on project finance. in 2015; correspondingly, capacity in last year of operation the feasibility of project finance, and (2034) also 50 percent • Project finance using non-recourse the debt capacity of offshore wind financing. This is not based on the Figure 44 farms, the annual debt service cover Assumptions of the calculation model creditworthiness of investors but ratio (DSCR) is calculated using a on the cash flows and collateral Source: KPMG analysis project finance structure. It shows offered by the project. the ratio between project cash flow

available for debt service77 and regu- The equity finance model is tradition- lar debt service78. ally adopted by utilities to fund large investment projects (like an offshore Using both calculation models, we wind farm) using resources available studied project returns achieved by within the group. For this investor OWPs based on the current EEG. group, investment approval is typi- We then examined how possible cally based on achievable returns. In changes to the EEG would affect practice, however, on-balance sheet project returns and DSCR. Figure 45 financing for OWPs does not involve provides an overview of all the calcu- equity per se, but is completely or lation models. partially financed with shareholder The base-case and downside-case loans for tax optimisation purposes. scenarios are based on the current This approach reduces the tax bur- 2009 EEG (see Section 4.2.3). Gen- den by increasing returns after taxes. erally, operators can chose either a

76 Project cash flows after taxes: Revenues less operating additions and withdrawals from typical project financing costs and taxes, before debt servicing and payments to reserve accounts for debt service and maintenance are not investors taken into account 77 Cash flow available for debt service: Revenues less 78 Regular interest and redemption payments KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. operating costs and taxes; for simplification purposes, 83

fixed FIT or have the option to sell Figure 45 electricity directly to the market. In Overview of calculation models accordance with the EEG, the period Source: KPMG analysis for the higher initial tariff for the IRR model model wind farm is 162.1 months (approximately 13 years and six Basic assumptions months) based on the assumptions

taken for on distance to shore and Step 1 water depth for the model OWP. Set up of model Equity finance model Project finance model Therefore the higher initial tariff for the model is granted from 2014 to 2028. After that period, FIT drops to Step 2 Input current 2009 EEG 2009 EEG 35.00 EUR/MWh. Typically, there- EEG tariff fore, operators expect to sell generated electricity directly to the market after expiry of the higher initial tariff. Step 3 Sensitivity analysis Base Case Downside Case Downside Case Base Case Figure 46 shows a projection of the electricity price-development compared with the EEG tariff Step 4 EEG acceleration Scenario 1 Scenario 2 Scenario 3 Scenario 1 Scenario 2 Scenario 3 The graph shows that the projected model electricity price in 2028 (91.95 EUR/ MWh) will be above the basic EEG tariff of 35.00 EUR/MWh. For this reason, revenues are calculated using projected electricity prices, following expiry of the higher initial Figure 46 Comparison of electricity price development tariff. and EEG tariff The downside case assumes a Source: KPMG analysis, EEX

higher increase in operating costs of 160 3 percent per year, compared with 2 percent for the base case. This 120 allows for analysis of the sensitivity of the project profitability with regard 80 to rising inflation. In its current form, the EEG does not include allowances for rising inflation. Therefore, increas- 40 ing interest rates directly affect EEG tariff MWh Electricity price / attainable returns. EUR 0 For all calculation models a simplified 2014 2018 2022 2026 2030 2034 tax calculation on project level was Note: Electricity prices for 2011 to 2014 are based on the aver- applied. The assumptions are shown age value of EEX annual futures for basic load and peak load, 9 July 2010; projection to 2034 uses indexing of 2 percent in Figure 47. per year KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 84 Offshore Wind in Europe

An assumed 3 percent annual Overview 8.3.1 Calculation model for equity financing – 2009 EEG increase in operating costs – as Legal form Corporation opposed to 2 percent per year – Corporate income tax rate 15.00 % In the base case, the model wind reduces returns by 0.5 percent. Solidarity surcharge 5.50 % farm generates an after-tax project Investment security could be Exemption threshold return of 7.1 percent, using 100 per- increased, therefore, by linking FIT for interest expenses cent equity finance. The higher to the general consumer index. At (EUR million) 1.5 indexing of operating costs to the same time, an amendment to Earnings stripping limitations 3.0 percent, compared with the base the EEG is unlikely to have a signifi- (percent of EBITDA) 30.00 % case, reduces project returns in the cant influence on investment deci- Trade tax multiplier downside case by around 0.5 per- sions due to the fairly minor effect (Helgoland) 350.00 % cent, to 6.6 percent. on returns. Basic federal rate (corporations) 3.50 % By comparison, KPMG´s 2009 report Trade tax rate 12.25 % “Onshore wind – Repowering poten- 8.3.2 Calculation model Add-back of interest tials in Germany” (2009) indicated for equity financing – for trade tax purposes 25.00 % a minimum pre-tax project return of Accelerated EEG model 9 percent (6 to 7 percent after tax) Acceleration of the EEG tariff is cur- Figure 47 for repowering projects for onshore Assumptions for the tax calculation rently under discussion to improve wind. However, to offset the higher Source: KPMG analysis the economic conditions for invest- risks in offshore projects, compared ment in offshore wind projects (see with onshore projects, investors also Section 7.5.2). expect an adequate premium on offshore investments. Acceleration means reducing the twelve-year period (plus site-spe- A UK report on offshore wind cific tariff extensions) in which the defines after-tax project returns of increased initial tariff is granted and 10 percent as a benchmark.79 The raising the tariff per MWh corre- report takes into account financing spondingly. Therefore, the total com- costs that lead to a lower tax bur- pensation granted through the initial den and hence higher project returns

tariff remains equal. after taxes. Figure 49 gives a sample calculation Given that OWPs in Germany have to illustrate this scenario. It shows higher risk profiles than both OWPs that accelerating the EEG rate does in the UK and repowering projects, 16 % not affect the level of initial com- after-tax project returns of 7.1 per- pensation; rather, it merely results in cent are insufficient. In our calcula- 12 % a shift between the granted period tion for the model wind farm, where and the level of the initial tariff. From there is 100 percent equity finance, the OWP operator´s perspective, the 8 % the current EEG tariff structure does 7.1 6.6 acceleration model, compared with not make investment into offshore the 2009 EEG, produces higher rev- 4 % wind farms in Germany economi- enues in the first years, followed by cally viable considering the high risks lower revenues in subsequent years, involved. 0 % until the end of the initial tariff. It Base Case Downside Case also produces a positive interest effect for OWP operators. Figure 48 Project return after taxes, 2009 EEG basis

2009 EEG Acceleration Change model (80 %) Time period for increased initial tariff Months 144 115.2

+ Site-specific extension due to: Distance from shore (40 km) Months 4.5 3.6 Water depth (28 m) Months 13.6 10.9 = Time period for increased initial tariff Months 162.1 – 20 % 129.7 Reduction

Increased initial tariff EUR / MWh 150.0 + 25 % 187.5 Increase

Annual electricity production MWh P P x Time period for increased initial tariff Months 162.1 129.7 x Increased initial tariff EUR / MWh 150.0 187.5 = Total revenues for time period ± 0 % of increased initial tariff EUR 24,315 x P 24,315 x P No change

Figure 49 Effects of the EEG acceleration

Source: KPMG analysis

Note: P corresponds to the annual electricity output of an OWP. Since P does not depend on the tariff, total compensa- Despite the fact that overall granted Three different acceleration scenar- tion varies solely according to the length and level of the initial compensation does not change, ios produce different after-tax project initial tariff. the acceleration model allows for an returns for the model wind farm – increase in attainable total revenues, compared with the 2009 EEG (Fig- in addition to an interest advantage. ure 51). This effect is caused by an exten- The result shows that by accelerat- sion to the period during which elec- ing the FIT to only 80 percent of the

tricity output can be sold directly, current EEG-FIT period, there are while the overall EEG tariff remains improved project returns of 9.7 per- unchanged. This allows OWP opera- cent after taxes. In particular, returns tors to make an earlier transition to are increased by a 9 percent rise direct electricity sales, based on mar- in overall revenues. In addition, the ket prices, due to the reduction in shift to higher revenues in OWPs´ the EEG period. For example, accel- early years of operation generates a eration to 80 percent (scenario 3) positive interest effect. In accelera- increases total revenues for this tion scenario 3, where the FIT period model by 9 percent, compared with is reduced to 80 percent, the interest current EEG (see Figure 51). effect is 1 percent compared with Our calculation model illustrates the 2009 EEG (Scenario 1: 2 percent; three different acceleration scenarios Scenario 2: 1.4 percent). in Figure 50. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 86 Offshore Wind in Europe

Figure 50 Overview of acceleration scenarios 2009 EEG Acceleration model Scenario 1 Scenario 2 Scenario 3 Source: KPMG analysis Acceleration of tariff period to Percent 100 % 67 % 75 % 80 % Increased initial tariff term Basic period Months 144.0 96.0 108.0 115.2 Tariff extension (model OWP) Distance from shore Months 4.5 3.0 3.4 3.6 Water depth Months 13.6 9.1 10.2 10.9 Total term of increased initial tariff Months 162.1 108.1 121.6 129.7 Tariff EUR / MWh 150.00 225.00 200.00 187.50

Figure 51 Difference in After-tax project returns in the overall revenues 15 % 11 % 9 % acceleration model

Source: KPMG analysis 16 %

12 % 12.0 10.5 9.7 8 % 7.1

4 %

0 % 2009 EEG Scenario 1: 67 % Scenario 2: 75 % Scenario 3: 80 % KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 87

The minimum DSCR for the model 8.3.3 Calculation model for Project financing project finance wind park, based on the 2009 EEG, Equity 35 % is 1.15x. Increasing operating costs The project finance calculation model by 3 percent per year had only a Debt 65 % was set up as an alternative to the minimal effect on DSCR, reducing Total investment cost (EUR million) 1,464 equity finance model. The main it to 1.14x in the downside case. Required debt (EUR million) 951 assumptions for project finance are thereof EIB (EUR million) 200 Based on discussions with banks based on discussions with banks and EIB term per tranche (years) 13 in-house research (Figure 52). and in-house research, it is evident Interest-only years 1 that banks require a DSCR of at least Banks providing project finance 1.35x to 1.40x for offshore wind Number of tranches 3 to German offshore wind projects projects. This means that the cash Repayment starting 2013 require an equity ratio of 35 to flows generated by the model wind EIB margin 2.5 % 40 percent. The duration of the park are insufficient to achieve the thereof commercial banks 751 loan corresponds to the term of the security for debt service that banks Term per tranche 13 higher initial tariff, since this is the require. Accordingly, the equity Interest-only years 1 only period for which fixed compen- ratio has to be raised above 35 per- Number of tranches 3 sation can be calculated. Currently, cent to reduce debt service during Repayment starting 2013 banks are unwilling to take on elec- a 13-year term. In the model wind Interest margin 3.5 % tricity price risks. In addition, banks farm, the required DSCR of 1.35x is Total arrangement fee 2.5 % consider 15 years a maximum term only achieved with an equity ratio of Basic interest rate 3.0 % for WTG loans. 44 percent.

An offshore wind project´s debt We investigated whether the accel- Figure 52 Project financing assumptions capacity is calculated on a conserv- eration scenarios for EEG would Source: KPMG analysis ative P90 wind yield, while projec- improve the debt capacity of off- tions for rates of return are usually shore wind projects, in addition to based on a P50 wind scenario Most increasing project returns. of the projects that supplied data for our analysis were unable to provide In this context, it must be noted that P90 wind yields. For simplification accelerating the period of higher ini- reasons, we applied a discount of tial fees will result in shorter loan 15 percent on the net capacity factor terms. This is because banks will and, therefore, indirectly on the wind only lend to the offshore wind sec- yield.80 tor over the period in which there are guaranteed fees for the electricity For the project finance calculation generated. model, DSCR was first calculated using the 2009 EEG (base case). The calculation, as shown in Figure 53, then took an increase in operating costs from 2 to 3 percent annually (downside case) into account.

80 This assumption is confirmed by two datasets, for which KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. both P50 and P90 wind yield projections were included 88 Offshore Wind in Europe

10.00 The different acceleration scenarios produce the following loan terms: 8.00 • Acceleration to 67 percent: 8 years 6.00 • Acceleration to 75 percent: 9 years • Acceleration to 80 percent: 10 years 4.00

2.00 Initially, the shorter loan term will have a negative effect on DSCR. This

DSCR 0.00 is because debt servicing increases 2013 2015 2017 2019 2021 2023 2025 2027 during the first years (assuming a lin- Minimum DSCR ear repayment schedule) but is coun- 2009 EEG 2009 EEG 1.15 2009 EEG DC 2009 EEG DC 1.14 teracted by higher future revenues from direct electricity sales Figure 53 Development of DSCR 2009 EEG base case Compared to with the minimum DSCR compared with 2009 EEG downside case based on the 2009 EEG, DSCR for Source: KPMG analysis the 67 percent acceleration scenario, increases to 1.26x. Even if the period was accelerated by two-thirds, investors would still have to provide a 10.00 higher equity ratio than the 35 percent recognised in the model. 8.00 In this 67 percent acceleration sce- 6.00 nario, the banks´ minimum DSCR 1.35x requirement is met with an 4.00 equity ratio of 40 percent. For the 75 and 80 percent acceleration sce- 2.00 narios, equity ratios of 41 percent

DSCR 0.00 are required. While accelerating the

2013 2015 2017 2019 2021 2023 2025 2027 EEG tariff improves the debt capac-

2009 EEG Minimum DSCR ity of the model wind park, an equity 67 % EEG acceleration 2009 EEG 1.15 ratio above 35 percent is needed to 67 % EEG acceleration 1.26 75 % EEG acceleration 75 % EEG acceleration 1.23 achieve the minimum DSCR (1.35x) 80 % EEG acceleration 80 % EEG acceleration 1.23 that banks require. Figure 54 Development of DSCR 2009 EEG For medium-sized project develop- compared with acceleration scenarios ers, the measures examined in Sec- Source: KPMG analysis tion 7.5.3 of this report are most significant, as they focus on governments covering more risks associated with offshore wind projects. KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. 89

8.4 Conclusion

The analysis shows that it is impos- 9.7 percent (80 percent acceleration) sible to achieve attractive returns and up to 12.0 percent (66.7 percent for OWPs in Germany based on the acceleration). In this case, total com- current EEG. An after-tax project pensation from the EEG remains return of 7.1 percent, with 100 per- equal. However, additional revenues cent equity finance, is clearly lower come from the direct sales of the than returns that can be generated electricity generated. Compressing from projects with much lower risk the EEG tariff also has a positive profiles (such as repowering onshore effect on debt capacity. The required wind farms). equity ratio is reduced from 44 percent (2009 EEG) to as low as 40 per- The acceleration scenarios can cent (acceleration scenario 67 per- improve attainable project returns cent). from 7.1 percent (2009 EEG) to

Image references

KPMG and the KPMG logo are registered trademarks of KPMG International. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe Wirtschaftsprüfungsgesellschaft, LLP and a member KPMG AG firm of the © KPMG 2010 network of independent member firms with affiliated KPMG International Cooperative („KPMG International“), All a rights Swiss entity. reserved. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative („KPMG International“), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International. kpmg.de

Contact KPMG AG Wirtschaftsprüfungsgesellschaft

Olaf Köppe Partner, Sector Coordinator Energy & Natural Resources T +49 30 2068-1149 [email protected]

Karsten Schulze Senior Manager, Energy & Natural Resources T +49 30 2068-4788 [email protected]

Andreas Mayer Manager, Restructuring T +49 40 32015-5419 [email protected]

Annette Schmitt Director, Corporate Finance T +49 69 9587-1467 [email protected]

Alexander Weidenbach Senior Manager, Transaction Services T +49 40 32015-5563 [email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. © 2010 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidi-ary of Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is KPMG Europe LLP and a member firm of the KPMG network of received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a independent member firms affiliated with KPMG International thorough examination of the particular situation. Cooperative („KPMG International“), a Swiss entity. All rights reserved. Printed in Germany. KPMG and the KPMG logo are registered trademarks of KPMG International.