With the UK’s substantial wind resource and relatively advanced nature of wind generation technology, it’s expected that wind will provide a significant contribution to the UK’s and Scotland’s renewable energy targets and aspirations. However, it’s not the resource’s actual availability nor, to some extent, the technology which will be the deciding factor in wind’s ability to contribute towards achieving those targets. That will come down to a combination of the economic conditions, fi nancial markets and – crucially – the regulatory environment.
DECC states that the UK already has greater offshore wind capacity than any other country in the world. However, how have the economic changes of the last year infl uenced the ability of banks to finance offshore wind? What are the barriers that offshore wind is currently facing from development? And what positive signs are there for this technology in the future?
Reflections on the last year
The financing of large-scale offshore wind has seen both positive and negative impacts in the last year. The weak economy has led to some banks facing ongoing funding challenges, and the backdrop of the eurozone situation has made things much harder.
Nonetheless, there’s still plenty of interest in offshore wind, with a number of banks still active in the sector. Despite the uncertainty, we have seen deals reaching fi nancial close and moving forward – the Lincs offshore project in the UK, as well as a number in Germany. Last year was successful for RBS where we loaned more than double any other bank to renewable projects in the UK, with wind being the largest proportion of energy projects funded.
The market itself has seen changes with nontraditional sponsors (non-utilities) getting involved, and new kinds of technology. This broadening of the range of developers should only improve the levels of market penetration some countries wish to achieve. Independent generators and entities like pension funds are also starting to invest which I see as being healthy for the sector. Therefore, whilst it remains quite a difficult market in which to get deals done, there are still positive signs.
Barriers to development
At an international level, the economic situation and the difficulty with liquidity in banking markets are of concern. Throughout Europe, banks are having problems in their domestic markets and as a result their ability and willingness to fund beyond their borders has reduced. Subsequently as some banks have cut back dramatically, the overall pool of money has been restricted. Then again, good deals are still fi nding support from banks and that is encouraging for the future of wind, both on- and offshore.
At a UK level, electricity market reform (EMR) brings with it some nervousness and concerns about the extent and implications of its changes on the markets. EMR has excellent aims and objectives which are diffi cult to argue with – decarbonisation, security of supply and delivering the lowest possible cost for consumers. Yet how you achieve that in practice is quite different – there are a number of aspects where we see positive intent, but where a lot of detail remains to be worked out.
From a banking perspective, regulatory change is usually diffi cult because it creates uncertainty. For me, when it comes to regulation, banks need three things: transparency, predictability and durability. We recognise as a bank, and as an industry, the direction of travel – but the specifi cs of how that will then work in practice in such a complex market is very, very hard to assess. We need a further level of detail to work out how it will pan out overall and if any nervousness around unintended consequences is justified. We have engaged with DECC very closely to give as much frank feedback as we possibly can on the package of changes and how they might impact the availability of funding. RBS finances projects across the market, funding all proven technologies and with a wide range of sponsors. We want the entire system to work as well as possible.
I believe the Green Investment Bank and the Offshore Wind Cost Reduction Task Force are important to the success of wind. We are delighted the GIB is formally moving forward and very pleased to see the headquarters in Edinburgh, with its very well-developed fi nancial community.
Also it’s been pleasing to see the GIB hiring very good people with highly relevant experience. We have had very positive dialogue on a number of projects and although there are aspects to clarify and the GIB is still finding its feet, it is moving in the right direction. Finding enough banks willing to fund projects has been a barrier so bringing in another entity with extra liquidity could prove transformational for a number of transactions, whether those deals are niche, and not followed by many banks – or whether they are large projects where there is insufficient liquidity in the market to fund them. Whilst limited in its pot of money, if the GIB can establish some early successes to demonstrate it’s really adding extra value – and proving to government the difference it can make – perhaps that could open the way to more funding becoming available.
The second positive can be found in the Offshore Wind Cost Reduction Task Force, which demonstrates the industry working together to bring costs down. It’s a clear demonstration that the industry is driven to be cost-competitive and not reliant on subsidy over the long term. Cost reduction is key – and through this group learning the whole process is quicker than could be achieved by fi rms in isolation. This is an industry with a shared goal, which is very positive. This cost reduction theme also feeds through to ROC banding, where DECC reduced the ROC for onshore wind from 1 to 0.9/MWh, based on evidence of reduced costs. That shows the cost path remains downwards with expectations of further competitive opportunities to be found. Discussions around regulatory support are much easier if the sector can compete on its own merits.
The offshore wind market is one that is defi nitely moving forward in spite of the diffi culties impacting on ‘getting things done’. Good offshore wind deals are still being supported despite Europe’s economic troubles and the uncertainty that surrounds EMR. As industry demonstrates an increased ability to work together to drive down costs, combined with potential support from the GIB, Scottish, and broader UK, renewable energy projects will continue to be attractive targets for bank lending.
Andrew Buglass is Head of Energy, Structured Finance, at The Royal Bank of Scotland. He will be speaking at the Scottish Low Carbon Investment Conference in Edinburgh on 11 October