IN DEPTH: UK offshore game-changer

The UK’s Green Investment Bank expects to name those investors prepared to back its £1bn ($1.7bn) offshore wind fund by the end of 2014, helping to restore confidence to the sector after a series of project setbacks.

The money — 20% of which will come from the bank itself and 80% from outside investors — will be spent on equity stakes in operational UK offshore wind farms, allowing developers to reinvest the cash in new projects.

With extremely attractive inflation-linked returns there is unlikely to be a shortage of long-term infrastructure investors — such as pension and sovereign wealth funds — willing to invest.

“The yields of 10-11% [per annum] over the lifetime of the project should make them very interesting to those with the funds,” chief executive Shaun Kingsbury tells Recharge.

“We will be looking to back projects that have managed risk and locked in power-purchase agreements with creditworthy parties. We see a lot of them out there.”

The bank believes the fund is essential if the UK is to realise significant growth in offshore wind, as developers do not have the capital required to build and hold onto these assets.

“By making these investments and encouraging others to do the same through a fund, it should allow developers to recycle cash into more projects and help reach the targets required for renewable power over the next few years,” says Stephen Tobin, a partner at lawyers Pinsent Masons.

Karl Smith, managing director of the offshore wind fund, tells Recharge: “One of the early catalysts for setting up the fund was that we had investors who came to us and said we think we like this market, but we are not sure how to invest in it.

“Since launching this fund we have had a lot of good conversations, met a whole number of fund managers and had quite positive feedback on their willingness to invest.

“We have already had a lot of demand for the fund, so we are quite keen to have a spread of investors, both here in the UK and overseas.”

Smith believes the bank is likely to have raised the money “towards the end of the year, when we hope to announce the projects involved and the funding”.

The GIB’s move follows a period of uncertainty caused by the slow pace of Electricity Market Reform (EMR) and concerns over the level of strike prices — as well as the cancellation of 7.2GW of projects off the UK west coast (RWE’s 1.2GW Atlantic Array; ScottishPower’s 1.8GW Argyll Array; and Dong and Centrica’s 4.2GW Irish Sea zone).

However, such concerns have eased as eight major renewables projects — including five new offshore wind farms — have signed the first contracts under the new EMR rules.

“We remain very confident in the UK [offshore] wind sector,” says Smith. “The fact is that there is a good amount of development projects out there. Like in any industry, there will be some projects that make more sense and are more economic than others.

“We have watched projects come and go in this sector, but we continue to see plenty of interest from utilities, and a strong pipeline of offshore wind farms.”