IN DEPTH: Offshore's fiscal future

Siemens’ 600MW, 150-turbine order to equip the Gemini offshore wind farm was a €1.5bn ($2.05bn) blockbuster deal for the German group.

But the Dutch project is more than just a big equipment order for Siemens, according to Wolfgang Bischoff, head of energy investments in the EMEA region for Siemens Financial Services (SFS). The way it is financed could have implications for the future of offshore projects across Europe, he says.

SFS itself is a 20% equity shareholder in Gemini, with the project majority-owned by Canada’s Northland Power, which holds 60%.

Gemini will cost €3bn to build, about 70% of which will be underpinned by project financing in a funding structure involving 22 separate parties.

That makes Gemini the largest project-financed wind farm yet, says Bischoff, but highly unlikely to be the last.

Gemini — due to start commercial operations in 2017 85km off the Dutch coast — is just 30MW short of the nameplate capacity of the London Array, the world’s biggest offshore wind farm.

Both projects show the way things are moving, Bischoff says, with a scale of 500MW or 600MW becoming more common. “Especially in the UK with Round 3 we see bigger projects coming up, which means enormous amounts of capital to be raised. You need quite a number of strong and determined senior lenders to get it done.”

But apart from exceptions such as Denmark’s Dong Energy, many of Europe’s battered utilities are in no state for the financial heavy-lifting needed to be the main sponsors of bigger, deeper, more expensive offshore projects. Project finance and its diverse, syndicated, multi-lender approach could be an answer.

“If you don’t have strong utilities to lead the projects, project finance can be an alternative funding scheme,” Bischoff says.

The key point about project finance is that it relies on the cash flow generated by the project to generate its returns. That leaves lenders feeling queasy if they hear words such as “delay”, “overrun” or “breakdown”. Is offshore wind now being seen as a safer investment?

“I think comfort is growing that this is not the devil’s work and not absolutely outrageously risky,” Bischoff says. “Some banks have come across problems in their projects, but most lenders have seen that these can be solved and that projects are coming into operation.”

In Gemini’s case, the presence of an industrial behemoth like Siemens as both equipment supplier and shareholder was an additional advantage, Bischoff believes.

“There are certain situations, especially in project finance, where the presence of Siemens — in this case particularly on the equity side — creates an additional level of comfort for other sponsors, financial investors and particularly senior lenders.

“You could say it is perceived that Siemens puts skin in the game.”

So can we expect more offshore wind capacity in European waters with SFS’s backing? 

“We’re looking at projects where Siemens plays a role as turbine supplier and we are analysing whether we can play a role on the financing side,” confirms Bischoff, without offering more details.