Confidence boost for UK offshore

The UK Green Investment Bank's plan for a £1bn ($1.7bn) fund can restore confidence to an offshore wind sector that has suffered setbacks in the past year.

The fund is intended to encourage investors to buy equity stakes in operational offshore wind farms – and may be joined later by a second targeting the construction phase.

Chief executive Shaun Kingsbury says probably around £12bn of UK offshore wind farms are operating today, plus a further £4bn of projects under some stage of construction.

“So we will be looking to back projects which have managed risk and have locked in power-purchase agreements with creditworthy parties. We see a lot of them out there," he tells Recharge.

“Over the next 10 years we think there will be a need for up to £30bn of capital to go into UK offshore wind. That money is not only going to come from developers and utilities, it also needs to come from financial investors.

“There needs to be more capital pumped into offshore wind at every stage – money to take projects through the construction, development and operational phases. So we are starting where investors are most likely to be comfortable, by raising finance for operational assets.”

Kingsbury is targeting three sources of institutional capital: UK pension funds/life assurance; overseas pension funds; and sovereign wealth funds. “We want to raise £1bn of capital, out of which we will commit £200m of our own money.”

He believes there is an appetite in the marketplace to acquire equity stakes in such operational wind projects. “The yields of 10-11% over the lifetime of a project should make them very interesting to those with the funds.

“We may set up another fund in the future which wants to take on construction risk, but we are starting off with the easier operational bit.”

The bank’s move follows a period of uncertainty for the British offshore sector, partly created by the slow pace of electricity market reform (EMR), plus concerns over the level of strike prices.

Further alarm was caused by RWE’s decision last November to pull the plug on its 1.2GW, £4bn Atlantic Array off southwest England, and ScottishPower Renewables decision to walk away from its 1.8GW Argyll Array project off Scotland’s western coast.

However, such uncertainty has lessened as eight major renewables projects – including five offshore wind farms – have signed the first contracts under the new EMR rules. These projects are expected to provide up to £12bn of private investment.

“It’s good because we now know who to speak to and who has got these five wind projects going forward,” says Kingsbury. “We are now engaging with developers to see if they have a gap in finance and how we can help.”

The next area the bank will concentrate on is financing small, community-scale renewables projects. “We are also working with the Department of Energy and Climate Change on some overseas pilot projects in emerging markets.”

The bank committed £668m to 18 green-energy projects in 2013-14 – more than double the number of green projects it backed in its first year. “About half the money we have invested so far is going into offshore wind,” he says.