Utilities Unbundled - Issue 14
Offshore wind requires a lot of capital. Dr. Cord Landsmann, CFO for E.ON Climate & Renewables, says pension and infrastructure funds are now investing directly in wind projects.
“Frank – and often time-consuming – contract discussions are needed about which risks to put in which party's pocket.”
— Dr. Cord Landsmann, CFO
E.ON Climate & Renewables
I've seen a real shift in financing over the last 18 months, from banks to pension funds and infrastructure funds.
We expect E.ON's average annual gross investment in renewables to be €1.3b to €1.5b (US$1.7b to US$1.9b). Of this, we will fund €0.8b to €1b (US$1b to US$1.3b) ourselves and look to third-party investors for €500m (US$652m).
What makes projects “bankable”?
On any wind project, the risk profile drops sharply once it becomes operational, and this is when we bring in investors. In my experience, pension and infrastructure funds want four things:
- Reliable, long-term partners: they want a company with a proven track record, offering low-risk, cash-yield investments over 15 to 20 years. For them, investing in wind is about buying into a whole new asset class. They want to be educated on the risk profile.
- Projects with operational data: they want to know what the technology is doing, not what it can do. They want assets they can touch. Our six offshore wind farms have two years of operational data. I can show investors real performance information on every E.ON wind farm worldwide on my Blackberry®.
- The best technology: investors ask what kind of turbines we're using, how we select them, etc. They need reassurance that the company has a rigorous process in place.
- Stable regulatory regime: any hint of retroactive subsidy cuts, such as in Spain, is an absolute no-go for investment. We must have confidence that government commitments to subsidies are firm in order to go ahead with such long-term investments.
The industry needs to create fit-for-purpose financial vehicles that meet these criteria. At E.ON, we use a partnership model with build-own-transfer (BOT) contracts. Frank – and often time-consuming – contract discussions are needed about which risks to put in which party's pocket.
Getting costs down
Offshore wind is still developing, but it needs to reduce its dependence on subsidies. E.ON's offshore wind strategy targets 40% cost reductions by 2015. As CFO, I don't sign off any projects unless they meet these targets.
Standardization will be a key area for savings. For example, there is no universal foundation suitable for all seabed conditions. Right now, we select the site and then build an offshore wind solution to suit it.
In future, we may flip this around: first build a standard foundation and then seek the right sites for it. We need to be innovative.
I tell my people all the time, “There is no Plan B.” We have big ambitions and we have to succeed.
This article was written by Dr. Cord Landsmann of E.ON Climate & Renewables. For more information on this topic, please contact Duncan Coneybeare.