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My job.

by Jerome a Paris Thu Oct 26th, 2006 at 03:55:48 PM EST

Some of you may have noticed that I wasn't around much in recent weeks. It's finally time for me to tell you what has kept me busy in recent weeks - in fact, in the past year and a half:

This Wednesday, a few banks, including mine, signed and disbursed a ground-breaking loan:  we put 378 million euros on the table, to build 60 wind turbines in the North Sea, 25 kilometers off the coast of the Netherlands, near Amsterdam. The wind farm, at 120 MW is not the biggest to be built offshore (that title goes to Nysted, built three years ago, which has a capacity of 165 MW), but it is the first-ever offshore wind farm to be financed by banks.

Above is a picture of one of the first piles, built just a few weeks ago. In just over a year, 60 of them will have been planted in the seafloor, have a wind turbine bolted on top, and the farm will start producing electricity - enough to provide power to 125,000 households and to avoid 225,000 tonnes of carbon emissions per year. It will look a lot like this one, North Hoyle, completed in 2004 and which uses the same turbines:


I explained in a diary written almost two years ago what project finance was and how it works, but the principle is simple: you finance a specific asset, and you get repaid only from the revenues generated by that asset, without recourse to the investors that own the project. This is a financing technique that works well for project with well identified assets with high initial investment costs, and strong cash flows after that, like big infrastructure items (toll bridges, pipelines) and energy assets (oil fields, power plants).

Wind farms are quite easy to fund using this project finance mechanism, and it has indeed been done on a wide scale in most Western countries, which have stable regulatory frameworks for renewable energy, i.e. mechanisms that guarantee that renewable energy sources get a high enough price (usually higher than "grey" power, but not always these days with the price increases for gas) for each kWh put on the grid. But so far, offshore windfarms seemed to be scaring banks, for a number of reasons:

  • construction costs are higher than onshore, as you need special boats and equipement to build the turbines, and you need to build a longer cable. The high cost of the cable, which must be borne by the wind farm (as it is built exclusively to connect it to the grid) also means that only larger scale projects make economic sense, thus implying bigger investment outlays;
  • operating costs are also higher, as the marine environment is tougher on parts, and access is similarly more difficult: even minor repairs will require the intervention of a boat and will take more time;
  • more problematic for the banks, operating costs are also more uncertain: there is little track record for offshore operations, and risks are not completely understood, such the long term impact of corrosive salt, and stronger winds, on turbines initially designed for onshore use. Bad weather can prevent access to the farm altogether and mean that even minor technical problems can cost big production losses as repairs are delayed;
  • finally, the issue of the size of the projects (which reach hundreds of millions of euros) has become an issue. Developers can be utilities, but they can be pretty small players; similarly, turbine manufacturers (with the exception of GE and, more recently, Siemens-Bonus) are also relatively small industrial companies. The presence of such small players was not an obstacle in the onshore sector, where the technology is well known, and nimble wind investors proved capable to develop, and these manufacturers to build, the windfarms typically seen onshore, i.e. in the 10-50 MW (or 10-50 million euros) range, and banks were comfortable to support both. For the bigger, longer, more expensive  offshore projects, this is no longer the case. How reasonable is it to finance a project costing 400 million but developped by companies with 10 millions euros turnover and built by a company with 50 million euros in annual profits?

The fact that wind is stronger and steadier offshore, and energy prodution is typically 50% higher per turbine than onshore helps make the case for offshore wind economically more compelling, but does not alleviate the above problems, and both investors and financiers have been reluctant to put money in this sector, despite currently being extraordinarily aggressive for onshore wind assets.

So how did we solve this?

:: ::

Now, I have to walk a fine line not to reveal any confidential information, so I'll use the press release which is in the public domain, and explain some bits briefly:


The financing structure includes a number of novel features to mitigate the risks associated with the construction and long term operation of wind turbines at sea, including the availability of a contingent facility (jointly with contingent equity provided by ENECO) to cover potential cost overruns or delays, cash sweep mechanisms and specially tailored availability guarantees under the operating contract with Vestas that allow debt service to continue even during periods of lower availability than expected. The project also benefits from a comprehensive, 11-year insurance programme with Delta-Lloyd N.V.

  • Availability of a contingent facility. That means that we have some additional funds available should there be unexpected spending or problems that cause the production (and thus revenue) to be delayed. We rely on fairly standard construction contracts, which have a given price and date, and usually include penalties if commitments are not meant, and I'm certainly not going to give ideas to people that there is more money out there to be spent. There will need to be real problems that are not covered by normal contractual terms, and banks will have a final say on whether any money is provided. But it is fairly unusual for banks to put up such reserves (usually, this is done exclusively by the investors), and we've done it in this case because it gives us additional control over construction and a higher certainty that the project will be built successfully. We've been willing doing this because we have studied the plans and contracts in much detail and are comfortable with the technical challenges, the solutions used to solve them and the backup plans.
  • Cash sweep mechanisms. That simply means that if the project is successful, we get repaid faster, by taking ("sweeping") a portion of the surplus to reimbursethe loans. Banks always use more conservative revenue estimates than investors to have a higher certainty that such revenue levels will always be reached - and make it possible for the debt to be paid. If thing go well, of even just as expected, there will be more revenue than the banks plan, and the investors will make a lot more money. So in this case, we have a right to a portion of these extra revenues in the "better-than-the-pessimistic-scenario" cases. That means that it is actually quite likely that we be repaid faster than we expect. We don't earn more, but we take risk over a shorter period, and it does lower the rate of return of the investors (as their own income is delayed by these payments).
  • Availability guarantees. That's the operator, Vestas, guaranteeing that its turbines (which it will be running and maintaining on behalf of the investors) will indeed produce the expected amounts of electricity, and agreeing to pay penalties if the production levels are lower than guaranteed. I cannot go into much detail here, but the general principle here is that these guarantees should not only cover the impact of lower revenues for the investors, but rather for the lenders. So the penalty payments take place for reallly degraded performance, rather than for slightly degraded performance, in order to ensure that there is still some income in the project even if things go really bad (if things go a little bit bad, we are covered to some extent by the fact that the banks already count on things going less well than normal as their "base case" scenario).
  • Insurance programme. That's fairly simple: you can buy insurance that compensates you if some things that should not go wrong do go wrong. Insurances make money because they charge you a slightly higher fraction of revenues than the probability of that thing happening. Risks like lighting, boat accidents, mechanical failures or weather events are known to insurers and they can quite easily quote prices for such circumstances. In this case, the project has managed to get insurance coverage for a fairly comprehensive set of events, which brings additional comfort to the lenders.

For those of you that know the business, this is all maddeningly vague, I suspect, while those of you that do not know much finance will probably already find it unbelievably complex and mind-numbing. Let's say that this is a compromise between the desire to explain what we did and the confidentiality requirements inherent to this job, and it may be slightly frustrating.

I will say that I am extremely proud of having brought this project to fruition, and I will further say that I consider that I had an instrumental job in getting it done, and I think that this financing will be a reference and a model for future transactions. I also consider myself lucky to work in a sector where I can do some good for the planet and which is fully compatible with the political ideas that I push here.

Display:
with a more exciting title: http://www.dailykos.com/story/2006/10/26/154840/72

Did anything happen on ET in my absence?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Oct 26th, 2006 at 03:57:15 PM EST
"Did anything happen on ET in my absence?"

No.  Nothing.  There's nothing in your inbox either. ;)

Hey!  Congratulations!  You are free!  And there are monopiles!  You know, I think windfarms are pretty, in a Teletubbies kind of way, once they are all built...

Those who can make you believe absurdities can make you commit atrocities. -Voltaire

by p------- on Thu Oct 26th, 2006 at 04:11:14 PM EST
[ Parent ]
ET just ambled along as usual, ya know. Clippety-clop.

Congratulations on this success! The only thing I can (stupidly) ask you about it is to clear up what you mean by "investors" in the project. These are the banks' clients, ie the borrowers? Are they also investing capital of their own? What kind of entities are they?

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Oct 26th, 2006 at 04:27:17 PM EST
[ Parent ]
Investors are the bank's clients, indirectly. They are investing project, and they own it in full.

But they are not borrowers, that's precisely the point of project finance: the borrower is a company which owns only the project (the wind farm in that case), and which has just enough capital (from investor contributions, plus bank loans) to build the project, and which then lives or dies on the revenues of its project.

In this case, the investor are a Dutch utility (which also buys the electricity produced) and groups specialised in the development of renewable energy projects.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Oct 26th, 2006 at 05:08:37 PM EST
[ Parent ]
Looks great - good work, hope there will be many more offshore wind farms.
by Fran (fran at eurotrib dot com) on Thu Oct 26th, 2006 at 04:28:53 PM EST
[ Parent ]
Now I know why you were so shy in answering my questions about the possibility sea wind farm, corrosion and all at our last meetup :) :).
by Laurent GUERBY on Fri Oct 27th, 2006 at 05:30:04 AM EST
[ Parent ]
Well I'm jealous.

you are the media you consume.

by MillMan (millguy at gmail) on Thu Oct 26th, 2006 at 04:12:30 PM EST
I don't understand the 'investors' either. Was the projected initiated by the banks themselves, or did a consortium come to the banks and say 'Let's do this'?

Other than that - excellent work of course. I'm jealous like MillMan. Certainly a project to be proud of!

Now if you want a challenge, try to get something similar happening in the UK. ;)

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Oct 26th, 2006 at 04:43:18 PM EST
The projects are always initiated by the "investors", who always have to put some of their money first - to do the feasability studies, the planning, get the permits, negotiate the contracts, etc... We only get involved when there is a "real" project (i.e. fully permitted, with identified contracts for every aspect: construction, sale of electricity, operations and management, etc...).

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Oct 26th, 2006 at 05:10:55 PM EST
[ Parent ]
I hope they multiply geometrically with as much careful planning.  Those are certainly prettier than the horrendous buildings on every inch of Spanish coast.

As to what´s been going on here...  I´m telling!  Some were out on the town, some were causing traffic jams and others had food fights, but I was good.

Our knowledge has surpassed our wisdom. -Charu Saxena.

by metavision on Thu Oct 26th, 2006 at 05:18:54 PM EST
Recently, a Vestas v82 was erected about 2 km from my house.  At 110 meters tall, it towers over the surrounding area.  Thank goodness these things are beautiful!  And quiet!  Sunday I walked over just to listen to it.  Yes it makes a sound, but I could still hear jets in a landing pattern for an airport 60 km away over the gentle whooshing.

I shot video of the building process.  It can be seen at:
http://www.youtube.com/watch?v=PyehD1j0kUU

(Trust me, this looks MUCH better on a DVD)

Congratulations.  Keep posting updates on your project please.

"Remember the I35W bridge--who needs terrorists when there are Republicans"

by techno (reply@elegant-technology.com) on Thu Oct 26th, 2006 at 05:37:09 PM EST
and maddeningly vague ...

About 20 years ago my primary job was working on project financing type transactions here in the US -- for airports, public sports facilities, energy plants, etc.  So I know how LONG the planning for these takes and how exciting it is when they are finished -- especially if the parties had to really think creatively on structure and credit enhancements -- and work around all the unexpected issues that inevitably come up.  But this project is especially exciting because you are financing the future. Congratulations!  

by Maryb2004 on Thu Oct 26th, 2006 at 06:18:41 PM EST
I know how LONG the planning for these takes and how exciting it is when they are finished

What blows my mind is how quickly these huge things will be built after that planning stage:

Above is a picture of one of the first piles, built just a few weeks ago. In just over a year, 60 of them will have been planted in the seafloor, have a wind turbine bolted on top, and the farm will start producing electricity - enough to provide power to 125,000 households and to avoid 225,000 tonnes of carbon emissions per year.

One year?  That is amazing to me.

Way to go, Jerome.

Rien ne réussit comme le succès.

by marco on Thu Oct 26th, 2006 at 09:23:17 PM EST
[ Parent ]
Interesting comments over there on DK, eh?

A couple of points that might have been lost in the foolishness:

  • Vineyard Sound (where the Cape Cod windmills have been proposed) is very shallow. Queen Elizabeth II ran aground there in 1992 because of the venturi effect between her hull and the bottom, which sucked her down in the water enough to make contact. The depth is between 12 and 50 feet in the windmill area.

  • The continental shelf on the American east cost extends a very long way into the Atlantic. George's Bank, a prime fishing ground, goes out beyond 200 km, and at places is only a couple of meters deep. In addition to fish, there is also a lot of oil there, and it would be an "out of sight, out of mind" place to put windmills...

by asdf on Thu Oct 26th, 2006 at 10:39:00 PM EST
While I had specific reasons for leaving Boston, the Cape Wind fiasco was an obvious symptom of the problem. The place was choking me.

I really do hate middle and upper class NIMBYism...I couldn't read much of the dkos thread. As was demonstrated, some people would prefer to save 100 birds from windmill kills at the cost of 10000 birds killed by acid rain and habitat destruction from mining. Just amazing.

you are the media you consume.

by MillMan (millguy at gmail) on Fri Oct 27th, 2006 at 12:23:58 AM EST
[ Parent ]
Just looking at the list of contributors and companies all coming into play, no wonder some abducting and locking up was needed to get everyone around one table. Hope they treated you well. Were you cooped in the Netherlands?

Of course I've been tracking the developments of the second off-shore windpark for the Netherlands with a half eye - part because out of a professional interest, and also when I learned you were involved. As I may have spouted at ET previously, there also had been made project proposals to include the formation of a ring-dyke structure to put the mills not directly on the sea-floor, but on an artificially created estuary off the coast. This to decrease adverse effects of off-shore farming, such as storms lowering production and rusting - but I never were able to find out whether these arguments were genuine. In any case, the ring-dyke plan went off the table quickly.

When the turbines are in place, I'll make a trip to the coast to take a look at them.

by Nomad on Fri Oct 27th, 2006 at 05:25:36 AM EST
Congrats!

Thanks for writing something about what kind of difficulties you people had and how they were overcome. It's very interesting and quite readable. Not mind-numbing at all.

by nanne (zwaerdenmaecker@gmail.com) on Fri Oct 27th, 2006 at 06:07:19 AM EST
I just read for the first time about Al Gore's "Connie Mae" initiative in your Daily Kos cross-post.  A commenter wrote:

I've long wanted micro-financing this way

I would like my local bank to give me this kind of project financing to install solar panels, geothermal heating systems, buy a hybrid car, and do other eco-friendly projects around the house that have large upfront costs but save money and the planet in the long run.

To which another person replied:

That's Al Gore's Connie Mae idea

... where carbon saving improvements are financed against the utility savings ... either for owners of existing homes or for builders of new ones. It would not take much of a Federal interest subsidy to get a big boost to a lot of technologies that are either already establish but need to be expanded, or else are just on the edge of adoption and need a push.

From Gore's speech at NYU Law School on 2006/9/18 (which was diaried by rdf):

Here in the US the extra cost of efficiency improvements such as thicker insulation and more efficient window coatings have traditionally been shunned by builders and homebuyers alike because they add to the initial purchase price-even though these investments typically pay for themselves by reducing heating and cooling costs and then produce additional savings each month for the lifetime of the building. It should be possible to remove the purchase price barrier for such improvements through the use of innovative mortgage finance instruments that eliminate any additional increase in the purchase price by capturing the future income from the expected savings. We should create a Carbon Neutral Mortgage Association to market these new financial instruments and stimulate their use in the private sector by utilities, banks and homebuilders. This new "Connie Mae" (CNMA) could be a valuable instrument for reducing the pollution from new buildings.

Is this an accurate comparison with how your financing deal is structured?

Rien ne réussit comme le succès.

by marco on Fri Oct 27th, 2006 at 11:24:14 AM EST
Just for the record:

  • You lied.  For illustrative purposes, a household is assumed to consume about one kilowatt (in reality it's a bit more).  The wind farm can only power 120.000 households if it runs at 100% availability, which it doesn't.

  • Coal power emits around 1kg of CO2 per kWh produced, a realistic mix around 0.5kg/kWh.  Your figure of savings therefore amounts to about 110GWh per year or an availability around 40%, which seems about right, though optimistic.

  • 3€/W peak power is comparable to and a bit higher than the cost of the new EPR at Olkiluoto, but the latter will produce more than twice as much electricity for the same rated peak power.  Never again call nuclear power expensive.
by ustenzel on Sat Oct 28th, 2006 at 08:00:20 AM EST
  • I did not "lie". I quoted a press release. If you want to discuss assumptions, say so, or ask. Don't say I lie. For the record, we consume kWh, not kW.

  • availability of 40% is the standard for offshore wind

  • when have I ever said that nuclear was expensive? You're picking on the wrong person.


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Oct 31st, 2006 at 02:31:00 PM EST
[ Parent ]
For the record, we consume roughly the same amount of kWh every month (or whatever other time interval), so that gives kW again, and roughly one kW per household.  

By that number, the conventionally used one, you overestimate the output of this wind farm by a factor of at least 2.5.  (Why at least?  Because these 40% have yet to be measured.  My physics textbook lists 40% as upper limit.)  

And it's simply getting to me that the output of wind farms is habitually overestimated by a large margin, the cost underestimated by a large margin if not several orders of magnitude, wrong conclusions are drawn from that and taxpayers (that would be ME) are made to pay for that nonsense!

by ustenzel on Wed Nov 1st, 2006 at 05:22:33 PM EST
[ Parent ]
I responded on the substance of your question here: http://www.theoildrum.com/story/2006/10/30/231713/57#32

I don't understand your confrontational tone because I don't see what you're trying to achieve here. I've mostly on the pro-nuclear side of the debate here, and I've discussed the cost of nuclear various times, and i don't see how you could imply in any way that I've been peddling lies, and to be frank, I deeply resent that word. If you think a number is wrong, call me on it, give your arguments, and let's discuss it. If it's wrong, it's wrong. I can make mistakes.

And just so you know, I'm making a real effort at remaining polite here because your attitude is frankly unacceptable.

btw, the 40% number has nothing to do with physics, and everything to do with the weather, so I have no idea what you're talking about.

Nuclear energy in France - a Sunday special

The real cost of electricity - some numbers (well, lots of them)
(I suggest you go see the externality costs table in that diary if you want to complain about taxes)

Alternative energies: wind power
wind power: debunking the critics

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Nov 1st, 2006 at 06:01:33 PM EST
[ Parent ]
120MW at 40% availability = 48MW on average = 48.000 households.

Not 120.000.  That's what's wrong.

by ustenzel on Fri Nov 3rd, 2006 at 06:12:53 AM EST
[ Parent ]
In the EU, an average household consumes around 3500 kWh per year. That's significantly below 1 kW average power, the latter more corresponds to the USA (and perhabs Scandinavian countries).

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Nov 3rd, 2006 at 06:53:18 AM EST
[ Parent ]


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