Silvia Pavoni reports on a record-breaking wind power project financed purely on future cash flows.

Off the coast of IJmuiden in Netherlands, the North Sea horizon line is interrupted by tall, imposing shapes. What could be romantically viewed as an army of sea monsters are in fact 60 wind turbines, 42 metres tall and 170 tonnes in weight, whose blades, 80 metres in diameter, will be able to generate at capacity up to 120 megawatts (enough for 125,000 households).

The Q7 project, developed by the Econcern group, is the world’s most offshore wind energy project (23 kilometres from the coast) and deepest in the sea at 24 metres.

Now at the beginning of its construction phase, the Q7 project has also broken a record in financing terms. Differentiating itself from offshore wind projects carried out by big energy companies that supported the project financing by strong balance sheets, the Q7 financing was based purely on the project’s future cash flows.

A team of lenders led by Dexia, Rabobank and BNP Paribas sharpened their risk analysis tools and came up with an innovative, non-recourse finance solution for a project type that until then was considered among the riskiest in the renewables field. The project was so engaging that one of the bankers working on the transaction joined the group that is developing Q7. Niels Jongste, now director of project finance at Evelop, the project development arm of Econcern, worked for Rabobank on the financing of the deal.

“Q7 was the first limited/non-recourse facility for an offshore wind farm worldwide,” says Mr Jongste. “The banks and the developers have put a lot of time and effort into getting the project bankable. Challenges they had to overcome were, among others, the lack of an EPC contract [which passes the engineering, procurement and construction risks from the developer to the contractor] and no fully proven technology.”

The innovative financing structure includes a number of novel features to mitigate the risks associated with the construction and the long-term operation of wind turbines at sea, including the availability of a contingent facility to cover potential cost over-runs or delays. Cash-sweep mechanisms and specially tailored availability guarantees under the operating contract with the turbine provider, Vestas, also allows debt service to continue even during periods of lower-than-expected availability. Furthermore, the project benefits from a comprehensive, 11-year insurance programme with Delta Lloyd.

The success of Q7 has served as inspiration for Dexia and Rabobank, which has provided limited recourse financing to another offshore wind energy project. “The C-power offshore wind farm in Belgium has also been financed on a limited recourse basis,” says Mr Jongste. ”The financing structure was based on the Q7 structure.”

Institutional interest

Offshore wind farms and other renewable energy projects have not only appealed to financiers, they are also raising interest from institutional investors. Two Dutch pension funds, ABP and PGGM, have recently invested in the Ampère Equity Fund, set up by the Q7 initial investors to expand funding to other renewable energy projects. All projects financed by the fund are expected to generate both a long-term predictable cash flow and an attractive yield on investment.

As for all projects based on new technology and in a relatively young market, investors should wish for good returns on renewables projects. Particularly when it comes to offshore wind farms.

“The market expects a 10% return from offshore wind projects,” says Kees von der Leun, member of the board of Econcern. “It could be much higher considering that the project is a first and can be perceived as riskier [than onshore wind projects] – even if offshore wind is of better quality and more constant than onshore wind.”

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