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Comment: Banking on Europe's offshore wind industry

Frost & Sullivan

The offshore wind industry has already garnered government support and is increasingly piquing the interest of the private sector thanks to its ability to contribute significantly to the European renewable energy targets of 2020. As installed capacity continues to grow, and market share increases, the banking sector will continue to become progressively more involved in this industry.

The offshore wind industry is expected to grow in relation to its bigger counterpart, onshore wind. While onshore wind will always occupy a major share of the wind energy market, offshore wind will become a more substantial contributor of electricity generated from wind by 2020. According to Frost & Sullivan estimates, installed capacity of offshore wind is expected to grow from 1.3 MW in 2008 to 18.8 MW by 2015.

"The banking sector's interest in the offshore wind industry has been accelerating rapidly in the past year and more so since the second half of 2009, and is expected to continue to grow stronger in the coming years," estimates Frost & Sullivan's Industry Analyst Gouri Kumar. This interest can be attributed to two primary factors: the irrefutable size, potential and opportunity that the industry presents, and the pre-existing involvement of both government and investment banks in efforts to rescue some of the most important projects last year.

The risks of investing in offshore wind

Bank involvement in the European offshore wind industry is a relatively new phenomenon. In the past, very few banks were involved in this industry as the risk factor was relatively high in comparison with the more mature onshore wind sector. Among inherent risks were: a lengthy permitting process, wind turbines placed in very harsh environments, higher project economics and more expensive O&M procedures. However, this risk is abating as countries like the UK and Germany spearhead efforts to reduce costs related to turbine technology and various components as well as easier installation methods and better accessibility.

Importantly, the offshore wind industry requires a significantly greater financial risk and investment involvement than onshore wind farms, making it potentially difficult and risky for one bank to bear the entire burden. As a result, banks partner with other banks, adding to the complexity of the deals. "Involvement by a smaller number of banks historically means that there is less experience in the industry financing offshore wind when compared with onshore wind," says Kumar.

Nevertheless, investment in this industry is growing because financial investors, mostly investment banks, are willing to assume major risks in order to capitalise on lucrative opportunities inherent in this industry. "Investors are trying to overcome these risks with innovative approaches and out-of-the-box thinking," Kumar concludes.

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Policy, investment and markets  •  Wind power