US offshore wind: Current financing conditions

US offshore wind: Current financing conditions

December 12, 2019 | By Keith Martin in Washington, DC

More than 1,300 people attended the annual offshore wind conference hosted by the American Wind Energy Association in late October in Boston. A panel talked about the current market for financing offshore wind projects in the United States. The following is an edited transcript. At the time of the panel, the 800-megawatt Vineyard project had been in the market seeking financing.

The panelists are Nuno Andrade, managing director and head of structured finance for North America for Santander, Yale Henderson, managing director and head of the tax equity desk at JPMorgan Capital Corporation, Martin Pasqualini, managing director with the CCA Group, one of top arrangers of tax equity, and Henrik Tordrup, formerly with offshore wind developer Ørsted and now a partner with Copenhagen Infrastructure Partners, a 50% owner of Vineyard. The moderator is Keith Martin with Norton Rose Fulbright in Washington.


MR. MARTIN: Nuno Andrade, you have been in the market this year trying to raise debt for the Vineyard offshore wind project. How much interest has there been among banks? Can you say how many banks are interested in lending?

MR. ANDRADE: We saw a tremendous response from the market. There is pent-up demand especially from European lenders who have been lending to such projects in Europe. The ability to raise debt will not constrain the US offshore wind sector.

MR. MARTIN: Can you say how many banks are interested in offshore wind?

MR. ANDRADE: Judging from the number of the unsolicited requests we got about Vineyard, more than 50 financing entities have a real interest in looking at offshore wind in the US.

MR. MARTIN: How much of a risk premium are banks requiring to lend to US offshore wind projects compared to projects on land?

MR. ANDRADE: It depends on the structure. Most deals on which we have been working have tax equity. The debt is back levered, meaning it is behind the tax equity in the capital stack. An inter-creditor or forbearance agreement has to be negotiated between the tax equity and the lenders. If the terms of this agreement are favorable to the lenders, then we would expect only a 25 basis-point premium to lend to an offshore wind project compared to a project on land.

MR. HENDERSON: Just to be clear, the inter-creditor discussion is about how much of a priority claim the tax equity will have over the cash flow from the projects. The discussions can become very nuanced depending on the transaction structure.

MR. MARTIN: Naturally the tax equity is willing to let the lenders take as much as much they want for scheduled principal and interest payments? [Laughter]

MR. HENDERSON: No. However, we are creative and open-minded.

MR. ANDRADE: These are bespoke agreements. The rating agencies focus on the terms. It is important to start the inter-creditor discussions early in the process.

MR. MARTIN: Besides a slight interest-rate premium, what other differences are there in debt terms between offshore and onshore wind projects? Let's start with tenor. How long are banks willing to lend?

MR. ANDRADE: The answer is different in Europe than in the US.

MR. MARTIN: Let's focus on the US.

MR. HENDERSON: It is a completely different dynamic, given the nature of the incentive being monetized by the tax equity and how much the tax equity represents as a percentage of the capital stack in an offshore wind deal compared to an onshore PTC deal.

MR. MARTIN: What will be the typical capital stack for offshore wind? What percent tax equity? What percent debt? What percent true equity?

MR. HENDERSON: I can only speak to the tax equity. It is definitely less than 30% of the capital stack.

MR. MARTIN: Sub-30% assuming what size tax credit? 80% of the full rate? 60%? 40%?

MR. HENDERSON: The most any of the new projects coming to market has been able to qualify for is 80%, and the percentages decline from there.

MR. MARTIN: So the tax equity is less than 30% of the capital stack in an offshore wind deal qualifying for tax credits at 80% of the full rate. Henrik Tordrup, what percent debt?

MR. TORDRUP: In round numbers, I think it will be 20% sponsor equity, 30% tax equity and 50% debt.

MR. MARTIN: Nuno Andrade, I did not get an answer from you on the debt tenor.

MR. ANDRADE: In Europe, longer tenors are being done for this type of asset, while a seven-year mini-perm structure has been more typical of bank debt in the US market. There is a balancing act between cost and tenor. The refinancing risk is the key consideration that sponsors have in terms of the tenor. Even during the financial crisis in the US, the project finance market remained open, which is different from what people saw in Europe, so there is still a bit of back and forth about optimum tenor.

MR. MARTIN: I think I heard seven years from you for the US. Is that right?

MR. ANDRADE: That is the typical tenor today for onshore wind. The question is whether something can be structured in the middle between a seven-year deal in the US and the longer tenors for offshore wind that we have seen in Europe.

MR. MARTIN: Is the debt-service-coverage ratio relevant for back-levered debt?

MR. ANDRADE: Absolutely.

MR. MARTIN: What DSCR do you expect to see for US offshore wind?

MR. ANDRADE: I don't think there will be a big difference between offshore and onshore in terms of the debt-service-coverage ratio.

MR. MARTIN: What is the debt-service-coverage ratio currently for US onshore wind?

MR. ANDRADE: It is 1.0 for the P99 output and between 1.35 and 1.40 for the P50 output. What is interesting about offshore wind is that the wind tends to be more stable. In terms of net capacity and variability, the resource tends to be better. This is something that has to be taken into account when talking about sizing parameters.

MR. MARTIN: We established already that the typical offshore capital stack is expected to be 20% sponsor equity, 50% debt and 30% tax equity. Will lenders allow subordinated debt to count as sponsor equity for this purpose?

MR. ANDRADE: One thing that I learned in this country is that, with good lawyers, anything is possible in a structure. I would say that the key is how deeply subordinated the debt is. Keep in mind that a project goes through different stages. There is construction. There is the period between mechanical completion and when the project is put into commercial operation. The tax equity may fund when 90% of the turbines reach commercial operation, so there is a period where cash flow may be increasing. Returning to subordinated debt counting as equity, the key is how deeply subordinated it is. This is worked out in the inter-creditor agreement.

MR. MARTIN: The reason I ask is tax considerations push some European pension funds to put in money as debt rather than equity.

MR. ANDRADE: To the extent that the sponsors expect a takeout through project bonds and the debt capital markets, there is a discussion to be had with the rating agencies. They focus on the degree of subordination. The bank market is familiar with structures where deeply subordinated debt is treated for all purposes as equity.

MR. MARTIN: Before going to market for Vineyard, did you consider project bonds or were you focused solely on bank debt?

MR. ANDRADE: We considered all the options.

MR. MARTIN: Yet you settled on bank debt, I think. For what reason?

MR. ANDRADE: Banks probably are more flexible during the construction period. However, since, in Europe, institutional investors have shown considerable flexibility, what type of capital is more efficient for this type of project will remain a subject of ongoing discussion.

MR. HENDERSON:Another consideration beyond what is most efficient is execution risk and the speed at which parties can move. The original timeline was to sign documents next week, I think. That was an ambitious timeline, but could have been done had the US Department of Interior not thrown projects off the Atlantic coast into limbo in early August. Bank debt was preferred because it had the lowest execution risk given the timeline.

MR. MARTIN: What hot buttons are there for lenders looking at offshore wind?

MR. ANDRADE: Construction risk gets a lot of attention. The perception is there is more risk to put a big turbine in the middle of the ocean than to do so on land. Over time, people will better understand the real risks with this technology. The logistics, the interface risk, all of that is highly scrutinized, and we have to spend a lot of time educating the market.

MR. MARTIN: Are there any audience questions about debt before we move to tax equity? Dennis Meany with Oatfield LLC.

MR. MEANY: Keith asked about the tenor. What about the amortization periods for long-term contracts?

MR. ANDRADE: One interesting thing about offshore wind is the power purchase agreements are longer. In the onshore market, power purchase agreements are getting shorter, and people are doing sizing all the way to the end of the contract and even including merchant tails. The ultimate goal in offshore is to give credit for the contracted cash flows during the full term of the contract.

MR. MARTIN: Will the debt amortize over the full term? Will there be mini-perm features?

MR. ANDRADE: I am saying that is the goal. We will see how the market reacts. It also depends on the type of lenders. Banks are more prepared to see tails. Institutional investors are more familiar with giving credit to the full tenor of the PPA, but sometimes they require higher debt-service-coverage ratios for different P-values. An analysis must be done about what is more beneficial for the project sponsor.

MR. MARTIN: Say your name and affiliation and then your question.

MR. HARTSHORNE: Prescott Hartshorne, National Grid. LIBOR or SOFR spreads?

MR. MARTIN: What is the LIBOR spread on the debt? You said it is 25 basis points above where onshore would be. Onshore construction debt is 75 basis points over LIBOR and term debt is 125 basis points over for contracted cash flow. Does that sound right?

MR. ANDRADE: There is a big difference between construction risks for onshore and offshore. A straight comparison to onshore term debt is difficult because onshore PPAs are getting hairier and more difficult, but historically, we have seen term debt spreads on deals with good PPAs of between 150 and 175 basis points.

MR. MARTIN: That's for contracted revenue?

MR. ANDRADE: Correct.

MR. MARTIN: Presumably these are also the rates that would apply to front-levered debt at the project level since the banks are not charging any premium to lend on a back-levered basis. All debt at this point is back-levered debt.

MR. HENDERSON: Front-levered meaning what?

MR. MARTIN: Meaning that the debt is ahead of the tax equity in the capital stack.

MR. HENDERSON: From a collateral or from a cash-flow perspective?


MR. HENDERSON: We have not seen a front-levered deal since maybe 2014. Solar deals with investment tax credits are sometimes structured so that the debt is effectively senior to the tax equity on a cash-flow basis, but not on a collateral basis.

MR. MARTIN: I think you told me that you expect to see a return to some front leverage in the future. Is that true and, if so, why?

MR. HENDERSON: I don't think it will be "front leverage." It will be back leverage with some interesting features. An offshore wind deal with an investment tax credit has a very different risk profile from an onshore deal with production tax credits, and we are not looking to get as much cash out of the offshore deal.

Tax Equity

MR. MARTIN: If we have time at the end, we will drill down into the details. Let's switch to tax equity. Marty Pasqualini, you have been out in the market trying to raise tax equity for offshore wind. How many tax equity investors do you think have an interest in such projects?

MR. PASQUALINI: All of the tax equity investors that do deals with investment tax credits expressed interest in the Vineyard project. Some had constraints tied to timing and the longer construction period required for such projects.

There are two elements to timing. There is the cost of funds during the long commitment period. And for some smaller investors whose future tax capacity is not as certain as for a JPMorgan, Berkshire Hathaway or someone of that nature, asking them to commit to invest two years from now is difficult. Ask them much closer to the commercial operation date when their money would go in and the response is almost uniformly positive in terms of level of interest.

MR. MARTIN: How many tax equity investors is that? You said it is the ones who have an interest in investment tax credits. And how much capacity is that in a year? Is it $3 billion, $2 billion, less, more?

MR. PASQUALINI: Without giving out state secrets, I can tell you that we had more than two times the amount of tax equity available to this project than the project needed. And that was from folks who could commit to invest two years in the future. The plan was to close on November 1. The fact that we had more than twice the tax equity on offer than we needed from investors who would stand that long a commitment period gives you an idea of the level of interest.

MR. MARTIN: Wind projects must be under construction by a deadline to qualify for tax credits. How are you seeing offshore wind projects start construction?

MR. PASQUALINI: You cannot dig turbine foundations or put in roads on the site and, given how long it takes to manufacture offshore wind turbines, you have to get there on physical work by another means.

MR. MARTIN: These are expensive projects. It is hard to incur at least 5% of the cost of a $3+ billion project, so the sponsors are left with physical work.

MR. TORDRUP: The other thing worth noting about offshore wind is the turbines are improving at a very rapid pace. It is not a good idea to lock yourself into turbines too early in the process because, by the time you are ready to build, a completely different turbine may be available: say 12 megawatts instead of 8 1/2 megawatts.

You need to think carefully about how to start physical work because there are some dynamics that are more complicated than for onshore wind.

MR. MARTIN: So be careful. You want to do physical work, but not on things where the technology will change before you finish construction. Marty Pasqualini, coming back to you: will most projects claim PTCs or ITCs, and why?

MR. PASQUALINI: The choice is a function of a couple things. It used to be that the ITC made more sense for projects with high capital costs per installed megawatt, and PTCs made more sense for projects with high efficiency factors. ITCs are tied to cost. PTCs are tied to output.

Offshore wind has high capital costs, so you would think the ITC would make the most sense, but what we are seeing in real time is what Henrik just alluded to: the technology is evolving so quickly that PTC transactions actually can hold up. And there are reasons why it may be more attractive in a financing context to go the PTC route, if possible.

MR. MARTIN: But the investor takes operating risks in a PTC deal. The ITC is entirely up front.

MR. PASQUALINI: True. However, the pool of ready PTC investors is much deeper.

MR. MARTIN: Why? Yale Henderson, why are PTCs easier to digest than an ITC?

MR. HENDERSON: The simple answer is the ITC is recognized entirely in one year. For example, assuming a 12% ITC, that is $360 million on a $3 billion project. That is a lot of tax credits for someone to absorb on the balance sheet unless the investor is a large bank.

MR. MARTIN: That would be almost $1 billion of tax credits — $900 million — for a project on which a 30% investment tax credit can be claimed.

MR. HENDERSON:. . . if projects were actually qualifying for a 30% credit. Unless the law changes, they would have had to be under construction in 2016.

You can do a PTC deal, but it means you are probably going to have to draw a larger number of tax equity investors into the deal, and you will end up raising less money in relation to the dollar amount of tax credits. Investors may be willing to write a larger check in an ITC deal because the amount of PTCs that may ultimately be available is less certain. Sponsors have to balance check size against liquidity in the ITC versus PTC tax equity markets and the potential complications of trying to close a partnership with a larger number of PTC investors than for an ITC deal.

MR. MARTIN: Marty Pasqualini, will all of these projects be financed using partnership flip structures? Why not sale-leasebacks? They buy more time to complete the project.

PTC deals can only be done using partnership flips. That's the only structure the PTC statute permits. But you have a choice of three structures in an ITC deal. In an ITC partnership flip, the investor must be a partner before any turbines go into service. In a sale-leaseback, the investor can wait up to three months after turbines go into service to fund.

MR. PASQUALINI: The problem is we are back into a front-leverage world, because I can't imagine a $3.5 billion single-investor lease transaction, so there will be debt at the lessor level, and you get all the inter-creditor issues we were discussing earlier. The change in lease accounting rules — the inability to use leveraged-lease accounting— has also made sale-leasebacks less appealing. I think the market is now very comfortable with partnership structures. If we need, for other reasons, to evolve to leveraged partnerships, this is a market that has always figured it out.

MR. MARTIN: Another reason sale-leasebacks do not appeal is they are longer-term financing. The term generally runs 80% of the expected life and value of the project. Investors want to be out of the deal sooner.

MR. HENDERSON: Yes, we don't like the long-term profile of a typical leveraged lease. We do not like the amount of residual risk we would have to take.

MR. MARTIN: Marty Pasqualini, offshore wind developers have been struggling to start construction of projects this year in order to qualify for federal tax credits at 40% of the full rate before the tax credits phase out entirely. A 12% investment credit on a $3.5 billion project requires something like $420 million tax equity investment.

There is an effort in Congress to allow a 30% investment tax credit to be claimed on wind projects that are under construction by the end of 2024 or until there are 3,000 megawatts of offshore projects in operation, whichever is later. Now you are talking about a $1 billion investment.

Is there enough capacity to cover the demand for tax equity for offshore wind if each project requires at least $1 billion in tax equity?

MR. PASQUALINI: I believe there is. I think that if we had been looking for the incrementally larger dollar amount for Vineyard, it would have been available. I can't speak for every single project and its particular dynamics, but I think there is depth in the market for these types of projects, especially with the high-quality sponsors behind them.

MR. MARTIN: Yale Henderson, JPMorgan is about 25% of the tax equity market at the moment. How many offshore wind projects have you been shown to date?

MR. HENDERSON: We are all in on offshore wind. We were there ready to go on Vineyard. We are talking to probably every major sponsor that has a leasehold position off the east coast about how it is qualifying for tax credits.

MR. MARTIN: How are you thinking about offshore wind? Why is it so attractive?

MR. HENDERSON: The risks are completely different than the risks we are running in the onshore wind space. With onshore wind, everything comes down to the revenue contract or lack thereof and uncertainty created by that. There is not a lot of uncertainty in the onshore market around construction: whether the project will get built, whether the turbines will work and how much the wind will blow. Those things are well understood in the onshore market.

With offshore, you have tax-credit-qualification issues, and you have turbine-risk issues. The turbine manufacturers are taking a lot of the turbine risk, so we feel pretty comfortable about it. Most importantly, you have a very good revenue contract. This gives offshore projects a different risk profile than onshore wind and solar projects and helps to balance our portfolio, allowing us to bid aggressively in big dollar amounts.

MR. MARTIN: Many offshore projects rely on physical work to get started. How comfortable are you with physical-work fact patterns?

MR. HENDERSON: We are comfortable with Vineyard's story, and we expect to be able to work with other developers. We are talking to them now about what they are trying to put together and making sure we are comfortable with their plans. We need ultimately to be comfortable not only with the construction-start facts, but also with the sponsor. Sponsors take construction-start risk. We need to be confident the sponsor has a strong enough balance sheet to cover the risk.

MR. MARTIN: One problem with starting construction based on physical work is that the developer must prove continuous construction if the project takes more than four years to complete. It is hard to do. How do you protect yourself at the back end of the construction period? I guess you don't invest. How does Nuno Andrade protect himself as the construction lender?

MR. ANDRADE: Whether or not the tax equity funds, the construction loan converts at the end of construction into a term loan that will be repaid over time out of project cash flows.

MR. HENDERSON: The lender is not bridging tax equity during construction.

MR. ANDRADE: . . . in this particular situation.

MR. MARTIN: Another big issue in the offshore wind market is these projects take time. The politics can change before a project is completed. How long a forward commitment are you willing to make as a tax equity investor?

MR. HENDERSON: The political risk is more of an opportunity cost for the tax equity investor. We will have spent time working on a project that ultimately has the rug pulled out from under it. We only fund at the end of construction. If the project does not satisfy all of the conditions precedent to funding, we will have lost a lot of time and effort, but we will be paid breakage costs and commitment fees to cover us for the time and expense of holding the capital for that two-year period.

MR. MARTIN: So you are prepared to commit two years in advance to fund the tax equity?


MR. MARTIN: Henrik Tordrup, is that enough time to get from financial closing to mechanical completion?

MR. TORDRUP: Yes, with a proper plan.

MR. MARTIN: Yale Henderson, I asked Nuno Andrade how terms are expected to differ in the debt market for onshore versus offshore projects. What about tax equity?

MR. HENDERSON: The differences are dramatic. The terms and conditions around pricing, the inter-creditor issues between us and the back-leverage lender, and the sponsor claim on cash flows have a completely different dynamic.

MR. MARTIN: You have said that twice now. Give me some examples. What makes an offshore transaction a completely different dynamic?

MR. HENDERSON: One example is that if we are doing an ITC deal, 80% to 85% of our return comes from the ITC and depreciation. We do not need a large claim on cash. The biggest risk is around ITC qualification. If the ITC is disallowed, we will be looking to take all the cash flow. That is probably the biggest source of tension: our claim on cash for a very small risk, but very deep hole that happens if the project is found not to qualify for an ITC.

MR. MARTIN: There is currently a 100% depreciation bonus, meaning the entire cost of the project can be deducted in year one. The 100% bonus is available for projects that go into service through 2022. It phases out after that. Is it possible to raise tax equity on offshore wind projects that do not qualify for tax credits?

MR. HENDERSON: That goes back to your question to Marty Pasqualini about the appetite for leveraged-lease transactions. There is no appetite for leveraged-lease transactions in our institution at the moment.

MR. MARTIN: Marty do you agree with that?

MR. PASQUALINI: In the bank market, yes. If an insurance company wanted to do an 18-year lease of a wind project with a 20-year offtake contract, I can be optimistic and say we could probably arrange that.

MR. HENDERSON: The leveraged leasing market has not really existed for 10 to 15 years. With interest rates where they are today, it is not worth the time and effort to do such a transaction, even for a $3.5 billion project.

MR. MARTIN: Marty Pasqualini, if Yale Henderson says tax equity accounts for about 30% of the capital stack for an 80% PTC or ITC deal, what if the only tax benefit is a 100% depreciation bonus. What percentage of the capital stack do you think would be tax equity?

MR. PASQUALINI: In a partnership?

MR. MARTIN: I guess you said it would not be a partnership. The transaction would be structured as a leveraged lease.

MR. PASQUALINI: So we are fully in the pretend world now. It would depend on what we can do on the debt side. The debt probably is going to be a significant component of the structure.

MR. MARTIN: Any tax equity questions form the audience? Gary Hecimovich from Deloitte.

MR. HECIMOVICH: Will tax equity investors be willing to invest in projects that take more than four years to construct if the developer can provide rigorous documentation proving continuous work? Has any tax equity investor had to cross that bridge yet?

MR. HENDERSON: We have not crossed that bridge. We know that question is being asked and we are working through that with our tax lawyers and with our management. I am hopeful that with the right facts and maybe some additional guidance from the IRS, we will be able to get there, but it will be a tough bridge to cross.

MR. MARTIN: Question from Tristan Grimbert, CEO of EDF Renewables.

MR. GRIMBERT: I did not hear a clear answer about what is an acceptable strategy for starting construction other than incurring at least 5% of the project cost and putting the risk on the sponsor.

MR. HENDERSON: I did say that we got comfortable with the physical work strategy used by the Vineyard project. We are in discussions with other sponsors about their particular facts and how they want to approach qualification.

MR. GRIMBERT: I heard what you said. You are putting the risk back on the sponsor.


MR. GRIMBERT: If you require a sponsor guarantee, it is not really a risk with which you are comfortable. The first question should be whether it is a sponsor- or project-level risk. If you require a sponsor-level guarantee, you are not really comfortable with the risk.

MR. HENDERSON: Let me put this very clearly. The risk allocation is important to our analysis of the deal. However, we would not fund a deal unless we fundamentally believe that the qualification story works from a tax perspective and will survive IRS scrutiny. We would not do a transaction where we do not believe in the qualification story even if we had the US Treasury back stopping that risk.


MR. MARTIN: Let's move to the sponsor side of the equation, Henrik Tordrup with Copenhagen Infrastructure Partners, CIP owns offshore wind projects in Europe. It has also invested in Vineyard here in the United States. It is a 50% owner of that project. How is the cost of capital for offshore wind in the US compared to Europe? How much is the gap, if there is one?

MR. TORDRUP: It is difficult to say exactly what the gap is. I think there is a gap, but it is not significantly above the interest-rate differential between the two regions of the world. There are negative interest rates currently in Europe. There are positive interest rates in the US. Besides that difference, the capital cost varies from one project to the next. In terms of perceived riskiness of the sector, I think the US has caught up quickly.

MR. MARTIN: There were a number of lessons that people took away from the two US offshore wind projects that have sought financing to date: Block Island reached financing and Cape Wind fell a little short. One of those lessons is that it is important to move through the process as quickly as possible because the politics of the project can change in the midst of trying to finance it. Has this been an issue for Vineyard?

MR. TORDRUP: It is no secret that there is one specific permit that we did not get according to the timeline that had been put forward to us, but we are working through it and hopefully will get the permit soon so that we can move forward on the project. Apart from that one permit, things have moved expediently.

MR. MARTIN: Another lesson I think from Cape Wind is that the technology can change if you have to wait a long time to secure permits and then negotiate financing. It is too hard to go back and redo the permits. You reopen everything to opponents who want to challenge the project. Is it any different in Europe?

MR. TORDRUP: In Europe, there is more flexibility in what you can do. Many projects are put forward by the government, which has a plan for what it wants to see built. Permitting moves more objectively and is easier to plan for.

MR. MARTIN: Another lesson from Cape Wind was that a well-funded opponent — in its case, Bill Koch — can bleed the project to death by challenging it at every turn. Vineyard is 14 or 15 miles offshore. Is that far enough to insulate it from the sort of opposition that Cape Wind faced?

MR. TORDRUP: Our impression is that it has been a completely different exercise. We have worked diligently with the different stakeholders. We have had great support for the project both on Martha's Vineyard and Cape Cod. That is not what might hold the project back. We need to make sure the federal government gets comfortable with how it wants to build offshore wind. When it gets comfortable, the project will be built at some point in time in some shape or form.

MR. MARTIN: Yale Henderson said, while we were sitting at a table in the back waiting for this session to start, that a significant number of wind projects have run into issues this year with the Federal Aviation Administration. Is this an issue potentially for Vineyard?

MR. TORDRUP: That is less of an issue compared to onshore projects.

MR. MARTIN: Another thing that came out during Cape Wind was that US laws and inexperience with offshore wind add to the cost of projects. For example, the Jones Act and the Cargo Preference Act were adding as much as 50% to transportation costs in 2015 when Cape Wind was in the market. In 2015, the marine construction industry, ports, insurance and financial markets were all charging risk premiums for offshore wind. How much of an issue does this remain today?

MR. TORDRUP: It remains an issue. You have to price in the additional cost as a developer when you bid for a PPA. It makes projects more expensive and the electricity for the consumer more expensive.

The real issues with it as well as with the delays in securing permits are the technology is developing quickly and the four-year period the federal government allows to finish construction is too short for offshore wind. You end up in some situations with sub-optimal solutions. It means you will not always get state-of-the-art projects in this country.

MR. MARTIN: Another lesson from Cape Wind was that turbine vendors were unwilling to price turbines on a cost-plus basis. They insisted on value pricing. Is that still the case? And what is value pricing?

MR. TORDRUP: You should let the suppliers answer that question, but the markets are more competitive now than they were before. Just as for any other product, sellers try to do value-based pricing, but their ability to do it depends on the amount of competition.

MR. MARTIN: Value pricing means you do not look in a book for the price? There is no sticker like on the car in a dealer showroom?

MR. TORDRUP: I don't think any business that develops a product today looks at the price it cost to produce and then adds a margin. That might be an internal metric, but everyone wants to sell for the highest price the market will bear.

MR. MARTIN: How much competition are you seeing from vendors to supply 9.5-megawatt and 12-megawatt turbines?

MR. TORDRUP: The offshore wind market has never been more competitive from the turbine side than it is now.

MR. MARTIN: When do you lock in the price of the turbines? I assume you do not want to commit to turbines until you are about to start construction work in the ocean?

MR. TORDRUP: We did not want to choose the turbines upfront because there is value in avoiding an early-rush decision before you know it is the right decision to make. That is a problem with the ITC and PTC phasing down in amount. The carried interest rate cost to incur costs to start construction for tax purposes is high compared to the value of the tax credits, especially in cases where there are delays.

MR. MARTIN: Block Island is five six-megawatts turbines. It has a 48% capacity factor. Vineyard expects to use 9.5-megawatt turbines. What capacity factor do you expect?

MR. TORDRUP: It is not necessarily going to be different.

MR. MARTIN: You do not think it will be above 50%?

MR. TORDRUP: The turbines are much bigger at Vineyard, so it is not a relevant comparison.

Lessons to Date

MR. MARTIN: What other lessons have you drawn from your experience with offshore wind in the United States?

MR. PASQUALINI: I think there are misconceptions about what happened with Cape Wind. The major change has been in the size of the sponsors standing behind these projects. You have sponsors now coming to the table with deep balance sheets and vast amounts of experience building projects in Europe and elsewhere. They aren't looking for equity capital, and they aren't learning how to build an offshore wind project on the go. This is a different game now: from turbine technology, to siting, to sponsors who have the wherewithal to wait out anyone, no matter how entrenched the opposition.

MR. TORDRUP: And the cost of wind electricity is now a third of what it was before. There is not really a premium anymore.

MR. MARTIN: So offshore wind has become a real industry. It makes the financiers comfortable to see big balance sheets behind these projects. Yale Henderson, Nuno Andrade, what other lessons can be drawn from the experience with offshore wind in the US to date?

MR. ANDRADE: The strength of the sponsors is one reason why banks are so interested. Financing renewable energy in the US is hard compared to other places in the world. The incentives create huge distortions and more risk than is ideal. What banks like about offshore wind is you have strong sponsors, better contracts and the ability to create structures from scratch that are less risky.

MR. HENDERSON: This is the same evolution that we saw onshore wind, solar and other technologies go through. Everything is now coming together: the technology, the sponsors and, hopefully in the near future, the federal permitting process.

MR. ANDRADE: Another thing worth mentioning is risk perception. There is still a higher risk perception once the projects start running than is probably justified. That is the biggest lesson that the banks learned in Europe, and we are starting to see the risk perception shift here as well.

MR. TORDRUP: US offshore wind — when it is constructed — will probably have the best credit quality for renewable energy projects anywhere in the world. The contracts are longer here than they are in Europe, and when the projects move into the operating phase, output patterns will not look all that different.

MR. MARTIN: Project finance is an exercise in risk allocation. Nothing gets financed until all the risks are identified and each risk has been assigned to one of the participants. What is the biggest risk in offshore wind?

MR. TORDRUP: The risk is during development and construction. Construction on water can be challenging. When the project is up and running, it is not more risky than onshore wind. To the contrary, output is likely to be more consistent.

MR. MARTIN: Financiers, what's the biggest risk in these deals?

MR. ANDRADE: I agree with Henrik that the key really is construction, logistics, interface risk — getting comfortable with those — and obviously having all the permits ready to go.

MR. HENDERSON: For us, it is all about tax credit qualification and making sure that story can withstand IRS scrutiny.

MR. MARTIN: Last question: we have one operating wind farm in the United States — Block Island — five turbines, 30 megawatts. What do you think will be the next one and when?

MR. PASQUALINI: I am not going to offend Henrik; it will be Vineyard.

MR. TORDRUP: How soon is in the hands of the US Department of Interior, but I think it will be done relatively soon.