Financial Innovation Set to Cut the Cost of Offshore Wind

FTI Consulting Releases First FTI Intelligence Report

LONDON, May 8, 2014 /PRNewswire/ -- FTI Consulting, Inc. (NYSE: FCN), the global business advisory firm dedicated to helping organisations protect and enhance their enterprise value, today announced the release of an FTI Intelligence report, the first of a series of data-driven publications evaluating competitive markets, policy, finance, technology and business models across the energy spectrum.

The report, Innovative Financing of Offshore Wind, focuses on renewable energy and explores the significant potential for cutting the cost of energy from offshore wind power by reducing financial fees and interest charges, which represent an astonishing 28 percent of project life cycle expenditures. The report is authored by members of the FTI-CL Energy practice, a cross-practice team of energy experts from both FTI Consulting and its subsidiary, Compass Lexecon.

A cost-of-equity sensitivity analysis by FTI-CL Energy professionals demonstrates how small changes in financing variables have a major impact on offshore wind energy costs to the consumer. The levelised cost of energy ("LCOE") is extremely sensitive to changes in debt margin. This analysis found that an increase of 100 basis points results in an average 3.4 percent increase in LCOE.

"Offshore wind energy economics are strongly governed by life cycle financial costs, and the potential to reduce these is considerable," explained Aris Karcanias, Managing Director at FTI Consulting and Leader of the Company's FTI-CL Energy practice in Europe, the Middle East and Africa. "Although financial costs normally are not expressed in terms of their share of overall capital expenditures, identification of the size of the opportunity to reduce capital expenditures shows the importance of financial innovation in providing cheaper electricity from offshore wind."

The report also found that the entry of new investors and lenders to the renewable energy sector with innovative ideas for structuring both equity and debt is applying beneficial pressure to financial margins. "Respectable returns without exposure to risk" was a strong message from European wind industry and financial sector chief executive officers interviewed for this report.

"Corporate and institutional investors looking for low risk, long-term and predictable yield investments are signing on pension, insurance and sovereign wealth funds, to name a few," said Athanasia Arapogianni, Consultant and member of the Company's FTI-CL Energy practice. "Innovative financing and an increase in the number of players in offshore wind finance are creating more competition among lenders, which will lead to lower charges, fees and risk premiums on interest rates."

The report further discovers that offshore wind now rates as an infrastructure asset favourably comparable with airports and highways, qualifying it as a safe harbour for investment and unlocking money markets previously closed to the sector.

"New classes of investors and lenders now are competing for involvement in offshore wind farms during construction and even pre-construction — once considered risky compared with investments in an operational facility," said Mr. Karcanias. "The latest innovation under discussion is bond finance. Investors are well-acquainted with bonds as a financing instrument and are using them to transform offshore wind projects into easy-to-comprehend investment opportunities, which, in turn, will assist in attracting capital to the sector."

In addition to the influx of capital for offshore wind investments, utilities and other equity investors are exercising exit divestment strategies and are selling their interests in completed projects to release capital back into more offshore wind construction.

"Replacement of equity with debt is creating a secondary market in refinancing offshore wind projects," continued Mr. Karcanias. "A clear pattern is emerging of how offshore wind construction will be financed in the future. Capital recycling and the lower capital expenditure levels achieved through learning curve experience are benefits expected to contribute to decreasing annual capital requirements for construction."

The report includes an analysis of this trend and reveals that 46 percent of the required investment by 2020 will be met by recycled capital. Global capacity today is about seven Gigga Watts ("GW") and the report projects capacity reaching 52GW in 2020, driven by notable growth in northern Europe, and 112GW by 2025, as markets in Asia and America continue to grow.

To purchase the FTI Intelligence Innovative Financing of Offshore Wind report in its entirety, visit the FTI Intelligence website at www.fti-intelligence.com or contact Aris Karcanias at aris.karcanias@fticonsulting.com.

Russia sues EU over ‘Third Energy Package’

Russia has filed a lawsuit with the World Trade Organization (WTO) over the EU's so-called 'Third Energy Package,' according to media reports.

“This procedure is provided for in the rules of the Organization,” a source said, adding that “Russia sent a note to the EU Mission at the WTO and notified the WTO Secretariat thereof,” Itar-Tass news agency reported.

A second news agency, Interfax, stated that a “source close to WTO” spoke of “the start [of a] court examination.” The agency said it obtained confirmation from the director of the Ministry of Economic Development’s department of trade negotiations, Maksim Medvedkov.

Signed in 2007, the Third Energy Package outlines a set of rules regulating the European gas and electricity market. The European Commission insists the Third Energy Package was aimed at increasing competition on the energy market, allowing other players to join the sector and liberalizing energy prices.

One of the core elements prohibits a single company from both owning and operating a gas pipeline and contains rules on third party access to the natural oil transportation grid.

“These and other elements of the Third Energy Package, in the opinion of Russia, contradict the obligations of the EU in WTO on basic principles of non-discrimination and market access...the Third Energy Package creates serious obstacles to ensure a stable supply of Russian gas to the EU, including a threat to the construction of new transport infrastructure, for example, in the framework of the ‘South Stream,'” Medvedkov told Interfax.

Moscow broke ground on the South Stream project after securing agreements with intergovernmental agreements with all countries which the pipeline would pass through: Austria, Bulgaria, Hungary, Greece, Serbia, Slovenia, and Croatia.

The Third Energy regulation mandates 50 percent of the pipeline can be operated by Russia's Gazprom, but the other 50 percent must be operated by a third party, a condition Russian energy ministers do not accept, as Gazprom is the only company that has the right to export gas via pipeline.

Russian President Vladimir Putin previously stated that the "Third Energy Package" and other documents “should not be backdated to the contracts that were signed before the decision on the Third Energy Package came into force.”

Medvedkov has stressed that Russia has unsuccessfully tried to solve “emerging problems” on a bilateral level.

Now, under WTO rules, Russia and the EU have 60 days to hold joint consultations. If no solution is found during this time, Moscow can demand the right to initiate the creation of a group of independent arbitrators to look into the case.

However, Medvedkov has not ruled out the possibility of Russia and the EU reaching an agreement during consultations.

“We do not aim to have legal proceedings with Brussels for the sake of the judicial process, we want to ensure predictable conditions for export to the EU under WTO rules,” he said.

The Third Energy Package is a set of regulations for an internal gas and electricity market in the European Union. Its purpose is to further expand the gas and electricity markets in the European Union. The package was proposed by the European Commission in September 2007 and adopted by the European Parliament and the Council of the European Union in July 2009. It entered into force on September 3, 2009.

In late 2013, Russia filed a lawsuit against the EU over energy adjustments.

Source: RT.com