The Global Offshore Wind Market

1. The Global Offshore Wind Market Policies and Investment Trends Irene Allcroft Director – Advisory Services EWEC 2009, Marseille

2. Policies and subsidies overview The European landscape Implementation and impact Market forecasts Case Studies

3. Europe has been at the forefront of offshore wind development since the 1990s Changing national policies has seen certain markets grow Which policies/support mechanisms have had most influence? European Offshore Wind market

4. Feed-in tariff – based schemes (also known as) FIT, ARTs, REFITs, Fixed Price Offers (FPOs), Standard offer contracts Objective is to provide long-term fixed price payment for renewable generators Quota-based schemes (also known as) TGCs (Tradeable green certificates, ROCs (Renewable Obligation Certificates), RPS (Renewable Portfolio Standard) Objective to create price competition between renewable energy generators to meet defined targets at least cost Typically have a defined maximum cost through a price cap instrument (Country variations) Support mechanisms: terminology

5. Investment tax incentives Provide for income tax deductions or credits on some proportion of the capital investment Reduces taxable income or offsets taxes due Investment tax incentives encourage capital expenditure Production tax incentives Provide for a set rate of income tax deduction or credits for each kWh of electricity produced by an offshore wind farm Production tax incentives encourage more efficient long-term production Tax incentives

6. Capital grants Subsidised loans Grid connection R&D Other investment incentives Picture courtesy of Vestas A/S

7. The European landscape (1)

8. The European landscape (2)

9. Differences in support /tariffs payable to developers supplying offshore wind energy into the grid systems across Europe (Revenue line impacts) Need to better understand available tariffs, support mechanisms and revenue stream structures to make informed investment decisions on future portfolio development across Europe (Balance of risk) FITs most widely spread in Europe, and perceived success has driven adoption in other countries Ongoing debate between quota-based schemes and FIT schemes in Europe. EU market entered competitive stage to attract developers – what impact will future EU concord have? Moves towards one European electricity market – timing and impact on revenue streams The developer’s investment dilemma

10. Appears a heavily subsidised sector Support mechanisms open to change – leads to uncertainty Capital costs of offshore wind need to be reduced to give visibility of sustainable future without subsidies Balance sheet financing been dominant to date Little debt financing taken place to date – although cases being put forward Equipment/services sector of the industry may be more attractive than the offshore wind farms themselves The Financial investor’s view: Offshore wind

11. ‘Many lenders have stopped providing credit for installations anchored to the ocean floor....offshore simply has a different cost structure and this has influence on profitability’ – Thiess Harder-Heun, Director, DeutscheKreditbank AG (Feb’09) ‘Still an extremely strong economic case for continued long-term investment in windfarm projects’ – Eddie O’Conner, Chief Executive, Mainstream Renewable Power’ (Feb’09) ‘...planning to invest in 1500MW of offshore wind capacity, but it is very expensive, both in capital cost and in maintenance’ – Sam Laidlaw, Chief Executive, Centrica (Jan’09) ‘ The economics of this project need revisited....we are working with our partners to study the feasibility of the project’ – Ziad Tassabehji, Head of Innovation & Investments, Masdar (Jan’09) Lack of clarity affecting investment

12. Market Forecasts (Global) 2009-2013 • 334 MW brought online in 2008 • 5.5 GW expected online between 2009-2013 • UK 2.3 GW • Germany 1.4 GW • Denmark 0.9 GW • Belgium 0.5 GW • 0.4 GW others • Outside of Europe, China is poised to construct its first large project • US development activity growing but few strong projects yet • Canada to begin construction of first major project in 2013

13. 10-year view Offshore wind development Case study 1 : Denmark • Impact of policy/support mechanisms • 1996 Danish Govt action plan (Energy 21) setting target of 4000MW of offshore installed capacity by 2030 • 1997 Danish Govt orders utilities to build 5 demonstration offshore wind parks by 2007 (proposed 750MW capacity) • 1999 Electricity Reform Agreement - opens up applications for offshore wind farms next to demonstration sites. Preliminary approvals received for 4 of the 5 wind parks • 1999 sees liberalisation of electricity market • 2001 – Danish Govt reduces 5 to 2 (Horns Rev & R0dsand - total 318MW) • Prior to 2004 Denmark had circa 400MW of capacity online

14. Danish market stalled between 2001-2005, resulting in no projects built offshore between 2004-2008 Following liberalisation of electricity market (2000-2004) the generating companies received a guaranteed price of 8cts/kWh (1999) proposed change from FIT to quota-based system enters political agenda with proposal to be fully operational by 2003 (Nov 2001) Following national election, negotiations on transitional rulings stall introduction until 2005. Complex transitional period follows: Post-2004 no feed-in tariff made available for turbines that were connected to the grid prior to January 2000. Newer wind turbines connected after Jan 2005 receive feed-in tariff , to be phased out within first 20 years of operation 2009 • Current output generated from offshore wind farms sold under Green certificate mechanism that attracts market price + premium, FIT also in operation • General carbon tax which provides the offshore wind generators with 13 cts/kWh produced Denmark : Impact of policy/support mechanisms

15. 10-year view Offshore wind development Case study 2 : Germany • Impact of policy/support mechanisms • 2000 Renewable Energy Sources Act (EEG) allowed utility companies to benefit from special feed-in rates for their own renewable generation facilities • 2004 Amendment – important changes for offshore wind power • Offshore turbines located in certain protected areas are no longer eligible for tariff • FIT rate for offshore set at 9.1cts/kWh for eligible farms • 2008 Amendment – increases rate from 9.1 to 13 cts/kWh

16. 2006 – new development law makes TSO responsible for bearing cost of grid connection of offshore wind farms. This applies currently to developments installed and ready to be put into service before 31 December 2011 2008 Further Amendment to EEG – increases FIT rate from 9.1 to 13.0cts/kWh and introduction of longer term reduced tariff arrangement. (Premium rate and reduced rate) 2009 • As of Jan 2009 FIT increased to 13 cts/kWh (premium rate), with an additional incentive of 2cts/kWh (reduced rate) bonus where construction of turbines starts offshore before end of January 2015 • Current premium rate to be maintained for at least first 12 years of operation of offshore wind farm • Thereafter the reduced rate applies until end of 20th year of operation • Post 2015, both the premium and reduced rates will decline at a rate of 5% per annum • Total of 21 wind farms of varying size have now been approved for construction in both the North and Baltic seas Germany : Impact of policy/support mechanisms

17. 10-year view Offshore wind development - present situation Case study 3: United Kingdom • Impact of policy/support mechanisms • Three bid rounds (2001), (2003), (2008), • Round 1 resulted in 18 offshore wind farms receiving permission to proceed ( 7 are operational, 3 are under construction, 1 more in development ) • Round 2 resulted in 15 offshore wind farm sites receiving permission to proceed (None are operational, 2 are under construction, remainder in development) • Official Round 3 results due shortly. Larger scale projects being developed by consortiums looking to share risk and cost

18. Quota-based ROC system in operation 1 ROC/MWh produced been available historically for offshore wind 2008 – Govt decision made to maintain ROC scheme rather than move to FIT scheme to avoid loss of momentum Renewable obligation (RO) on utilities to source certain percentage from renewable sources in place for 25 years to secure long-term market Round three projects may move forward faster than some Round 2 projects Some Round 2 projects may not get built 2009 • As of 1st April 2009, 1.5 ROCs/MWh produced available for offshore wind • Support for planning phase costs introduced for Round 3 projects. Crown Estate will support up to 50% of the planning costs up to planning approval being granted • Developer still responsible for grid connection costs UK : Impact of policy/support mechanisms

19. Conclusions • Uncertainty on future policy slows down investment from the developers perspective • Short-term incentives not enough to keep up investment • Better clarity on different stakeholders responsibilities • Due to scale of costs, debt financing may become more common, even for larger utilities • Investment incentives not enough to stimulate industry development – developers/financiers driven more by longer-term production incentives • Capital costs of offshore wind need to be reduced over next 5-year cycle to give visibility of sustainable future without subsidies

20. Contact details United Kingdom Aberdeen 47 Albert Street Aberdeen AB25 1XT United Kingdom t: +44 (0) 1224 264970 Email: i.allcroft@dw-1.com London St Andrews House Station Road East Canterbury CT1 2WD United Kingdom t: +44 (0) 1227 780999 Email: adam.westwood@dw-1.com United States of America New York 40 Wall Street 28th Floor New York, NY 10005 USA t: +1 (212) 400 7195 Email:steven.kopits@dw-1.com