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Commercial returns from UK offshore wind

September 2011

2© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

Key recent KPMG European credentials and thought leadership

■ In 2010, KPMG demonstrated an excellent track record of closing renewables transactions, including two landmark offshore wind transactions

■ KPMG has also advised some of Europe’s largest utilities on their renewables and broader generation strategies in recent years

■ We have also demonstrated clear sector thought leadership:

Selected renewable energy credentials

Corporate FinanceAdvisor to one of the

successful investors on its acquisition of a share from

RWE

€1.8 billion

2010

Gwynt y Mor project 576MW

Corporate FinanceAdvisor on the partner

search for its offshore wind project, DanTysk (288 MW)

€1 billion

2010

Corporate Finance

Advisor to acquire a 73MW portfolio of German operating onshore wind projects from

DIF

Value not disclosed

2011

EOS Holding

Selected global power sector M&A credentials

The winds of change: An insight into M&A in the renewable energy

sector in 2009

Powering ahead: an outlook for renewable

energy M&A 2010

Offshore wind farms in Europe: 2010 Survey

Horizon Nuclear Power

Acting as advisor in relation to plans for nuclear new build in

the UK

Value not disclosedOngoing

DECC CCS project

Acting as financial advisor in relation to the Carbon Capture

and Storage Demonstration Project

£1 billionOngoing

Lead financial advisor to the Polish State Treasury in the

disposal process of the State’s shares in Energa S.A.

Ongoing

Lead financial advisor to Viridian senior lenders on NIE sale and Viridian financial restructuring

$2 billionOngoing

Financial advisor in respect of proposed transfer of

Transmission Asset ownership from ESB

Value not disclosed Ongoing

Emirates Nuclear Energy Corp

Acting as financial advisor on the development of a civil nuclear power programme

$20.4 billionOngoing

United Kingdom CEE

Ireland MENA

Repsol

Corporate Finance

£50 million2011

Advisor to Repsol on its acquisition of Seaenergy

Renewables Limited

Green Power 2011: the KPMG renewable

energy M&A report

Ampère Equity Fund

Corporate Finance

€500m

2008

Lead advisor for the set up of the fund, to invest

throughout Western Europe


Mechanisms for achieving returns from UK offshore windThere are increasing opportunities to enter the market

Projects currently being developed are much larger than historically

■ In excess of £100 billion implied capital commitments, with utilities’ balance sheets inevitably under pressure

■ Market will become more fragmented

■ Utilities already looking for partners before construction or to sell stakes post-commissioning

■ M&A activity is set to increase

Market shares of UK offshore wind projects in operation or construction

Market shares of all UK offshore wind projects, including pre-construction

Total 4.9 GW Total 47 GW

Forecast UK offshore wind capex by developer (£ billion)

Note: Uncommitted capex only (i.e. excludes projects currently under construction)


Mechanisms for achieving returns from UK offshore wind

Specific opportunities to enter the market

There are opportunities to partner with the utilities on UK projects:

■ DONG – has already partnered with investors on two projects. Will likely consider partners for further projects (e.g. ‘Burbo’)

■ RWE – opportunities for stakes in ‘Gwynt y Mor’ and ‘Rhyl Flats’

■ Centrica – has already introduced partners for its offshore wind projects. Will consider partners for its next big construction project ‘Race Bank’

Alternatively, there are opportunities to acquire projects from independent developers

■ Warwick Energy – has the nearest term UK construction project owned by an independent developer, ‘Dudgeon East’. A developer with a strong offshore wind track record (two operating projects delivered to date)

■ Mainstream – has two development opportunities in the UK, although they are further from start of construction. Also has a strong offshore wind track record; the team has delivered projects in UK and Ireland


Mechanisms for achieving commercial returns from UK offshore windTransaction values have shown large variations

Recent pre-construction transactions have ranged from £0 to just under £200,000/MW

■ Differences in part reflect very different project economics

■ Market turmoil of past three years has also had an important effect

■ There are still a low number of investors in offshore wind beyond the main utilities

Round One transactions Round Two transactions

Walney

£176k/MW

Gwynt y Mor

£0k/MW

Sea Energy

£33k/MW

■ Development values of £33,000 to £67,000 per MW

■ Many of these projects had received their construction permits

■ Projects mainly in construction, therefore may include an element of capex


Mechanisms for achieving commercial returns from UK offshore wind Current offshore wind structures to manage capital and ratings

Balance sheet financing External financing (3 options)

UJV - per London Array Holdco financing - per Walney

Split of project assets / revenues

X Complex and inflexible structure

More simple structure

X Except for PPAs

Simple approach

Little structuring

Utility Investor

Project

49%51%

Internal funding

Utility trading

co

Utility Investor

Project

49%51%

PPA ‘A’

PPA ‘B’External debt

PPA ‘A’

Under options 2 & 3, a part project financing can only be achieved if: Minority protection and

strong governance

Sponsors aligned and agreed approach

Full consolidation Full consolidation Full consolidation

Proportional consolidationNegative from credit ratings

perspective, as project debt included in corporate gearing calculation

Proportional consolidation of project, therefore no ‘leveraging up’

Subject to ‘stand behind the project test – i.e. would step into partner’s position

Per DanTysk

License Holder

Utility Investor

Investor SPV

External debt

49%51%

UJV (Joint operating

agreement

External debt

Utility Investor

Project

49%51%

Project financing - per Lincs

Simplest for external lenders

X Negative for utility rating

All structures can achieve similar results – except a conventional project financing

1 2 3

X Few junior balance sheet investors For all three options, the utility would have to accept project contracts that reflect lender requirements


Expectations for commercial returns from UK offshore windProjects are heavily supported by UK government subsidy

Currently over 60% of the project revenues come from Government subsidy

■ Subsidy has increased in recent years as projects have been further from shore and thus more expensive to build

■ Current Green Certificate mechanism to be replaced by feed in tariff

Construction period

Development period

Operational period

Illustrative split of revenues

Illustrative split of operating costs


Expectations for commercial returns from UK offshore wind

Key investment assumptions

Relatively small number of factors have large impact on commercial returns

Revenue

■ Project-specific, P50 output - typically 3,250-3,500 MWh / MW installed (c.35%-40% load factor)

■ Future power prices in line with current one year forward prices (c.£55/MWh), inflating at RPI + 0.5%

■ 2 ROCs (Green Certificates) per MWh produced, adding c.£85-90/MWh

■ Power Purchase Agreement at 90% market price for wholesale power, ROCs and LECs

Costs

■ Capex of just under £3 million per MW installed (excludes cost of offshore transmission assets)

■ Opex of £125k per MW installed

Timing

■ 20 year operating life, following 4 year development timeframe and 3 year construction period


Expectations for commercial returns from UK offshore wind Project economics are most influenced by revenue and capex

Typical whole life project IRRs range from 10% to 14%

■ Revenue assumptions have the largest impact on economics

■ Capex is far more important than opex

■ Capex has increased in recent years. However there will be pressure to reduce costs; to ensure political acceptability of support

Revenue

Costs

Timing

OFTO

Sensitivity analysis based on an illustrative base-case project

Illustrative IRR of 12.4%

Thank you

Presentation by Adrian Scholtz

Director, KPMG Corporate Finance

E-mail: [email protected]

Telephone: +44 (0) 207 311 4230

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).

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