Ratings agency Standard & Poor's has unveiled its methodology for deciding on the credit rating of offshore wind farms, ahead of an anticipated boom in such projects.
The agency rated its first offshore wind farm – Europe's WindMW or 'Meerwind' project – in November but says it expects to see many more offshore projects over the next decade. S&P gave the 288MW Meerwind project a BBB- rating, while Moody's rated it Baa3.
Offshore wind farms are often financed on a project basis, with no recourse to the project sponsor, and have 'idiosyncratic risks' associated with them that distinguish them from onshore counterparts, S&P said in a research note.
Aside from construction risks, the key risk is that cashflow will fall short of expectations due to operational issues. Because of the greater difficulty in maintaining offshore assets, S&P believes offshore wind projects are more likely to suffer from operating and maintenance cost overruns, weaker availability and declining efficiency compared with onshore wind projects.
As for any power project, 'operational redundancy' is a positive factor. In many cases, this means a diversity of generating assets by technology or geography but, in the case of a single wind farm such as Meerwind, redundancy is provided by a back-up power transformer and other equipment, that limits the likelihood of a catastrophic failure.
Resource availability is an important issue for all wind projects, but "the risk is inherently more acute for offshore projects because of their limited track record," S&P said. Key information in the risk analysis is the proximity of the wind readings to the proposed site, the height at which the wind data was obtained, the duration of the data and information on seasonal variability. Meerwind was praised for having "a comparatively compelling set of data" and S&P estimated that long-term variability in its wind resource would not exceed 20%.
For projects with such large upfront capital costs, power purchase agreements or feed-in tariffs that fix revenues for several years are generally a necessity. But, S&P noted, they may not cover the life of the assets or even the debt tenor. The agency's rating of the project takes into account how significantly cashflow would be affected by a once-in-20-year market stress to power prices after the contracted period. It also acknowledges that many countries have a storing regulatory preference for renewable assets.
Other factors influencing credit ratings of offshore projects include: debt service coverage ratios, resilience to a decline in availability and increased operating costs, and counterparty risk. Meerwind benefited from having the German government and Siemens as key counterparties, S&P said. The former authorised "a lucrative feed-in tariff" while Siemens guarantees 95% availability of its turbines.
