A perfect storm of shapeshifting government support, supply chain woes, and cost inflation is creating choppy seas as the sector industrializes – new-model finance as well as new technology is needed to find a solution, writes Hexicon's Marcus Thor
By Marcus Thor
After record breaking years of installations and weekly announcements of rising targets for renewables across the globe, dark clouds are nonetheless looming on the horizon for the booming offshore wind industry. Uncertain revenue support from government, supply chain woes and cost inflation, project timeline and regulatory exposure, and shifting financial landscapes are amassing to create a perfect storm that could capsize progress on the energy transition.
This is particularly true for floating wind which, while rapidly maturing as a technology, still needs gigawatt-scale deployment to fully industrialize in terms of design, engineering, installation, and operations if it is to reach cost-effective commercialization in the coming decade.
There is no question of the size of the prize represented: close to 80% of global wind energy resources stream over waters greater than 60 metres in depth. But in the context of industrial decarbonization it goes deeper, with the International Renewable Energy Agency estimating floating wind will need to expand from the 250MW currently installed to as much as 2,000GW by 2050 to maintain a 1.5°C Paris Agreement pathway.
Taken in this light, the success of floating wind is essential. Still, it won’t happen by itself and the gap between project pipeline and actual power production looms large. However, a new innovation front is emerging in the energy transition to help bridge the future: finance.
'This innovative approach, where finance flexes to align creatively with technology and policy risks and factors in continued market uncertainty, is a new model that needs to be trialed'Marcus Thor
This May, we entered into a development financing agreement of up to €45m ($50.5m) with Glennmont Partners to fund the growth of Hexicon’s project pipeline and provide long-term financial flexibility for our 17GW gross global pipeline.
The model we have devised we believe successfully strikes a novel balance with a competitive floor rate even amid climbing coupons, while deliberately using the flexibility within a large and geographically diversified portfolio and Hexicon’s demonstrated track-record for maneuverability to offer a healthy cap on upside benefits and prepayment options as co-incentives for optimized development.
A creative hybrid of venture capital principles and project finance strictures, the à la carte result offers a push-back against conventional underwriting strictures to mitigate exposure to localized policy and regulatory dependencies that make-or-break development cycles in collateralized assets. That the value of the deal outstrips Hexicon’s current market price further we suggest emphasizes the sometime wrongheadedness of public market dynamics in appropriately valuing early-stage development and most precious of all long-term assets for offshore wind: seabed.
This is further emphasized this week when we set the seal on an agreement Wallenius Group-owned Wallstreet Aktiebolag and several private investors for a credit facility of up to €7m that will cover Hexicon's working capital needs while enabling us to divest projects at times and on terms that are advantageous to us. And it will secure our liquidity through to next summer so we can maximize the benefits of the Glennmont deal.
With Glennmont’s backing and the added runway of the Wallenius credit facility, Hexicon can continue to mature its crown-jewel floating wind projects in South Korea (2.16GW), Italy (7.GW), UK (32MW), and our home market of Sweden (4.5GW), while pursuing longer-term development and technology prospects in South Africa, Iberia, Ireland, North America, and beyond.
This innovative approach, where finance flexes to align creatively with technology and policy risks and factors in continued market uncertainty, is one new model that needs to be trialed at this stage in the development of what is finally still a new industry – and could be a timely tonic to keep the floating wind sector thinking of new solutions as the offshore energy transition evolves.
· Marcus Thor is CEO of Hexicon, which last year became the first winner of a UK contract for difference for floating wind power, for its 32MW TwinHub pilot in the UK Celtic Sea
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