Rabobank Project Finance on financing wind projects in rapidly changing times

When the first offshore wind farm was built in Dutch waters, no one at that time would have been able to foresee how quickly the price per megawatt hour would drop. Neither did the Rabobank. A conversation with Marc Schmitz and Pieter Plantinga, managing director and executive director respectively at Rabobank’s project finance department, responsible for renewable energy financing.

During the interview at their office in Utrecht it became instantly clear that both men have been working together for quite some time, ever since 2009 when Plantinga joined the project finance team at Rabobank. Schmitz was at that time already working for the team since 1999. Prior to this, he worked for Vattenfall (back then Nuon).

Their project finance team handles all large renewable energy projects in Europe with a debt amount of at least 25 million Euro. These projects include mainly solar, onshore wind and offshore wind. Other renewable energy projects such as biomass, heat and bio fermentation are also dealt with within the team by separate specialist in this area of expertise.

How do you look back on your cooperation?

Schmitz: “Pieter and I built this department in Europe to what it is today. When he joined in 2009, our renewables team consisted of seven people, now we have a team of around twenty people.” In addition, Rabobank has teams in the US and India (covering renewable energy Asia).
Plantinga: “It was necessary to upscale and create the large, solid team as we have today. The wind energy market has matured, with more complicated structures. There is more market price risk involved now.”

Schmitz: “I remember the first wind project I worked on. These were 1,65 megawatt turbines near Muiden. Look at the sizes of the turbines now. We have in the meantime worked on around twenty offshore wind energy projects, almost thirty if you include the refinancing’s. In the Netherlands we were involved in the first offshore wind farm to be financed through project financing globally. In Belgium, we have been involved in every offshore wind farms. Furthermore, we have also been involved in a large number of German projects and the first French project and Taiwan, together with our team in India. Many of the companies involved in Taiwan are European so it made sense.”

Plantinga: “In the onshore sphere we worked or work on several large wind farms, including, NOP Agrowind, Krammer, Vermeer and Drentse Monden.”

Schmitz: “We are also active in Spain, the Nordic’s, recently the UK and Ireland again, and we are currently looking into the Polish market. Amongst these are more challenging markets due to newer structures with corporate PPA’s, including some market price risk.”

The Netherlands is also developing more large onshore wind farms. Is there a large difference in the process between onshore and offshore?

Plantinga: “Although the type of financing is similar, the parties you work with are different. Offshore is very capital intensive and therefore there are more sponsors in a single project. These sponsors tend to develop multiple similar projects, they know what we need from them. This market is more consolidated. Onshore, many of the old projects have been long term developments by farmers in the Netherlands. These have generally never developed a project before and will most likely not do this again. On average, one out of three onshore projects being developed will be realised.”

Westermeerwind Wind Farm. © Westermeerwind

“Onshore, you also have to deal with a legacy. In the early days developers did not really involve the local communities. You can see the effect of it now in some parts of the Netherlands like Drenthe. This is something which needs to be addressed more and more consciously by developers in the early stages of project development. The Krammer project in the province of Zeeland is an example of how it should go, with the right set of shareholders and local participation.“

Onshore there are already problems connecting new projects to the grid. Does this affect your business case?

Plantinga: “Not in the sense that we simply don’t finance a project if the connection is not guaranteed. However, we now see private initiatives coming in who want to realise the grid connections. We are following this development and investigating if we could finance these.”

How is your team positioned in the international playing field of project financing of wind energy?

Schmitz: “Rabobank is a niche player but definitely a front runner in our field. For a long time we were the largest project financer in the US of renewable energy projects. In offshore wind we were involved in one of the first offshore wind farms in 2006, Q7, now called Prinses Amaliawindpark. In 2007 we helped finance the first Belgian offshore wind farm C-Power. Keep in mind that offshore wind only really became popular in 2015, so we were almost ten years ahead of our time! In Scandinavia we were also one of the first to accept market price risk. We are involved in 8 projects there.”

“The project finance department of Rabobank excels in financing projects with a value between 100 and 500-600 million Euro. When it comes to project values of two, three billion Euro there are other players who are better equipped.”

Plantinga agrees: “Another difference between us and the larger players is that they often use external advisors. We are more used in serving the entire market, especially in the Netherlands. Here we work together with the customer to set up the financial structure for their project, therefore each project is unique.”

Have you ever experienced a situation where a project went too much over budget?

Schmitz: “Project finance is quite straight forward, you finance a single asset with clear fund flows. With companies the money flows go in all directions. With projects a technical advisor approves each drawdown based on actual progress of works. It is therefore easier to control.
We have had an experience once where a project went way over budget. It then becomes a play between the banks and shareholders. In practise, the shareholders will have to contribute more to the budget as they can’t risk losing the project to the bank.”

Plantinga: “In addition, each project has a contingency for unexpected costs. However, I once worked on a project that went way over budget. One of the suppliers went bankrupt and could, as a consequence, not deliver the components. This had a ripple effect on the entire construction schedule. It required a tremendous effort from all parties to restructure the project!”

How important is sustainability for Rabobank?

Plantinga: “Sustainability has come higher and higher on the agenda of the bank over the past years. And we are asked to do more in this sector.”

Schmitz: ”We actually already tried to push this many years ago but Project Finance remained under the radar for a while, amongst others due to the high capital requirements and long term debt in renewable projects.”

The subsidy-free offshore wind tenders of lately are welcomed by many. Do you share this feeling?

Schmitz: “In 2011, Rabobank, together with Bloomberg, published a study titled ‘Reaching the ten cents per kilowatt hour’. The target was 2020. We, and a group of 25 industry experts, were cautious whether this was possible. Look at the price now, 6 to 7 cents per KwH! However, I don’t think letting go of subsidies is per definition a good development. Let me put this right, I think the Dutch government is currently doing a very good job in managing the development of wind energy in our country, however, I think it would have been better to keep the subsidy system, albeit restricted to an acceptable level.”

“How many risks are developers willing to take? What if the projects will not be realised? Do you really want to risk companies supporting the industry to go bankrupt and lose thousands of jobs. That’s to nobodies interest. The problem is, nobody really knows what the situation is, say, in twenty years. The low interest rate and steel price have played a positive role in the lower cost of energy. What if the interest rate would go back to the level we have seen in 2011 or 2013,14? If you want to move forward with the energy transition then you probably have to introduce the subsidy scheme again. In the past, the level of subsidy required was very high, over 100 Euro per megawatt hour. I personally think a limited subsidy, between 15 to 20 Euro per megawatt hour would be perfectly fine for a project.”

Plantinga: “Both the UK and France have indicated not to go entirely without subsidies. The strong focus on building offshore wind farms without subsidy remains a surprise to me anyway. One tends to forget that coal and gas plants have also been supported.”

Turbine sizes are increasing at a rapid speed and new technological innovations are introduced. As a bank, does this bring additional risks to the financing of wind projects?

Schmitz: “The increase in turbine sizes is a continuous natural process so it is not really a big risk.”

Plantinga: “Our technical advisers would probably say that further development of existing technologies sometimes pose more risks, due to things being overlooked. With new technologies, every tiny detail is tested and checked by certification bodies over and over again.”

Finally, do you have a favourite wind energy project?

Schmitz: “In general the projects that were most challenging are the ones I look back on with most pride. For me these were the Westermeerwind, Belwind and NOP Agrowind projects. In these projects we had many challenges which we needed to overcome.

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