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[Belt and Road Financial Cooperation Practice Case] ICBC: The UK Moray East Offshore Wind Farm Project

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Editor's note: In order to systematically study the financial cooperation practice of the BRI, promote experience exchanges and business cooperation in the financial sector, and better introduce the excellent cases of financial cooperation, Asian Financial Cooperation Association (AFCA), on the basis of Belt and Road Financial Cooperation Committee (BRFCC), conducts Asian Financial Cooperation Association Belt and Road Financial Cooperation Practice Report. The appendix of the report selects 40 Belt and Road Financial Cooperation Practice Cases, including credit support, equity financing, bond issuance, insurance services, payment and settlement, risk management, inclusive finance, investment and financing platform, and epidemic prevention and control. The rich cases not only show the business achievements of AFCA members and relevant institutions under the BRI framework in recent years, but also reflect the new changes of the BRI financial cooperation practice.

ICBC: The UK Moray East Offshore Wind Farm Project

Summary: The Project is a typical case where financial institutions from multiple countries work together to develop a large-scale new energy project jointly. It is funded by a syndicate consisting of 16 banks, such as Industrial and Commercial Bank of China (ICBC), BBVA (Spain), Santander Bank, Commerzbank, Crédit Agricole CIB, Societe Generale, Natixis (France), ING Bank (the Netherlands), Mizuho Bank (Japan), and Sumitomo Mitsui Banking Corporation, as well as two international credit insurance agencies. The support of financial institutions from multiple countries in project development embodies the concept of green finance that advocates multilateral cooperation for joint development. The Project has swept a host of international awards including the “EMEA Wind Deal of the Year 2018” by Thomson Reuters’s magazine Project Finance International.

I. Background and Analysis of Financial Needs

i. Project background

At a time when wind energy is massively developed and used as a renewable energy source across the world, wind power generation has developed rapidly in Europe and become the primary source of electricity in some countries of the continent. With respect to offshore wind power generation, Europe has always maintained a leading and dominant position worldwide. In 2017, 11 European countries possessed more than 4,000 offshore wind turbines, with a cumulative installed capacity of 15.8GW. Their combined new installed capacity reached 3.1GW throughout the year, an increase of 25% year-on-year. Of it, 1.68GW went to the UK and 1.25GW to Germany.

In 2009, the British government initiated the public bidding process for its offshore wind farm projects in nine offshore zones. A joint venture controlled by the Portuguese EDP Renewables (hereinafter referred to as “EDPR”) won in January 2010 the licensing bid for the 1.3GW offshore wind power development in the Moray area off the coast of Scotland. Based on the project development conditions, EDPR later established two wholly-owned project subsidiaries, Moray Offshore Windfarm (East) Limited (hereinafter referred to as “Moray East”) and Moray Offshore Windfarm (West) Limited, to develop the eastern and western parts of Moray, respectively.

ii. Financial needs

The Project needs a total investment of GBP2.7 billion, of which GBP670 million is equity investment, GBP80 million comes from the early operating income of the Project, and the remaining funds are sourced in the form of senior syndicated loans according to the project financing model.

As agreed upon by and between shareholders, the equity investment during the construction period of the Project will come in the form of cash or equity bridge loan, and the equity bridge loans will be repaid by shareholders’ cash injection. The total equity bridge loans provided by various shareholders are now expected to not exceed GBP670 million, of which EDPR plans to contribute GBP220 million, with the guarantee provided by a Spanish branch of its parent company Energias de Portugal (hereinafter referred to as “EDP”) (the Spanish branch hereinafter referred to as “EDP Spain branch”).

II. Specific Measures and Highlights of Work

Thanks to the efficient synergy brought about by ICBC’s global presence, the Global Finance Department of the Head Office, London Branch and Madrid Branch moved quickly to get the work divided properly. They did vigorous marketing among potential customers, carried out due diligence in response to financial needs, and analyzed the financial support feasibility scheme for the Project.

i. In-depth analysis of country risk

Britain is now one of the most developed capitalist countries and one of the richest countries in the world. Despite Brexit, the UK economy has performed better than expected, thanks to favorable factors such as the loose monetary policy and non-volatile financial market. However, the increasing uncertainties after Brexit have put the pound under some depreciation pressure. The continued fluctuation in the exchange rate attests to the market’s sensitivity to Brexit, an event that may negatively impact investment prospects in the UK.

A host of favorable conditions make Britain a magnet for foreign investment, which includes the sophisticated infrastructure, flexible labor market, ample technical labor resources, superior business environment, simple and convenient taxation system, and low tax environment—a highly competitive edge among developed countries. The British government is committed to achieving manufacturing-driven economic growth and reducing corporate taxes in exchange for flourishing investment. According to the World Bank’s 2017 Business Environment Index, the UK ranked 7th among all surveyed countries and regions. At that time, all of the big three credit rating agencies gave the UK an investment grade rating (Moody’s, Aa2, stable; Standard & Poor’s, AA, negative; and Fitch, AA, negative).

In October 2015, Chinese President Xi Jinping paid a state visit to the UK, which became the prelude to a “Golden Era” of China-UK relations. The two countries decided to build a global comprehensive strategic partnership for the 21st century. In September, President Xi met with British Prime Minister Theresa May who came to China to attend the G20 Summit. The two sides reaffirmed the general direction of maintaining the “Golden Era” of their relations. China and Britain are each other’s important trading partners. The UK is China’s second largest trading partner in the EU, and China turns out the UK’s second largest trading partner outside the EU, the second largest source of imports, and the fourth largest export destination.

Compared with the traditional land-based wind power, offshore wind power has an array of advantages that include a rich reserve of wind energy resources, long utilization hours of power generation, no land occupation, suitability for large-scale development, close distance to load centers, and convenient consumption. These resource endowments enable offshore wind power to show enormous potential for development. According to data from the European Wind Energy Association (EWEA), technically feasible offshore wind power available on the continent amounts to 2,695GW, with the power generation potential reaching 10,520TWh/year. Europe sees its offshore wind power resources mainly distributed in the North and Baltic Seas and near the Atlantic Ocean.

As at the end of 2017, the offshore wind power projects of Europe in operation posted an installed capacity of 15,780MW, accounting for 88% of the world’s total. The continent, therefore, dominated the global offshore wind power market. In 2017, the new installed offshore wind power capacity in Europe stood at 3,148MW, a year-on-year increase of 25%, most of which was in the UK (1,679MW) and Germany (1,247MW).

According to the statistics by the Crown Estate, the UK by the end of 2017 had 33 active offshore wind farms with an installed capacity of 5,826MW, accounting for 5% of the total electricity generation in the country. Besides, there are eight offshore wind generation projects with 4,580MW being built, and four projects with 3,642MW planned yet unbuilt. Based on the projects being built and planned, the Crown Estate predicts that by 2020, offshore wind power generation will account for 10% of the UK’s electricity supply.

The UK can attribute the booming offshore wind power industry to its renewable energy-pro policy and abundant offshore wind power resources. To increase the ratio of renewable energy, the British government began to implement the Renewable Obligation (RO) in 2002, which essentially introduced mandatory quotas for renewable energy. Power operators need to generate renewable energy power in amounts specified for the year. If it is impossible to do so on their own, they can purchase the Renewables Obligation Certificates (ROCs) from the market. Otherwise, they will be fined. The RO system has greatly promoted the development of renewable energy in the UK.

In 2009, the British government introduced the banding of ROCs as a way to increase support for renewable energy generation that was technologically immature. According to the bandings for renewable energy generators, 1.5 ROCs were issued for each 1MWh of offshore wind electricity, which was further increased to 2 ROCs in 2010. As the increasingly mature offshore wind power technology brought down power generation costs, the UK announced a slight decrease in the number of ROCs awarded to each 1MWh of new offshore wind power for the year 2016/2017, but it was still higher than that of land-based wind and PV power generation. Overall, the development of offshore wind power generation has obviously benefited from the implementation of ROC bandings in the UK.

From the perspective of resource endowment, the UK is in the temperate maritime climate zone, and the humid and rainy weather all year discourages the country from developing solar energy at a large scale. The relatively small land area makes it difficult to vigorously develop land-based wind power like China and the US. The plan to develop nuclear power ambitiously has also been thwarted by the Fukushima Daiichi nuclear disaster in Japan. As an island country, Britain has a long, narrow coastline and the nearby North Sea is bestowed with excellent wind resources. The development of offshore wind power naturally becomes an important option for the UK to achieve its renewable energy goals. In 2000, the first offshore wind power project of Britain Blyth Offshore Wind Farm (4MW, two Vestas-produced 2MW wind turbines) went into operation, which represented the prelude to the offshore wind power boom in the country.

In 2014, the UK rolled out the Contract for Difference (CfD) scheme, under which electricity prices of offshore wind power projects are determined through a bidding mode. A bid-winning developer signs the 15-year CfD with the British government at the winning price. If the market price is lower than the contract price, the operator sells electricity through the electricity market at the market price, and then gets the difference between the bidding price and the market price settled by the government in the form of subsidy. Where the market price is higher than the contract price, the operator must return the surplus part to the government. Thanks to the CfD policy, offshore wind power projects carry more certain income from investment. So far, the UK has announced the first two rounds of CfD bid-winners. Five offshore wind power projects with a combined installed capacity of 4.4GW, including East Anglia ONE and Neart na Gaoithe have determined their developers and bidding prices.

The Project itself has signed a 15-year CfD with the British government, locking the reasonable, stable electricity price in advance. Besides, the contractors of all parts of the Project are some world-class offshore wind companies that have rich experience in undertaking offshore wind power projects in the North Sea. Given the British government’s strong support for and the rapid global development of offshore wind power, the industry risks remain relatively small, and the project risks are basically controllable.

ii. Multilateral cooperation in project development sets a good example for opening up

1. From the perspective of project shareholders, equity is jointly held by multiple parties from different countries, a design that accurately embodies the concept of multilateral cooperation for joint development of third-party markets.

On October 19, 2015, EDPR, through its wholly-owned subsidiary EDPR UK Limited, signed an investment cooperation agreement with China Three Gorges (Europe) S.A. (hereinafter referred to as “Three Gorges Europe”). According to the agreement, the wholly-owned British subsidiary of Three Gorges Europe, China Three Gorges (UK) Limited (Three Gorges UK), would acquire a 10%-20% stake of the Moray East project. To date, the acquisition of a 10% stake has been completed. In addition, Three Gorges UK has the option to purchase another 10% stake of the project company.

On July 7, 2017, Delphis Holdings Limited, a subsidiary of the French Engie Group, reached an agreement with EDPR UK Limited to acquire a 23% stake in the Project for GBP21 million.

On March 23, 2018, Diamond Green Limited, a subsidiary jointly established by Japan’s Mitsubishi Group, Mitsubishi UFJ Lease & Finance Company Limited, and Kansai Electric Power Co., Inc., reached an agreement with EDPR UK Limited to acquire a 20% stake in the Project for GBP36 million. Diamond Green Limited subsequently exercised its option to acquire a 13.4% stake in the Project, with the held shares totaling 33.4%.

To strengthen cooperation in the field of offshore wind power and integrate superior resources, the guarantor EDP and the France-based ENGIE Group on May 31, 2019 signed a memorandum of understanding for strategic cooperation to establish a 50/50 joint venture called “EDPR Offshore España SL”, which would be dedicated to developing the two groups’ offshore wind power projects and integrating their existing project resources. After the merger, the Project will be incorporated into the joint venture, and EDP and ENGIE will each hold 50% of its shares. After the equity transaction is wrapped up, EDPR will see its equity ratio decreasing from 33.3% to 28.3%, and Engie’s equity ratio will go up from 23.3% to 28.3%.

2. From the perspective of project equipment import and engineering construction, the use of cutting-edge equipment and construction experience from many countries benefits the sound development of the new energy industry.

According to the current development plan, the Project will be divided into two parts: power generation and power transmission. The contractor of the offshore wind power generation part is Geosea NV, a subsidiary of DEME Group, a world-renowned marine engineering company. The supplier of wind turbines and supporting facilities is Denmark’s MHI Vestas. The supplier of array cables is the Netherlands-based VBMS. The substation contractor is the Germany-based Siemens Transmission And Distribution Ltd. The offshore cable supplier is Denmark’s NKT. Taken as a whole, the Project adopts the most advanced technology and equipment, and makes full use of local green energy. It, therefore, plays an active role in promoting the development of green energy.

3. From the perspective of financial support, an international syndicate consisting of financial institutions from different countries paves the way for the smooth implementation of the Project.

The Project is a typical case where financial institutions from multiple countries work together to develop a large-scale new energy project jointly. It is funded by a syndicate consisting of 16 banks, including Industrial and Commercial Bank of China (ICBC), BBVA (Spain), Santander Bank, Commerzbank, Crédit Agricole CIB, Societe Generale, Natixis (France), ING Bank (the Netherlands), Mizuho Bank (Japan), and Sumitomo Mitsui Banking Corporation, as well as two international credit insurance agencies. The joint support of financial institutions from different countries for project development gives a full expression to the recognition for the Project in the international capital market as well as the global competitiveness of ICBC as a Chinese-funded bank.

III. Results Achieved and Influences

The Project will bring tremendous social benefits. After put into operation, it is expected to supply electricity to one million families in Scotland, accounting for 40% of local households, and reduce carbon emissions by 3.3 million tons. Informed of the Project’s financing needs, ICBC realized this would be an arduous task against a tight schedule. Relying on the Bank’s global business presence, overseas branches of ICBC actively cooperated with each other according to their division of labor. With project risks assessed properly, they got the project proposal approved in a timely manner. What they had done was highly recognized by customers and peer banks.

The Project was rated as the “EMEA Wind Deal of the Year 2018” by Thomson Reuters’s magazine Project Finance International. At the second Belt and Road Bankers Roundtable, it was awarded the “Best BRI Project IN 2017-2018” by the Belt and Road inter-bank regular cooperation (BRBR) mechanism to commend its vivid embodiment of sustainable development concepts such as green finance and the principle of “joint building through consultation to meet the interests of all”.

IV. Challenges, Lessons Learned, and Policy Suggestions

Under the Project, multiple financial institutions from different countries have cooperated with each other to form a syndicate of banks. Through it, Chinese-funded banks have made strides in developing business in Europe, and accumulated valuable experience of undertaking multilateral cooperation projects in the power markets of developed countries. Given the fact that this type of business involves diversified, complicated risks, the front-office departments of Chinese-funded banks worked with their institutions in the place where the client is located to conduct due diligence before credit business was initiated. Meanwhile, they mobilized functional departments to give full play to their advantages in professional operation and make good use of smooth communication channels available at home and abroad. An efficient cross-departmental collaborative working mechanism, therefore, integrated the strength of Chinese and foreign institutions to arrive at the best solutions. Learning from the experienced international professional agencies, they identified and controlled project risk points. Keenly aware of credit risks, they formed a risk control synergy where internal and external forces were coordinated throughout the process, with the quality and efficiency of credit business further assured.