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Alternative Energies 9 November 2007 Europe Companies Mentioned Ticker Rating Price TP EKT GR NEU €4.40 €4.70 PNE3 GY BUY €2.75 €4.80 Sector performance TAKE OFFshore -1M 9.2% -3M 16.0% YTD 59.5% 462 The WilderHill New Energy Global 462 s Massive offshore wind development is ready to take off and we see this subsector DJ Euro Stoxx as one of the most promising ways to combat climate change. Most European countries 420 420 are reaching maturity in their onshore wind expansion since the most attractive locations (highest wind speed areas) have been occupied yet. However, wind power is 378 378 still the only large scale alternative able to meet EU targets (20% from renewables by 2020) and therefore it will force operators to keep investing in the sector. By 2015 we 336 336 expect at least 10GW offshore wind capacity to be installed across Europe against less 294 294 than 1GW at present. The EWEA even targets 150GW by 2030 with the North Sea and the Baltic Sea as most attractive areas. D J F M A M J J A S O N s Momentum in the European renewables area is moving offshore. Offshore wind will be highly competitive to gas and coal by 2020 (€55/MWh) upon technical improvements and larger scale of the farms (300MW on average). The benefits of offshore wind are numerous: a lot larger than onshore farms, more advantageous wind resources resulting in improved load factors (3,400 hours against 2,100 hours onshore) and a more generous remuneration. s Regulatory support for offshore wind to gain momentum. Most European countries with strong offshore wind potential are currently setting advantageous tariffs and speeding up the consenting process. In Germany a new law will increase the feed-in tariff for offshore from € 91/MWh to € 110-150/MWh while developers won't need to pay anymore for grid connection. Also in the UK offshore wind is highly subsidized as operators receive 1.5 green certificates per MWh opposed to 1 for onshore wind farms. We value an average offshore project in Germany at € 2.66m/MW once operational implying an added Equity Value of € 0.68m/MW. These economics are almost double the value of onshore wind farms. s We initiate coverage on Plambeck Neue Energien (Buy, € 4.8) and Energiekontor (Neutral, € 4.7). In Europe, Germany will be one of the lead movers with an actual pipeline of 24.5GW. This is a country where Plambeck and Energiekontor have high exposure to and we think especially Plambeck will attract lots of bargain/value hunters with its over 2,500MW pipeline. We have used a € 110/MWh German feed-in tariff in Analyst: Dieter Furniere our models, although a shift to € 150/MWh would inflict a rise of our TP by over 100% +32 2 222 55 45 firstname.lastname@example.com to € 11.0/share for Plambeck and € 12.0/share for Energiekontor. We furthermore discuss and value four offshore wind projects in the Benelux: C-Power, Eldepasco, Belwind and Q7. Please refer to important disclosures and analyst certification on pages 78 - 80 of this report. Renewables 2 I. CONTENT I. CONTENT ...................................................................................................... 1 II. OFFSHORE - THE NEXT ERA ...................................................................... 3 II.1. Differences offshore – onshore ........................................................................3 II.2. About Kyoto and EU targets.............................................................................4 II.3. Renewable energy by 2025..............................................................................5 III. CLEAR SKIES AHEAD FOR OFFSHORE WIND .......................................... 7 III.1. Feeling windy ...................................................................................................7 III.2. Remuneration favors offshore wind..................................................................8 III.3. New technology: sales top service flop? ..........................................................9 III.4. Taking a deeper look into capex, especially the grid ......................................10 III.5. Environmental constraints ..............................................................................11 IV. THE OFFSHORE WIND DEVELOPMENT PROCESS: GERMANY .......... 13 V. SCRUTINIZING EUROPE'S OFFSHORE WIND POTENTIAL ................... 17 V.1. Wind energy output gains scale .....................................................................17 V.2. Using offshore to realize Europe's renewable targets ....................................18 V.3. Germany: still room to grow in wind but moving offshore ...............................20 V.4. Belgium, any way the wind blows...................................................................24 V.5. The UK, in the vanguard of the European offshore league ............................25 V.6. The Netherlands, still blowing in the wind ......................................................27 V.7. France is rolling in wind..................................................................................28 V.8. Portugal, virtually locked to new entrants .......................................................29 V.9. Italy: strong incentives, onshore wind is booming ..........................................29 V.10. Spain, can countryman Don Quixote swim?...................................................30 V.11. Poland, regulation to be revisited ...................................................................31 V.12. Denmark, taking some time off.......................................................................32 VI. THE OFFSHORE WIND PLAYERS ............................................................. 33 VI.1. European wind farm ownership evolution.......................................................33 VI.2. The next step is offshore ................................................................................35 VII. VALUATION AND ECONOMICS ................................................................. 37 VII.1. What does it cost?..........................................................................................37 VII.2. Valuation of a reference offshore wind project per country ............................38 VIII. LOOKING AT THE BELGIAN PROJECTS .................................................. 41 VIII.1. C-Power, the first Belgian offshore wind project.............................................41 Equity Research Renewables 3 VIII.2. Eldepasco.......................................................................................................47 VIII.3. Belwind...........................................................................................................49 IX. Q7, OFFSHORE IN THE NETHERLANDS .................................................. 52 IX.1. Positioning......................................................................................................52 IX.2. Shareholders and management background..................................................52 IX.3. Q7's project portfolio ......................................................................................53 IX.4. P&L and valuation ..........................................................................................53 X. PLAMBECK: A ROCKY ROAD TO OFFSHORE SUCCESS ...................... 55 X.1. Regaining unconsciousness...........................................................................56 X.2. Finding PNE's position in the wind value chain ..............................................57 X.3. Shareholders and management background..................................................58 X.4. Plambeck's project portfolio............................................................................59 X.5. Financials: Focus on guidance .......................................................................62 X.6. All eyes on the offshore division .....................................................................64 X.7. Financial Profile..............................................................................................66 XI. ENERGIEKONTOR, TAKING ON THE OFFSHORE CHALLENGE............ 67 XI.1. A little history lesson not to be proud of..........................................................68 XI.2. Wind development, from the cradle to the grave ............................................68 XI.3. Shareholders and management background..................................................69 XI.4. Energiekontor's project portfolio .....................................................................70 XI.5. Financials, taking on some operation .............................................................72 XI.6. Valuation ........................................................................................................73 XI.7. Financial Profile..............................................................................................75 XII. ROUND-UP: PNE VS. ENERGIEKONTOR .................................................. 76 Renewables 4 II. OFFSHORE - THE NEXT ERA II.1. Differences offshore – onshore Higher capex for offshore wind Throughout this report, we will illustrate the huge potential of offshore wind. Not only will the countered by better wind installed base enjoy exponential growth, also the economics are to favour offshore wind quality and growth potential development, in spite of high initial costs. Looking at the full cost of existing power plants, offshore wind is not competitive yet to gas, coal, nuclear and not even to onshore wind as it still stands in its infancy. However, we are confident that, just like for onshore wind, strong capex reductions are possible going through the learning curve. Taking into account estimates from GWEC on capital cost reduction, offshore wind will be fully competitive to gas and coal by 2020. Graph 1: Historical onshore capex evolution (€/ kW) Graph 2: Projected offshore capex evolution 3,500 2,600 Learning curve 3,000 2,400 Higher cost of 2,200 2,500 materials 2,000 2,000 1,800 1,500 1,600 1,000 1,400 500 1,200 0 1,000 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030 Source(s): UK parliament, Dexia Est. Source(s): UK parliament, Dexia Est. The advantages of offshore Larger in scale: While onshore wind parks have a typical size of 15MW, offshore on average reaches 60MW while this will go up to 300MW in the future. We have even identified German projects of 1,000MW (~ 1 nuclear plant). As a result grid connection costs and O&M costs can be spread more easily. Higher load factor: Given the higher wind speed on sea, offshore wind parks are characterized by improved running hours at 3,400x p.a. against 2,100x p.a. for onshore. More favourable remuneration: In Europe's main wind countries the offshore premium over onshore stands at € 20-40/MWh. For Germany we have pencilled in a feed-in tariff of € 110/MWh while we acknowledge negotiations are still ongoing to raise current tariff of € 91/MWh towards the range € 110-150/MWh. Graph 3: Tariffs offshore versus onshore € 167/MWh € 132/MWh € 130/MWh € 110/MWh € 116/MWh € 89/MWh € 93/MWh € 83/MWh Germany UK Spain France Onshore Of f shore Source(s): Dexia Est.,* Our expectation for Germany is € 110/MWh out of the range € 110-150/MWH Renewables 5 Table 1: European offshore vs. onshore wind Onshore Offshore Comment Wind speed (m/s) 4-8+ 8-12+ Average plant scale 15MW 300MW Technical availability 98% 95% Capex € / kW 1,200 - 1,600 2,200 - 3,000 Operating hours ~ 2,100 ~ 3,400 Capacity factor 29% 40% Opex per kW 30,000 75,000 Lifetime (years) 25 25 (unproven) Installed capacity in Europe MW (end '06) 47,072 904 98% onshore Installed capacity in Europe MW (end '15) 115,919 10,444 92% onshore CAGR 06-'15E 10% 30% Installed capacity in Europe MW (end '30) 150,000 150,000 50% onshore CAGR 06-'30E 5% 24% Debt factor 75/25 65/35 Project credit spread (bps) 150-200 200-250 Source(s): Dexia Est. II.2. About Kyoto and EU targets We cite the vice president of Total's renewable energies division: "wind power is currently the only alternative energy form capable to meet EU targets and to boost the share of renewables in total energy consumption from 14 to 22%. This should be achieved primarily by developing offshore wind farms." And he is not alone. A read across the renewable energy (RE) sector demonstrates that offshore wind is capital in meeting Europe's RE targets and has tremendous potential to secure supply and to reduce greenhouse gases. Kyoto protocol, achieving 2012 targets The EU adopted the Kyoto protocol through the introduction of burden sharing targets of -8% by 2012. Still lots of work needs to be realized since by 2005 only a reduction of 2% was achieved. To achieve these targets severe investments are needed like the extension of nuclear plant lifetimes, the use of CDM/JI, CHP, clean coal, CO2 power plants and especially renewables. This will take place through the NAP 2008'12 scheme. Long term planning through the EU's Renewables Directive The Green Paper "A European Strategy for Sustainable, Competitive and Secure Energy" proposed the preparation of a renewable energy roadmap. The Green Paper also foresaw the preparation of a European Strategic Energy Technology Plan that aims at moving Europe towards a low carbon energy system, e.g. by permitting a sharp increase in the share of lower cost renewables, including the roll-out of offshore wind. In December 2006, the European Parliament voted on the issue of renewables targets. It adopted, in its resolution, a 25% overall renewable energy target and a sector target for renewable electricity of 35% by 2020 (including hydro). Wind could contribute 12% of EU electricity by 2020. One third of this will more than likely come from offshore installations. This is feasible, for example, currently 18% of electricity consumption is covered by wind in Denmark. In Spain and Germany this is 8% and 6% respectively. The Energy Package released in January 2007 is the Commission's follow up on the consultation and has led to the adoption of a binding 20% target for renewables by 2020 (excl hydro). Renewables 6 Graph 4: GHG emissions (base year = 100) Source(s): European Commission Taking a look at national targets Differentiated national overall targets are derived with Member States' full involvement with due regard to a fair and adequate allocation taking account of different national starting points and potentials, including the existing level of renewable energies and energy mix. These steps consist of agreeing on the contribution that the 27 EU Member States have to make in order to reach the target and adapting the legislative framework to allow an adequate monitoring of the new commitments. Most European countries are lagging far behind their initially targets set. Graph 5: EU burden sharing targets 2008-'12 vs. 1990 (%) Graph 6: % change in emissions between 1990-2005 Source(s): European Environment Agency Source(s): European Environment Agency II.3. Renewable energy by 2025 Offshore wind, renewable of the The question on the type of renewable energy that will be the most durable by 2025 was studied by future our renewable energy team. In this study a conclusion was made on the basis of the Boston Consulting Group matrix (BCG), used for analyzing business units or product lines. Based on the terms cash cow, dogs, question marks and stars Tidal wave, PV, Geothermal, Biomass, Onshore wind, offshore wind and Fuel Cells were compared. On the axes we range the renewable energy types based on the growth potential and market share. As a result of this study, wind at sea is a star and shows the largest potential. Renewables 7 Graph 7: Dexia Renewables matrix, renewable energy by 2025 Tidal wave Offshore wind G r H o i g w h Photovoltaics t h Biomass Geothermal P o Onshore wind t e n L t o i w a l Hydro Fuel Cells High Low Market share Source(s): Dexia Est. Renewables 8 III. CLEAR SKIES AHEAD FOR OFFSHORE WIND III.1. Feeling windy Superior quality of wind resources on sea drives the offshore wind business. The North Sea and Baltic Sea in particular are good wind areas with speeds of 8-12m/s at open sea wind vs. 4-8 m/s on land. The widely available sea area furthermore offers opportunities for larger farms, close to the scale of gas, coal and even nuclear plants. Graph 8: European wind resources at 50 metres above ground level Source(s): European Wind Atlas Extremely good wind quality in the In Germany, Belgium, France and the Netherlands wind speed on land is 4.5-6.5m/s against 6- North and Baltic Sea 7m/s at the sea coast and 8-9m/s in open sea. The UK seems to be an exception as with speed ranging up to around 9.5m/s at hub height (50-60 metres above sea level) often higher than offshore wind farm at 5km from the shore that are in the range of 8.3-9m/s. The UK is characterized as an extremely windy region with both tremendous onshore and offshore potential. In general wind speed offshore is approximately 40% higher than onshore boosting load factors with offshore plants running 3,400hours p.a. against 2,100 onshore. Graph 9: Beaufort wind scale Source(s): Macfarlane Generators Production of wind energy usually starts at about 4 m/s (Beaufort Force 3) and increases more or less linearly until 13m/s (Beaufort Force 6/7). Many machines halt operations at about 20m/s. Renewables 9 III.2. Remuneration favors offshore wind Graph: Remuneration scheme In Europe two standard mechanisms have been determined to remunerate green electricity producers. Feed-in tariffs are used in Germany, Denmark and Spain, the countries with the largest amount of onshore wind installed. Green certificates and quotas were introduced in Belgium, the UK and the Netherlands. A feed-in tariff system is the most attractive for green electricity producers as it creates cash flow visibility within a sustainable framework. Feed-in tariff A feed-in tariff is a mechanism designed to promote the uptake of renewable energy through government legislation. The regional or national electricity utilities are obligated to buy green electricity (electricity generated from renewable sources) at the market rates set by the regulator. Feed-in tariffs have been demonstrated to be the most effective way to promote the use of renewable energy. Feed-in tariffs, the best way to Graph 10: Feed-in Tariff standard mechanism support wind energy Source(s): Dexia (1) The regulator or government will set the feed-in tariffs taking into account the extra costs for producing renewable energy. In addition renewable energy will in most cases get priority access to the grid. (2) The renewable energy producers like wind operators can sell their green electricity at a fixed minimum price to the Transmission System Operator who will (3) sell the electricity to electricity suppliers. (4) The electricity supplier will charge the higher costs for renewable energy to its clients. The cost for green electricity will in this way be spread over all the customers. Quotas and green certificates A green certificate is a tradable commodity proving certain electricity is generated using renewable energy sources. It is a market based mechanism aimed at promoting the use of renewable energy sources in electricity production. Green certificates encompass (1) The regulator or government will allocate a certain amount of green certificates to green more risks than feed-in tariffs, electricity producers. Typically one certificate represents generation of 1 MWh (Megawatt hour) of although still strongly electricity and represents the environmental value of renewable energy generated. (2) Additionally supportive electricity suppliers will in general have a sort of buying obligation usually indicated as a percentage of electricity supplied that needs to be green electricity. These are the quotas set by the regulator. Not achieving this quota will result in penalties, the fictive reference price. (3) The green electricity produced will be sold on the power market like other electricity and (4) the green certificates on a separate green certificates market where the transmission system operator (TSO) or electricity provider short of green certificates can buy green certificates at current market prices. (5) The electricity can finally be sold to the customer. Renewables 10 Graph 11: Green certificates standard mechanism Sell green certificates on the GCM Green certificates Market (GCM) 4 TSO - Allocation of green certificates (1/MWh) - Prove to be green Electricity Buy green 1 certificates on the Electricity supplier Power 3 GCM (market based Market sometimes with minimum price) 2 Regulator Government Electricity Supplier Licensed entitiy Sets quota for electricity suppliers 5 Sell electricity to Penalize when amount of customers GC not reached Customer Source(s): Dexia Such national trading schemes are in use in the Netherlands, Belgium, Sweden, the UK and Italy. It is our view market based schemes like quotas offer less protection than feed-in tariffs. The fundamental problem with the quota scheme is that there is no long term certainty. When a quota is set either for a period of time or for a quantity of power, once that goal is reached there is no reason to support the green power producers. A variety of support for offshore wind In Germany extra support is offered to offshore wind farm operators by obliging the TSO's to pay for the grid infrastructure. The grid infrastructure represents about 25-30% of the total investment cost, proving the strong support Germany is giving to offshore wind. In addition, countries like Germany and Belgium offer higher incentives for offshore than onshore wind energy. In Germany feed-in tariffs for onshore wind are € 91/MWh and the expected feed-in tariffs for offshore wind energy are expected to be in the range of € 110-150/MWh. More in-depth information of remuneration and targets per country can be found in chapter 5: scrutinizing the European offshore wind potential. III.3. New technology: sales top service flop? Be aware of the risks, as only Nothing is without danger and this isn't different for offshore wind. On average an onshore wind limited experience has been farm operator has to expect damage to his facility every four years. In case of rotor mount gained, yet breakage it sometimes takes 18 months to get a new one, which means turbines stand still for a long time. Problems still exist in onshore wind while offshore wind projects are already knocking on the door. One of the first projects in Denmark in 2004 had already resulted in a disaster where Vestas had to remove the turbines from an entire wind park because the turbines were not sufficiently resilient to withstand the local sea and weather conditions. Similar problems were encountered off the British coast in 2005. This forced German wind turbine manufacturer Enercon to step away from offshore wind projects. They believe the potential is tempting although they don't want to lose its good standing on the high seas. The insufficient experience with offshore wind farms to evaluate their technical availability is one of the disadvantages offshore wind developers currently have to address. Maintenance access to offshore turbines can be difficult leading to the potential for increased down times. This can be minimized both through provision of helicopter access and sound predictions of offshore weather, which allow better planning of maintenance through innovative design solutions. Preventative maintenance and development of smart wind farms which include component monitoring to predict failures would also be very useful. Renewables 11 III.4. Taking a deeper look into capex, especially the grid Table: Offshore wind Capex (€/kW) The investment cost for offshore wind projects currently is around € 2,400/kW throughout Europe 2,600 compared to € 1,200-1,400/kW for onshore wind farms. The grid connection cost takes a big bite 2,400 2,200 out of the investment budget for offshore wind farm developers compared to 5-10% for onshore 2,000 1,800 wind. In addition the stronger foundations are needed to sustain underwater pressure. In this way the turbine cost only represents 40% of the total investment costs where for onshore wind farms 1,600 1,400 1,200 1,000 this represents over 70% of the investment. Since the total investment cost for onshore wind farms has been decreasing thanks to renovations in technology we also foresee this to happen for 2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030 offshore wind farms although to a lesser extent given the already available know-how and onshore expertise. Therefore we foresee the investment cost, currently estimated at € 2,400/kW to drop to € 1,800/kW by 2025. Economies of scale will play an important factor in this context with offshore wind farms of 300MW and more against onshore wind farms of 15MW. Especially fixed O&M costs will be more easily spread. Graph 12: Onshore wind farm cost split-up Graph 13: Offshore wind farm cost split-up 5% 10% 17% 24% 43% 8% 70% 24% Turbines (tow er; nacele; rotor) Grid Foundations Other Turbines (tow er; nacele; rotor) Grid Foundations Other Source(s): Dexia Est. Source(s): Dexia Est., Wind-Kraft Journal For the moment we can't omit looking at the investment cost what is being one of the biggest culprits for offshore wind farm development. The accompanied shortage in turbines and moreover the cost to produce turbines is strongly correlated with metal prices which have been increasing heftily over the past few years. In the US, FPL Energy (one of the biggest and first projects offshore in the US) for this reason backed out from previous plans to build a US$ 700m offshore wind park for 140MW on New York's Atlantic coast. When LIPA first announced its plans for the project costs were estimated between US$ 150 and US $200m. FPL's winning bid finally was US $356m in 2003. Later on costs increased to US$ 650m and to nearly US $700m summer 2007. Graph 14: Investment cost (€ /kW) vs. distance from coast for offshore wind farms (excl. UK) 4,500 4,000 y = 24.1 07x + 1635.4 3,500 R 2 = 0.7198 3,000 € /KW 2,500 2,000 1,500 1,000 5 15 25 35 45 km Source(s): Offshore wind projects, Dexia Est. *Scale of bubble based on wind farm scale in MW Renewables 12 Obliging Transmission System Operators to stand in for the grid infrastructure, as in Germany and Denmark, is one of the strongest incentives a government can give to lower the investment costs and to support offshore wind development. Unfortunately this is not the case in other European countries although negotiations are ongoing between the Belgian TSO monopolist Elia and Belgian offshore wind developers to take the offshore grid for their account. C-Power was given a € 25m grid subsidy and based on company data the grid represents € 170m of the € 800m investment cost. If Elia would buy back the grid this would give a serious incentive to other offshore wind investments in Belgium and maybe a signal towards other European countries. As an example we have outlined the costs for submarine cabling and the component cost for offshore grid installations. Table 2: Submarine and offshore grid component costs Submarine cable Capacity (MW) € m/km Component €m AC 132/150kV 200-250 1.5 Platform for convertor (transformer) 20 AC 400 kV 700 2.7 Extra cost for HVDC-VSC platform 7 DC 400 kV 600 0.6 260 MVA transformer (150kV) 2 DC (VSC) 400 kV 550 0.3 HVDC convertor (600MW) 65 Source(s): RECaBS, Dexia Table 3: Representative European offshore wind energy project list Project name Costs (€/kW) MW Hours Capacity Factor Distance coast Butendiek (GE) 2,000 240 3,300 37.7% 34km Horns Rev (DE) 1,900 160 3,820 43.6% 14-20km Thornton Bank (BE) 2,667 300 3,460 39.5% 27-30km Borkum West (GE) 2,300 1,000 4,300 49.1% 45km Q7-WP (NL) 3,192 120 3,580 40.9% 23km Borkum Riffgrund (GE) 1,736 576 3,646 41.6% 38km Thanet Offshore (UK) 2,417 300 3,700 42.2% 11km Eldepasco (BE) 2,778 216 3,403 38.8% 37-38km Belwind (BE) 2,424 300 3,636 41.5% 46-48km Average 2,336 315 3,574 40.8% 31km Source(s): Companies, Dexia Only a limited amount of projects are installed, totalling 904MW end '06. The projects listed above are projects under construction as most of the previously built projects are nearshore wind farms and thus not representative for future buildings. From these projects, located in the Northern Sea and Baltic Sea we can conclude the average cost is ~ € 2,400/kW (excluding the countries with grid cost exception) with ~3,700 operating hours p.a. or a capacity factor of 42%. No projects have been currently built outside Northern Europe and no information is available on Mediterranean projects. We estimate, based on the lower wind speed in open sea (8m/s against >9m/s), the operating hours in Spain, Italy and Portugal at 3,100. Studies point at an enormously rich wind resource in the North Atlantic, with at least two thirds of Europe's offshore wind potential in the North Sea. Also a distinction needs to be made between countries separately. Thanks to the exclusion from grid connection costs and the in-house know how, average offshore capex in Germany comes in notably lower than for our € 2,400/kW average throughout Europe. The UK represents the other side of the coin, with an investment cost over € 2,700/kW something we also witness for onshore wind farms in the country. III.5. Environmental constraints Prior to be granted public approval, wind farm developers need to carry out an Environmental Impact Assessment (EIA). In this way the potential effects on the environment are mapped. The EIA provides information on the potential environmental impacts from installation till dismantling. The process is lengthy and can easily take several years. Thanks to pilot projects, necessary environmental experience has been gained and the timeline to set-up an offshore wind farm has shortened. However, due to these environmental constraints a variety of wind farms won't reach approval. One of the reasons we apply a 5-10% probability rate for offshore wind farms that are only in the planning phase and still exploring the environmental capacity and measuring the wind Renewables 13 speed. We have only limited visibility with a merely 904MW offshore wind parks which entered service throughout Europe end '06, and environmental studies in most cases lack profundity. With this as a remark it seems better to remain cautious when new offshore wind projects are announced. In Germany for instance a pipeline of over 24,500MW is under development, with 4.7- 6.5GW consented, while the 2025-'30 target ranges between 20,000-25,000MW. Since every year new projects are initiated, it is understandable that not all projects are to reach completion. Wind farm developers are furthermore strongly dependent on regulations, making them decide whether or not to proceed with their project. Renewables 14 IV. THE OFFSHORE WIND DEVELOPMENT PROCESS: GERMANY Two thirds of Europe's offshore wind energy potential is situated in the North Sea, positioned adjacent to densely populated countries like the UK, the Netherlands, Belgium and Germany. Wind speeds run up to 12m/s, providing capacity factors of ~50%. The average capacity factor of offshore wind turbines in the North Sea is estimated at 42% (3,700 operating hours) against an average European onshore capacity factor of 23%. The German North and Baltic Sea area should be able to supply 15% of the German electricity demand by 2030. Pre-Project Planning and environmental impact assessment Lengthy pre-project planning due First, areas potentially suitable for offshore wind energy use are screened. This is done on the to the novelty of offshore wind basis of the offshore installations ordinance using all collected data with the participation of the concerned ministries. The low-conflict areas are selected first and used for the initial phase and the first expansion phase of offshore wind farms in the Exclusive Economic Zone (EEZ, >12nm from the coast). On average one wind turbine can be built per km². The developers will look at the wind speed expressed in m/s. Before permitting starts, before turbines are ordered and before construction commences, wind park developers use wind maps and maps with suitable areas for offshore wind farms in both the North as the Baltic Sea. Compared to onshore wind, the land or sea bed where the wind farm will be constructed can't be leased. The sea bed falls under the jurisdiction of the law and permission will be needed from the government to build a wind farm. Developers will also look whether grid connection and attaining permissions is possible or not. Graph 15: North Sea, offshore projects Graph 16: Baltic Sea, offshore projects Online Consented Under Consideration Online Consented Under Consideration Source(s): dena Source(s): dena Larger offshore wind farms (> 20 turbines) need an environmental impact assessment (EIA), investigating the marine environment in the project area and predicting the impact of the projected wind farm. Furthermore the BSH examines whether the project constitutes a hazard to navigation. Where a wind measurement and EIA takes around 2 years on average for an onshore wind farm, several European cases give an indication of 3 to 5 years between the start of the project and the actual project planning and authorisation. Detailed Project Planning and authorisation An important part of each approval is the supplementary provision which, in a largely standardised form, is part of each notification of approval issued by the BSH for an offshore wind farm project. For example, wind farm approvals expire after 25 years and after the end of their regular service life an extension of approval can be re-considered. Also, to prevent that areas are reserved for future use, construction of the turbines has to be started within 2.5 years after notification of the approval. Renewables 15 Table 4: Overview consents procedure, assessment application Project Business Efficient Technical quality Financial quality Grid Country Decommissioning Development Plan space use project project connection Belgium yes yes yes yes yes Denmark yes yes Germany yes yes yes yes no no Netherlands yes yes yes yes United Kingdom yes yes yes yes yes yes Source(s): Netherlands Ministry of Economic Affairs Before developing an offshore wind farm, the developer needs the legal rights to use part of the national or international water. The licensing of offshore wind farms is dependent on the location the wind farm is placed, more in specific a distinction needs to be made between wind farms in coastal waters (less than 12 nautical mile zone off the coast) and wind farms in an Exclusive Economic Zone (EEZ). Licenses needed, depend on the In the German territorial waters all federal government provisions and those of the adjoining coastal location of the wind farm states are applicable. The German coastal states govern the licensing and construction of wind farms in coastal waters. German territorial waters only play a minor role in offshore wind development such as with the Wadden Sea national park and the routing of shipping channels. In countries like Denmark, offshore wind energy deployment near shore (territorial waters) is common, while in Germany in specific focus is on the deployment of wind energy in the EEZ. Approval for EEZ projects is given by the Federal Maritime and Hydrographic Agency (BSH) on a "first come first serve" basis weighted for the quality and focussed on the objective. The procedure is based on the Law of the Sea of 10 December 1982 and the German Seeaufgabengesetz (Federal Maritime Responsibilities Act), implemented by the Seeanlagenverordnung (Marine Facilities Ordinance), which is the basis for the approval procedure. Additionally separate approval is needed for the sea cables. Germany only applies a one-stop-shop system to the application procedure for the EEZ. Additional licenses from the different regions (Länder) are required for the cable crossing through the coastal waters. Table 5: Required permissions for the sea cable Approval Responsible Authority Building permission for the pilot phase BSH Permission for laying and operating the cable in the seabed by the Federal Water and Shipping Authority authorizing agency for river and navigation specific policy approval Lease contract to use the 12-nm zone for laying a sea cable Federal Water and Shipping Authority Water and Dike Permission, approval to cross dikes and waters Regional Administrative Board Exemption from the prohibitions of the National Park Regional Administrative Board Permission for laying the sea cable in the EEZ BSH Consent for grid connection Network Operator Source(s): dena The issue of building permits for offshore wind turbines will furthermore depend on a large number of different agencies and institutions. There will be licenses needed for the connection of offshore wind farms to the onshore grid, especially for the placement of the sea cables. This can result in additional licenses when connection is needed within the coastal waters. In the case cables will cross shipping routes and tideways, a permit is required from shipping authorities, as well as for the land lease of the seabed in the 12 nm zone. Furthermore permits are needed to cross dikes and small waters from regional authorities, as well as for the crossing of environmental areas/parks. The licensing usually takes 2 years given the scale, the impact and the often longer procedure due to grid licensing. Renewables 16 Table 6: Cable licensing country cost connection to the grid licenses in EEZ Licences in coastal waters Act on the Exploration and Exploitation of Non-Living Belgium Wind farm operators Resources of the Territorial Sea and the Continental Shelf Denmark TSO (preferred area's), or windfarm operator Germany TSO (Transmission System Operators) Seeanlagenverordnung Länder Netherlands Wind farm operators PWA license & Electricity act PWA license Sweden Wind farm operators Electricity Act Electricity Act United Kingdom Wind farm operators Electricity Act Electricity Act Source(s): Netherlands Ministry of Economic Affairs, Infrastrukturplanungsbeschleunigungsgesetzes Financing/construction phase Construction usually takes Given farm's scale and accompanied high costs, most offshore wind developers look for financing 18months, however, is strongly before commencing construction. Large investment costs lead to more prudence and in this dependent on the scale of the wind context, banks do not want to take any permitting risk and will only on a fully developed, fully farm permitted basis and with clear understanding of the applicable regulatory framework step in the project. Banks will accept the regulatory change risk, but need an existing legal framework that makes the projects economically viable to start with. The permitting phase needs to be financed through equity from the developer (pre-project financing) whereas banks and investors will only step in once fully permitted. Once financing is completed the construction phases on average take 2 years until completion. The construction will in most cases go through several phases to gain first experience, especially on the environmental impact. The commissioning and installation of an offshore wind farm is more complicated than at an onshore wind farm. In a first phase piles (1) are driven into the seabed once a suitable place for the wind farm is found. At this place erosion protection are placed at the base to prevent damage to the sea floor. At the moment the turbine is assembled, sensors on the turbine detect the wind direction and turn the head (nacelle) to face into the wind, so that the blades can collect the maximum amount of energy. The movement of the wind over the aerodynamically shaped blades (2) makes them rotate around a horizontal hub, which is connected to a shaft inside the nacelle (3). This shaft, via a gearbox, powers a generator to convert the energy into electricity. Subsea cables (4) take the power to an offshore transformer (5) which converts the electricity to a high voltage (33kV) before running it back 5 -10 miles to connect to the grid at a substation on land (6). An offshore turbine order usually takes 18 to 24 months against 15-18 months for onshore and depends on the type of supplier and customer. German wind farm developers have an optimal position as most of the largest worldwide turbine manufacturers are German players: REpower, Nordex, Multibrid (Areva, Add, TP € 840), Siemens (Buy, TP € 120) … Nevertheless we foresee turbine delivery difficulties for at least another 2 to 3 years and also the grid connection could result in serious delays. Graph 17: How does an offshore wind farm works Source(s): Bwea Renewables 17 Projects in operation 20 years of operation, waiting for Once the development process is finished, project developers can choose to operate the wind farm projects to gain experience to themselves or sell it. In this context Babcock and Brown is a core client of Plambeck Neue grasp the actual life expectancy Energien for its onshore farms and Dong for the offshore Borkum Riffgrund project. In the operation phase, developers usually deliver the service of maintenance of their developed wind farms. The four above described phases: i) pre-project planning and environmental impact assessment; ii) detailed Project Planning and authorization; iii) financing/construction and iv) operation are in the best way represented in a timeframe. We apply probability rates to the different stages in the development phase. The probability rate we apply to project planning will be different country per country. The given probability rates are for Germany, taking into account the targets set by the German government, offshore wind studies and the pipeline both consented as not consented. Since after consenting initial process and construction constraints still remain high, offshore wind farms will have a lower probability rate than onshore wind projects. Graph 18: Offshore wind project timetable and probability Germany 100% 85% 65% 25% 10% 5% 2.5% 0.0% indentified pending construction In operation permitted Turbines Project not Measurement Permits ordered identified Project Fully Under Time schedule: 3-5 years two years 2 years Source(s): Dexia Est. Renewables 18 V. SCRUTINIZING EUROPE'S OFFSHORE WIND POTENTIAL V.1. Wind energy output gains scale Graph: 2006 installed global The wind industry is enjoying a tailwind thanks to government incentives in order to combat climate change which needs a global solution. In 2006, total installed capacity has been taken to 74GW worldwide, up 15GW year-on-year (+22.2%). In terms of economic value, new generation equipment installed reached US$ 23bn (€ 18bn or € 1.2m/MW). The countries with the highest total capacity are Germany (20.6GW), Spain (11.6GW), the US (11.6GW), India (6.3GW) and Denmark (3.1GW). In terms of new installed capacity, the significantly underdeveloped US market took the lead with 2.5GW followed by Germany (2.2GW), India (1.8GW), Spain (1.6GW), China (1.3GW) and France 0.8GW). This development shows that new players such as France and China are gaining ground. Europe still continues its world leadership status with 48GW installed (65% of global capacity) producing around 100TWh (on average 2,075 running hours) which is still not more than 3.3% of total EU electricity consumption. Remind that Europe has committed itself to reach 20% by 2020. This clearly demonstrates further upside for the European market but here we will see a structural shift from maturing wind markets like Spain, Germany and Denmark towards underdeveloped markets such as Italy, Greece, France and CEE countries. Estimating the precise installed capacity base by 2020 is a very challenging exercise as we have to consider different points: i. resources potential of available sites running at 2,000+ hours p.a. onshore and 3,000+ hours p.a. offshore; ii. the absence of binding targets and regulation for new assets commissioned beyond 2015; iii. the electricity consumption growth differs by area; iv. the Source: GWEC potential breakthrough of new technologies like solar, tidal/wave energy, fuel cells and v. the public acceptance of nuclear energy. Whatever be the outcome of these uncertainties, minimum levels to be achieved by 2030 stand around 365GW worldwide (vs. 150GW in 2010). Industry reports even suggest this 2030 forecast could be underestimated by a factor 3.0x in a blue sky scenario. In the EU minimum levels achieved by 2030 are estimated at 250GW. The EWEA (European Wind Energy Agency) believes in 300GW by 2030 throughout Europe (150GW onshore and 150GW offshore) while being less bullish on the short term with 80GW in 2010. Graph 19: EU Cumulative installed capacity 2000-2030E 300.0 CA GR 8% Offshore 175.0 CA GR 10% 81.9 48.0 Onshore 34.4 40.5 CA GR 14% 23.2 28.6 12.9 17.3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2020 2030 Source(s): GWEC (2000-2006), Dexia Est. 2007-2030E Wind power isn't here to stay; wind Based on the European Commission's Energy Package, wind could contribute 12.7% of EU power is here to grow! electricity by 2020. Further research from Eurelectric and the European commission expects 22.3% of the total power share in 2030 will come from wind energy and in the power efficiency case as prescribed by the European Commission this could run up to 30.3%. Renewables 19 Table 7: Wind power's share of EU electricity demand 2005 2010 2020 2030 Wind power production (TWh) 83 179 510 978 Baseline electricity demand (TWh) 3,013 3,483 4,006 4,367 Efficiency case electricity demand (TWh) 3,013 3,314 3,250 3,218 Share of wind energy (baseline) 2.8% 5.1% 12.7% 22.4% Share of wind energy (efficiency case) 2.8% 5.4% 15.7% 30.4% Source(s): Eurelectric, European Commission V.2. Using offshore to realize Europe's renewable targets Offshore wind power hasn't been In Europe 904MW offshore wind capacity is installed over 25 projects and 436 turbines. Currently able to live up to the expectations, 47.5GW onshore is installed equalling an annual growth of 31% over the last 15 years. Denmark yet represents the bulk of the onshore capacity (46%) followed by the UK (34%) and The Netherlands (14%). Germany only stands at the beginning when it comes to offshore wind, while they are the world wind leader onshore. The use of offshore wind throughout Europe has been delayed due to great distances of the projects from the coasts, water depths up to 40 metres and due to the rising cost for wind turbines. Graph 20: New installed offshore wind capacity Europe end '06 (MW) 300 Others UK 250 Sweden Netherlands 200 Germ any Denm ark 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 Source(s): Douglas-Westwood With less than 300MW offshore wind power to be added per year through 2008, Europe's offshore wind power market growth has failed to live up to the initial hype. However, in 2009 the first impressive growth should be witnessed. In the UK, Germany and Sweden, 170MW to 225MW is expected to be installed in each country per year. Additionally, single projects are expected in Belgium, the Netherlands and France. With an expected annual growth of 1,300 MW between 2010 and 2015, 10.4GW of offshore wind power capacity should be installed by 2015 accounting for 8% of Europe's total wind power installed base. Table 8: European offshore wind development Year Country Description 2007 Belgium, UK, Sweden Single project activations, C-Power in Belgium 2008 Germany Borkum West test field 2009 Germany, UK, Sweden Several projects (>200MW) for each country 2011 Belgium C-Power 207MW, in addition to 30MW 2012 UK Several Round 2 (500MW) projects 2015 Norway, Spain Strong players starting offshore >2015 Italy, Russia, the Baltics and Malta Plans for offshore development after 2015 Source(s): Dexia Est. Renewables 20 Offshore wind projects starting to Onshore wind power will still realize stronger growth than its offshore partner, however, the boom as of next decade additional capacity in onshore wind is expected to decrease after reaching its top beginning next decade. Repowering and offshore wind will take over from then onwards. Graph 21: European Offshore Wind Power, 2007-2015 (MW) 140,000 10,444 8,744 Of f shore 7,144 120,000 Onshore 5,744 4,644 100,000 3,564 80,000 2,514 1,409 1,139 60,000 904 40,000 20,000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source(s): Emerging Energy Research Denmark was the first, Germany Most of the offshore wind capacity added comes from only a few countries (the UK, Germany, and the UK will take the lead very Denmark and Sweden) not by coincidence the countries where onshore wind is reaching saturation soon and is consolidating (Germany, Spain, the Netherlands, Denmark). Most of the additional offshore wind capacity will be built in Germany and the UK with countries like Sweden, Belgium and Norway on their trail. The onshore wind markets are only limitedly scaling and gradually entering the consolidation phase (the UK, Belgium, France and Sweden). Denmark was the first to enter the offshore wind front and will ease off in the next years. In the range of the big wind countries that evolved the most in onshore wind, Germany is lagging behind in offshore. The amount of projects together with strong potential of the Baltic and the North Sea and a stimulating regulation will boost construction in Germany around the start of next decade. Graph 22: Wind Power Market Maturity in European Countries (status 2007) Source(s): Emerging Energy Research As seen some countries are still lagging behind their RES targets and are still in the growth phase with a different approach towards RE. We would like to focus on countries with the most potential on the offshore front, while taking a peak in onshore wind energy. Governmental regulations, accompanied by the different use of incentives (green certificates, feed-in tariffs), the potential of the operating area (North Sea, Baltic Sea … ), the maturity phase of onshore wind, and the players active are other important factors that play a crucial role on growth prospects and a country's attractiveness. Renewables 21 V.3. Germany: still room to grow in wind but moving offshore Huge offshore potential in Germany needs a shift from onshore to offshore wind. The figures can't be clearer: 20.6GW Germany onshore wind is installed end 2006 with a target of 36/42GW by 2030 and while no offshore wind plant is built, Germany is targeting 20/25GW by 2025-'30 (€50bn or € 2,300/kW). This would cover around 15% of Germany's current electricity demand and while the German onshore wind market is saturating, and good locations becoming scarce, the offshore wind market is ready to kick off. As a strong developed wind energy country (28% of the world's total installed capacity and 43% of Europe), the question needs to be asked whether there is still enough room to grow in wind energy in Germany. Good onshore locations (> 2,000 operating hours p.a.) have become scarce while Germany's RE targets (12.5% electricity supply coming from RE by 2010 and 27% by 2020) still need to be reached (2006: 11.8%). In Germany 30.5 TWh electricity is generated through onshore wind which represented 5% of Germany's total electricity consumption. The wind energy share in the total final energy consumption rose 12.1% over the period 2005/'06 and is with 42% of the total RE output, still the main contributor. Electricity output from hydropower remained stable in 2006, with 21.6 TWh while electricity from biomass (without gas from landfills and sewage treatment plants, biogenic wastes) totalled 18.6 TWh in 2006 or an increase of 37% y-o-y. Other sources like photovoltaic, solar thermal power and geothermal power merely represent 3% of the electricity supply from renewables what makes them negligible. Table 9: Share of RE sectors in total final electricity consumption in 2005-006 in Germany Electricity TWh 2005 2006 %change % of RE Comment Hydropower 21.5 21.6 0.5% 29.7% Wind power 27.2 30.5 12.1% 41.9% pure onshore wind Biomass 13.5 18.6 37.8% 25.5% without landfill gas, sewage treatment plants, biogenic waste Photovoltaic 1.3 2.0 53.8% 2.7% Solar thermal power - - - Geothermal power <0.1 <0.1 - 0.1% Total 63.6 72.8 14.5% Source(s): BMU, Centre for Solar Energy and Hydrogen, StBA, AGEB More wind energy is required if Germany wants to reach its 2020-'30 RE targets. Especially since hydropower and solar are only modest contributors and biomass is in the first place used for heating and fuel. Wind energy on the other hand has the huge potential to produce electricity from RE in Germany. Graph 23: Development of electricity generation from renewables in Germany Inflection point offshore wind Source(s): Bundesministerium für Umwelt, Naturschutz und Reaktorsicherheit Renewables 22 Market size and targets in Germany 18 applications consented; waiting Of the current 18 applications consented by the Federal Maritime and Hydrographic Agency (BSH), for the new EEG law 15 are located in the North Sea and 3 in the Baltic Sea area. The majority of these applications concern areas out the 12nm zone and have a water depth of more than 30 metres. However, for most of these projects the license for the cable lines from the respective Federal Land is still outstanding. A gradual establishment of the licensed offshore wind farms can therefore be expected from 2008-'09 at the earliest. In total we have a view on an offshore project pipeline of 24.5GW of which between 4.76GW (3.6MW turbines) to 6.5GW (5MW turbines) has been consented. German EEG, blowing the offshore way RE makes a very substantial contribution to climate protection by avoiding emissions of greenhouse gases. 12% of Germany's electricity generation currently comes from RE and 5% of the total electricity comes from onshore wind energy. Graph 24: How does the EEG work Source(s): Viertl Onshore wind, a huge contribution Through the Renewable Energy Act (EEG) Germany executes Europe's RE directive and already to renewable energy inflicted at doubling in the stake of RE in the total electricity production 2000-'06 from 6.3% to 12%. 33.8bn kWh of electricity could in 2005 on average be generated through wind power. In 2005, this corresponded to around 5.5% of Germany's net electricity consumption. In July 2007 there was a four-year period review where the targets of renewables in the total energy mix were increased from 20% to 27% by 2020 (of which 26% offshore wind, 50TWh or 13.3GW) and 45% by 2030 (offshore wind 25GW). The German government estimates the total technical potential at 18-35GW offshore using 5MW or 10MW turbines in the North Sea area alone. Previously Germany had a renewable target of 50% of total energy consumption by 2050. The sharpening of the targets makes us feel confident regulatory support will continue especially for offshore wind, in our view the RE source with the most potential (26% of RE by 2020, 33% of RE by 2030 against 0% currently). Graph 25: Wind capacity in Germany compared to EEG laws H2'07: new EEG law (focus offshore) Source(s): BMU Renewables 23 Through the EEG Germany intends to promote the usage of RE forms especially innovative and young RE technologies. Key findings from this law, in specific for wind, are: i) a minimum guaranteed price for electricity fed into the public mains, coming from RE sources, ii) grid operators are legally obliged to accept electricity from RE sources and to provide remuneration in accordance with the tariffs stipulated by the EEG (different depending on type of RE, the size of the system, the time of commissioning and for the wind on the location, the later the operation begins, the lower the tariff) and iii) the guaranteed compensation for supplying energy to the grid provides investment security for operators and wind power industry alike, while creating considerable pressure to reduce costs. Higher capex for offshore wind Furthermore through the Infrastrukturplanungsbeschleunigungsgesetzes (Infrastructure countered by better wind quality Planning Acceleration Act) of 17 December 2006, the German Parliament decided transmission and growth potential system operators (TSO's) have the obligation to connect and to pay for the grid costs of all offshore windfarms for which construction commenced prior to 31 December 2011. Especially those wind farms 30-100km away from shore will benefit. Grid connection costs (25-30% of total project cost or € 500/kW including internal cabling) will in this way be borne by the transmission system operators and create a huge advantage for the wind park developers. New lucrative offshore wind framework € 110-150/MWh from € 91/MWh A government subsidy trade-off learns us that if onshore wind operators want to reach a IRR of 8- 10%, the tariffs onshore taking 1,400 operating hours p.a. going forward (good onshore locations are becoming scarce) will need to increase to € 130/MWh. If we then again, taking into account the 1,400 operating hours p.a., estimate the demanded tariff in the case an onshore developers wants to achieve the same EV they currently get (€ 1.25m/MW), this tariff would come in at € 110/MWh. The government can thus choose for a trade-off between onshore and offshore and remunerate the offshore wind developers with a feed in tariff of around € 110-130/MWh. This is in line with the € 110-150/MWh suggested by the German government. A boost in feed-in tariffs from For onshore and offshore wind the regulation and tariffs vary significantly. Onshore wind is already €c8.74/kWh to €c11-15/kWh makes a proven technology while offshore wind still needs to prove itself and therefore needs more investments in offshore wind government support. Nevertheless, the recommendation for the new EEG act was accompanied by extremely interesting a more supportive onshore scheme as well. As an example, the degression of the feed-in tariffs was reduced from 2% to 1% per year. The remuneration phase runs over a period of 20 years. For offshore wind (wind farms are classified as offshore if they are constructed at least three nautical miles off shore) a variety of support measures have been agreed upon: i) the wind farms that become operational from 1 October 2008 on will see a rise in feed-in tariffs from € 91.0/MWh to € 110-150/MWh for the first 12 years reduced by € 35/MWh afterwards (this range will become more exact), ii) the timeframe for the beginning of the degression is prolonged from 1 January 2008 to 1 January 2013; iii) the degression grade will be higher coming in at 5-7% against 2% previously (in 2013 the new offshore wind farms in operation will thus receive € 110-150/MWh reduced by the degression rate) and iv) the 12 year period can be extended according to distance and water depth. Table 10: EEG: onshore and offshore wind implementation (2004/2007) EEG 2004 EEG 2007 Onshore Offshore Onshore Offshore 81.9 + 7.0 for turbines with 110-150: Operational from Feed-in tariffs (€ MWh) 87 91 favorable net adaptation October 1, 2008 onwards properties 5-7% : Operational from Degression 2% 2%: January 1, 2008 1% January 1, 2013 Source(s): EEG 2007 Through the EEG, the German government incentives wind power initiatives. With one of Europe's most transparent incentive schemes, with clear visibility on feed-in tariffs, both onshore and offshore wind developers are stimulated. In 2006 alone over 2,200MW onshore has been installed. As the most important wind market in Europe (43% of current installed capacity) Germany will fully exploit its knowledge. Going forward the German market will remain a key growth engine in the region accounting for 16% of the 84 GW that are expected to be installed in Europe between 2007 and 2015. Most of this growth will come from repowering (expected to take-off after 2010) and Renewables 24 offshore wind. Currently a still large amount of onshore projects is in the pipeline but offshore will take over the land. Graph 26: Market forecast wind power in Germany (installed capacity per year) Source(s): dewi Reasons to support offshore wind instalment in Germany Wind farm operators will be able to benefit from capex savings. Over the period 2007-'15 an extra 11GW in wind capacity is expected to be installed. Taking the 1,400 operating hours p.a. for onshore wind this would provide 12TWh in electricity. 11GW onshore investment at € 1,200/kW gives us a total investment of € 13.2bn. To reach the same output offshore, with 3,700 operating hours p.a. in Germany, extra wind capacity would come in at 3.25GW. With an investment cost of € 1,980/kW (excluding the grid connection cost), the total investment cost for wind farm operators is € 6bn, half of the cost for onshore instalment. Even including the grid connection cost, thus with an investment cost of € 2,400/MW the total investment cost still comes in lower at € 7.8bn against € 13.2bn onshore. Offshore wind instalment will also increase the grid system adequacy/stability compared to onshore and result in cost savings thanks to the prevention of paying for backup reserves. If we look at the output of offshore and onshore wind farms, one thing becomes clear, offshore wind is more stable. Especially during the winter, the season with the most wind, offshore wind is more stable, with diversions of up to 10%, while onshore output can differ over 20%. Especially the spikes are noteworthy. The onshore load factor sometimes comes in below 10%, while offshore we see lows of around 15-20%. These shortages have to be backed or need to be filled up through re-firing the cold reserves in Germany. The cost for these reserves is around € 5-10/MWh, and by limiting the undercapacity costs will consequently be lower for the TSO. Graph 27: Fluctuations in onshore and offshore wind power infeed Source(s): Elia Renewables 25 V.4. Belgium, any way the wind blows 1,350MW offshore wind potential Belgium's onshore wind energy potential is estimated to be 1,500MW for the Walloon region and 1,600MW for the Flemish region by 2030. Of the theoretical potential of 13,000MW offshore wind energy in the Belgian continental shelf, only a concession area of 270km² is approved or 2,000MW. This brings us to a total of 5,100MW total wind capacity by 2030. Industrial specialists see a lack of space to build onshore sites, while local players have been looking to set up offshore wind farms. With 194MW installed onshore end 2006, Belgium is only a small player in a growing market. By 2015 around 980MW is expected to be installed, equally divided over onshore and offshore wind. Most part of the promotion of RE sources in Belgium falls within the competence of the regions (Walloon region, Flanders, Brussels). The Federal State stands in for pricing aspects and for those parts of Belgium which are not covered by the competence of any of the regions, i.e. the maritime territory over which Belgium is able to exercise its jurisdiction under Belgian maritime law. Onshore wind energy will thus fall under the jurisdiction of the regions, while offshore wind energy falls under the competence of the federal state and more in specific the Belgian maritime law. On federal level, the Electricity Order states measures are needed to ensure a minimum volume of electricity generated from RE sources. In order to do this the Electricity Decree creates a mechanism both for issuing green certificates and for minimum prices for green electricity. The issuing of green certificates presupposes the issuing of a certificate of origin by an approved monitoring body, which certifies that "the electricity actually generated is green electricity and the amount generated has been calculated according to the standards and measurements currently in force". The certificate of origin must contain certain compulsory pieces of information. The Belgian TSO Elia (Neutral, TP € 31.3 ) (Transmission System Operator) is obliged to redeem the certificates, which may be federal or regional, from producers of green electricity at a minimum fixed price (which varies depending on the generation process) over a period of ten years dating from the time when the generation installation enters service. Table 11: Belgian offshore wind farms Project Thornton Bank Eldepasco Belwind Developer C-Power Elektrawinds Econcern Size (MW) 300 216 330 Nr. Of turbines 60 36 66 Distance from shore (km) 27-30 37-38 46-48 Load factor (%) 38% 39% 42% Operating hours Company Est. 3,350 3,403 3,636 Operating hours Dexia Est. 3,600 3,650 3,700 Investment costs (€ m) 800 600 800 Inv. Cost €/kW Company Est. 2,667 2,778 2,424 Inv. Cost €/kW Dexia Est. 2,500 2,600 2,700 Source(s): Company data, Dexia Est. Green certificate prices different Each region has, within the limitations of its competency, adopted legislation on green electricity from region to region which contains stipulations covering green certificates. The Walloon Region has adopted the decree of 12 April 2001 on the organization of the regional electricity market and the decree of 30 November 2006 on the promotion of green electricity. The Flemish Region has adopted the decree of 17 July 2000 on the organization of the electricity market. The Brussels Capital Region has adopted the Order of 19 July 2001 on the organization of electricity in the Brussels Capital Region. Table 12: Permitting procedure Belgian offshore wind farms Level Domain concession Federal Building permit and exploitation permit Federal Permit for construction and exploitation permit for offshore cable Federal Permit for onshore cable Flemish Source(s): Dexia Renewables 26 The Walloon system is based on mechanisms for the sale of physical electricity and the exchange of green certificates and on system of minimum price for the sale of green certificates. In the Walloon region green certificates are trading at €92/MWh and are issued to producers for a period of 10 years. The Flemish system is also based on mechanisms for the sale of physical electricity and the exchange of green certificates, and on a system of minimum price for the sale of green certificates. The minimum price at which the TSO is obliged to buy the green certificates is set at €80/MWh for onshore wind production. Green certificates are currently trading at about €108/MWh in Flanders. Every electricity supplier is obliged to have a minimum share of RE generated in Flanders. This minimum share was 2% in 2004 and will rise towards 6% in 2010. The electricity supplier can choose between generating green energy itself or by buying green certificates on the market. Green certificates are granted by the VREG or CREG with the exception of green electricity originated from RE source in the Belgian sea area. In Flanders green certificates are issued for a period of 10 years, except 20 years for solar power. These certificates can finally be sold on a separate basis from the electricity from which they originate. Electricity suppliers with a shortage in green certificates will need to pay a fine. From March 31 2005 this fine is € 125 per missing green certificate. Offshore wind, regulated on federal On Federal level, the Belgian TSO Elia is obliged to pay minimum prices per MWh for level installations younger than 10 years, depending on the applied production technology. The minimum price for green certificates origination from offshore wind energy is €107/MWh. The federal state overlooks the offshore wind instalments and is regulated by the CREG. Graph 28: Belgian wind farm applications in the BCS Graph 29: Area foreseen for offshore wind farm installation Source(s): C-Power Source(s): C-Power The C-Power project, the first of In the Belgian continental shelf (BCS) one area close to the Dutch continental shelf is free for few large projects offshore wind turbine installation. Currently one wind farm, the C-Power project, on the Thornton Bank is under construction while some other applications are running within the BCS for a total of 580MW. Together with the C-Power project this equals 810MW offshore wind. V.5. The UK, in the vanguard of the European offshore league The UK government made a firm commitment that 10% of the electricity supplies should come from renewable sources of energy by 2010 with wind energy as the main contributor. Despite this commitment the target is likely to be missed due to a logjam on the approval process of onshore wind. The British Wind Energy Association (BWEA) expects 8,000MW of capacity by the end of the decade or three quarters of the national target. Currently the UK only produces 2% of its overall energy from renewables and only 1,967 MW wind capacity is on the market yet demonstrating that the UK wind development market needs to quickly scale up with added capacity of 1,500MW expected every year through 2015. But, the market will be hard pressed to realize its potential since Renewables 27 growth is being capped by i. grid capacity constraints which could, on bear case assumptions, cut the 2010 installed base expectations more toward 6GW rather than 8GW; and ii. a high level of "not-in-my-backyard" (NIMBY) opposition from the local population driving developers more offshore. The sluggish approval process for onshore wind has been at the basis of the slower than expected expansion in wind, however, with the framework to support offshore wind energy through two successive rounds of sea bed allocations installed, new ground is broken. The construction of these offshore windfarms will make a valuable contribution to the future targets. Graph 30: Round 1 wind farms Graph 31: Round 2 wind farms Source(s): BWEA Source(s): BWEA Round 1 and Round 2 offshore to dominate growth on the UK wind market Tremendous offshore wind In a best case scenario, UK's wind industry could reasonably supply 20GW (approximately 17% of potential in the UK UK's electricity capacity) by 2020 from offshore wind alone. The UK has been estimated to have over a third of Europe's total offshore wind resource, which is equivalent to three times the electricity needs of the nation at current rates of electricity consumption. The offshore process started in 1999, when a set of guidelines were published inflicting a vast amount of applications. In the end 18 of the applications were granted permission to proceed in what has become known as round 1 of UK offshore wind development for a total of 1,500MW. The first round 1 projects are currently completed with North Hoyle (commissioned in December 2003), Scroby Sands (completed in December 2004), followed by the world's largest offshore wind farm the 90 MW Kentish Flats (2005) and Barrow Offshore (90MW, finished construction in July 2006). Seven of the remaining projects have received consent from the planning authorities (estimated at 730MW), while the remaining four are still awaiting consent (180 turbines). After round 1, where particularly the difficulty in getting planning consent for offshore wind farms will be handled with, round 2 was announced in December 2003 with 15 projects with a combined capacity of 7.2GW. Only three (1.8GW) of the round 2 projects have the necessary permits. While round 1 project benefited from capital grants these will not be available for round 2 projects. The UK is expected to be the main driver of offshore growth in Europe, adding over 3GW in the next eight years, or 34% of the total new capacity installed in Europe through 2015. Renewables 28 Attractive economics thanks to high wind speeds and improved regulation Renewable obligation certificates supportive although not the best Alongside the release of the UK Energy White Paper, the UK system has been revised, with the way to support renewables government introducing ambitious targets for renewables to exploit its status of one of the windiest regions in Europe. It adopted a 15% obligation by 2015 which requires 16.5GW by then. Under the new ROC scheme, which is expected to be effectively starting in 2009, onshore wind will receive 1 ROC/MWh and offshore 1.5 ROC/MWh. These certificates are allocated by Ofgem. Table 13: Renewable obligation UK, as of April 2009 Technologies ROCs/MWh Sewage gas; landfill gas; co-firing of non-energy crop (regular) biomass 0.25 Onshore wind; hydro-electric; co-firing of energy crops; energy from waste with combined heat 1.0 and power; other not specified Offshore wind; dedicated regular biomass 1.5 Wave; tidal-stream; advanced conversation technologies (gasification, pyrolysis and anaerobic digestion); dedicated biomass burning energy crops (with or without CHP); dedicated regular 2 biomass with CHP; solar photovoltaics; geothermal Source(s): RO UK As part of the legislation, UK government will also speed up planned grid upgrades to accommodate increasing wind power penetration, especially when Round 2 offshore wind farms go online. We forecast wind farm operators to receive the ROC incentive in addition to the base-load wholesale price of € 68.4/MWh (we predict it to fall to € 52.5/MWh through-the-cycle). Table 14: DCF input/output (from GB£ to € at price of 1.43x) UK wind farm Onshore offshore difference Electricity price (€ /MWh) 68 68 0.0% Buy-out price (€ /MWh) 51 76 50.0% Recycle price (€ /MWh) 19 29 50.0% Climate Change levy (€ /MWh) 5 5 0.2% Full price (€ /MWh) 144 178 24.3% Operating hours p.a. 2550 3750 47.1% Capex €/kW 1650 2700 63.6% Debt portion 75% 65% -13.3% Long-run WACC % 8.0% 9.8% 22.4% Enterprise Value €/kW 2,342 3,631 55.1% Added Eq. value €/kW 692 931 34.6% Source(s): Dexia Est. The ROCs encompass a buy-out price of € 50.6/MWh and a recycle price of € 19.1/MWh during 20 years. Also including a climate change levy of € 5.4/MWh, offshore wind all-in revenues are at € 167.0MWh (onshore € 132/MWh). We compute a value of € 3,631/kW for new wind power plants based on the aforementioned revenues and a typically higher cost structure: opex of € 22/MWh, capex of € 2,700/kW versus € 1,650/kW onshore and higher interest costs in the country. We have used an average WACC of 9.76% based on leverage of 65% and an unlevered beta of 1.064x (versus 0.7x for countries where feed-in tariffs exist). The added equity value stands thus at € 931/kW for offshore wind assets in the UK. For onshore wind, we calculate a fair EV of € 2,342/kW or an added equity value of € 692/kW V.6. The Netherlands, still blowing in the wind With the scrapping of the fixed rate wind incentive (MEP) by the Ministry of Economic Affairs, new onshore and offshore projects no longer receive support and the only option for owners is to sell electricity produced by their wind plants at market prices. Only two offshore wind farms, Egmond aan Zee (nearshore) and Q7 got an exception and get € 97/MWh for the first 10 years of operation. While the government is considering reintroducing the MEP, there is no indication as to when a new scheme would be in place or what the level of the new MEP would be. As a result, the construction of new offshore wind farms came to a halt and for the time being the Netherlands have an offshore project pipeline of 560MW, of which 120MW should come online between 2008 and Renewables 29 2009. Another project, the 300MW Scheveningen Buiten got consented in the beginning of 2007 and will be build 30km offshore. The Netherlands agreed in the Kyoto Protocol to reduce the emissions of greenhouse gases in the 2008-'12 period with 6% relative to the 1990 levels. In 2020, 10% of the overall energy consumption in the Netherlands should come from RE. The share of renewables in electricity production will be approximately 25 %. Graph 32: Target shares of RES in 2020 6% 23% 16% 13% 16% 26% Solar Wind Others Biom as s Was te H eat pum ps Source(s): Offshorewindenergy.org Locations to construct onshore wind farms are becoming scarcer and the process of obtaining construction licenses has been very difficult over the past few years. With government plans to have installed around 7,500MW wind capacity by 2020 most of the wind capacity will need to come from offshore installations, estimated at 6,000MW by 2020 and 1,500MW to 1,700 MW onshore (especially through repowering). This makes offshore wind energy 'the' component in the Dutch energy policy to reach its RE target. With the installation of Exclusive Economic Zones (EEZ's) offshore installations are possible outside the 12nm zone. In view of the intensive and growing use of the North Sea, only a part of the EEZ will be available for offshore wind farms. V.7. France is rolling in wind The overall French wind market reached 1,480MW end 2006, more than a doubling compared to the 710MW installed end 2005. The market is projected to add an average of 1,100 MW per year in the next 8 to 10 years. Overhaul in regulation to exploit the potential in France The incentive scheme recently underwent an overhaul, which included lifting the project size cap of 12 MW, introducing an offshore feed-in tariff of €130/MWh and €81/MWh for onshore for the first 10 years accompanied with linear interpolating based on operating hours. A new permitting scheme, introducing wind power development zones, was adopted. The market shows great potential and is currently very fragmented with no wind power operator controlling more than 10% of the market and open to new players. Still we only have a view on one large offshore wind project in the pipeline, Enertrag's 105MW farm Côte d'Albâtre, expected to be operational in 2009. Table 15: French offshore wind feed-in tariffs Operating hours 1st 10 years (€/MWh) Next 10 years (€/MWh) 0-2,800 130 130 2,800-3,200 130 Linear interpolation 3,200 130 90 3,200-3,900 130 Linear interpolation 3,900- 8,760 130 30 Source(s): French law France needs to get 21% of its electricity from renewable sources by 2010 and has the second most wind resources in Europe with wind power potential estimated at 50,000MW of which 30,000MW offshore. Since there is still sufficient potential in onshore wind development, we believe the offshore wind market in France will await the developments in other countries like Germany, Belgium and the Netherlands, where the need for offshore is larger given the limited qualitative Renewables 30 onshore wind sites available. We feel it is important to be an early mover in offshore wind in order to attain the permits in time and to get the best locations. Even though we don't foresee a massive short term offshore expansion in France; a project pipeline will be installed in short notice in order to attain a first experience in the field. We believe that EDF EN (Neutral, TP € 50), E.ON (Add, TP € 140) (through its upcoming acquisition of Snet from Endesa) and GDF-Suez (GDF, Add, TP € 42; Suez, Buy, TP € 49) will be looking with high interest to these projects. During the H1'07 conference call Poweo's (Buy, TP € 57) CEO Mr. Beigbeder demonstrated interest in this segment. Table 16: French renewable energy targets (MW) Targets (MW) 2010 2015 % of total (2015) Wind onshore 12,500 13,000 58.4% Wind offshore 1,000 4,000 18.0% Photovoltaic 160 500 2.2% Geothermal 90 200 0.9% Hydropower 500 2,000 9.0% Waste to Energy 200 300 1.3% Biomass 1,000 2,000 9.0% Biogas 100 250 1.1% Total 15,550 22,250 Source(s): Legifrance gouvernement V.8. Portugal, virtually locked to new entrants Portugal is a high-growth market with an attractive incentive scheme and a stable regulatory framework. Current target for wind energy is 3,750MW by 2010, as part of an overall objective to reach 9,680 MW of installed capacity from renewables. At present no offshore projects are in the pipeline and with permitted onshore capacity of on average 725 MW per year in the next five years the Portuguese wind market (currently only onshore) is fully permitted due to grid constraints, and virtually locket to new entrants. The Portuguese tariffs depend on the amount of load hours. A higher capacity factor will result in lower tariffs. Table 17: Portuguese wind feed-in tariffs Operating hours Full load hours capacity factor €/kWh <2,000 h 2,000 22.8% 0.079 2,000-2,200 h 2,200 25.1% 0.085 2,200-2,400 h 2,400 27.4% 0.072 2,400-2,600h 2,600 29.7% 0.060 >2,600 h 2,800 32.0% 0.052 Source(s): Agencia para A Energia V.9. Italy: strong incentives, onshore wind is booming While onshore wind is still With the best greenfield sites already claimed in Italy, the only way for new entrants is to team up booming, the offshore markets with local players or acquire operational projects from developers. With most partnerships set and will await European experience developers looking to retain a larger share in their projects, limited extra onshore possibilities are available although with the current pipeline in place, Italy has still a strong growth potential in onshore wind. In 2006 the Italian wind energy industry grew 30% and prospects are even higher for 2007. Studies show a potential of at least 10,000MW. Wind energy will be fundamental to reach the EU's RE target, what means wind energy will need to reach 8,000MW by 2010 if Italy wants to reach the target of 25% by 2010. Offshore wind farms will be located in the Mediterranean Sea, offering less wind quality compared to the North and Baltic Sea. As a results, no offshore wind farms are consented and no incentives for offshore are given. Nevertheless, Enel has an offshore project pipeline of 50 to 200MW and is the only player. If players interested in the very lucrative Italian want a piece of the pie, they will need to be quick. If the offshore wind market takes off, it won't take long before the best sites will be taken. The very rewarding incentive scheme that is now in place for onshore wind, will more than balance the 'lower' wind quality in the Mediterranean Sea. Renewables 31 V.10.Spain, can countryman Don Quixote swim? With a total 11,615MW installed and an annual growth of 15.8% (1,587MW in 2006) Spain has a strong Renewable Energy Plan 2005-2010 and is the runner up in total capacity installed. Spain envisages 12% of RE energy consumption from renewable sources by 2010 and 20GW from wind. The country has the trump cards in hand to remain the most attractive European wind power market. The recent law revision clearly supports further wind farm development in the country. With offshore wind almost unexploited, Spain has the assets in hand to furthermore increase its footprint on the worldwide wind market. Spain is projected to experience the most growth in Europe adding just less than 20 GW between 2007 and 2015, the equivalent to 24% of the total capacity added in Europe as a whole during this time. At this moment the zones for offshore projects are defined (as early as 2008) and the consent process smoothened. Spain's very lucrative incentive scheme will be needed to offset the minor wind quality compared to Germany and the UK. We have a view on a pipeline of 2,800MW while it is predicted Spain will generate between 2,000 and 3,000MW by 2020. Operators applying for a license to build an offshore wind farm in one of the government designated zones will have to show that their wind park will generate at least 50 MW of electricity. Companies must apply for a block of seabed and must have performed studies on various aspects of the area, including impacts on the environment, fishing activity, historical heritage, and undersea cables and pipes. New regulatory framework from 2008 will give an extra boost to wind energy Through a new regulatory framework, voted May 28, 2007 and starting in 2008, new tariffs were issued and should give the wind energy market an extra boost. Operators of new assets that will enter operation after December 31 2007 may choose between two significantly improved remuneration regimes for onshore wind: i. a 20-year fixed tariff of € 75/MWh (falls back to € 62.73/MWh after 20 years) with no retroactivity, and updated annually by CPI – X with CPI at 2.5% and X at 0.25% during 2008-12 and at 0.5% beyond 2012; or ii. a fixed premium of € 30/MWh to the pool price with the introduction of a floor at € 73/MWh and a cap at € 87/MWh. Operators of st assets that entered service prior to December 31 2007 will have to opt before January 1 2009 whether to stay in the current RD 436/2004 regime (also here were two alternatives: fixed tariff € 68/MWh or market option with a premium of € 38/MWh) or to move to the new assets scheme. We believe the latter option seems evident as the prior mechanism did not provide an actual CPI update neither did it include (caps &) floors. As for offshore wind, the new regulatory framework has given the same options as for onshore wind although with higher tariffs. The Council of Ministers passed the law on offshore wind parks on July the 20th and the law came into force officially when it was published in a State Official Bulletin on August 1st 2007. Again operators can choose between: i. a 20-year fixed tariff of € 73.23/MWh incentive price (falls back to € 61.20/MWh after 20 years) with no retroactivity, and updated annually by CPI – X with CPI at 2.5% and X at 0.25% during 2008-12 and at 0.5% beyond 2012; or ii. a fixed premium of € 30/MWh to the pool price with the introduction of a floor at € 84.3/MWh and a cap at € 164/MWh. We estimate the pool price at €47.5/MWh on a long-run cash cost assumption approach. We might be too cautious but prefer to value Spanish wind capacity starting from the fixed tariff scheme rather than the premium system which included uncertainties about pool prices. The ceiling price is set at € 170/MWh. Spanish utilities ready to get their feet wet Southern utilities with a stronger onshore presence have avoided the offshore market but some players are taking preliminary steps to ensure first mover status once offshore picks up in their markets. Endesa looks the first Spanish utilities company to explore the local offshore opportunities following its recently launched JV with Enerfin and we believe that Iberdrola will follow suit given the recently improved regulatory review in Spain regarding offshore and the expertise of Scottish Power in the UK offshore market. Renewables 32 V.11.Poland, regulation to be revisited In Poland the total wind capacity installed increased by 83% in comparison to 2005, going up to 153MW. Poland uses a quota/green certificates based approach with a RE target of 3.6% of the total energy production in 2006 to 7.5% in 2010. The country targets 2,000MW in wind by 2010. The obligation for TSO's to purchase green certificates (10.4% by 2010) and preferential grid accesses are strong incentives. On the negative side we see a lack of financial support mechanisms and problems with obtaining the technical conditions for connection to the grid together with environmental restrictions linked to NATURE 2000. Graph 33: Polish green certificates remuneration P enalty fo r no n co m pliance Standard c harge fo r no n co m pliance Expected m arket price Green certific ates Electricity 0.0 20.0 40.0 60.0 80.0 100.0 Expected total income 1 MWh: €/MWh € 89/MWh Source(s): Energy law amendment 2005, European Commission, Dexia Est. In order to meet the 2010/2020 RES targets, Poland plans an extension of the green certificates market which is currently in place only until 2012. 37% of the total 6,700MW of wind power by 2015 installed in the Eastern European region is expected to come from Poland. Especially alongside the Northern Baltic coast a vast amount of opportunities are still available. Nevertheless, the slow permitting process (up to 2.5 years for onshore wind) and poor infrastructure (especially the grid as in so many CEE countries) puts a drag on the hefty potential of the country. These culprits don't frighten Western European players from investing in the country, with Iberdrola, Greentech and Dong heavily investing in wind. Poland's price/MWh is divided in two parts, black energy and a certificate of origin. The current black energy rate is € 31.8/MWh, while the green certificate price is € 57.5/MWh. This gives us a total income of ~€ 89/MWh. By 2020 the target is the installation of 13,600 MW wind and achieving the production of electric power from wind farms at the level of 30TWh (average operating hours of 2,100hours). This figure is without offshore wind. Due to the existing barriers resulting from establishing the Nature 2000 area on almost the entire area of territorial waters and by the introduction of a concession for settling artificial island in the Exclusive Economic Zone support is negligible. Over the last years, there was practically no discussion concerning the development of offshore wind farms. The introduction of the "Strategy for development of Polish coastal regions", but still far from its final form, should change the offshore wind policy. In this context, according to the Polish wind association, the construction of wind farms at sea creates significant possibilities for further development of wind energy. The use of sea area for wind energy purposes could increase the installed amount of wind energy by 2030 with over 30%. Recently the Polish government in this context decided to build three hundred wind generating units in the Baltic Sea as part of the drive to diversify energy supplies and to wean itself off its reliance of Russian gas. These wind farms estimated at 900MW in total are to be built by BOT Górnictwo and Energetyka energy company. Reaching their RE targets is a concern for the Polish government as they don't agree with the demanded CO2 emission targets by the European Commission who demands a reduction of the emission by a third. Poland has a RE target of 7.5% by 2010 while RE represented 2.6% of the total energy consumption in 2005. The Polish minister of environment calls it "a threat to the development of our country and Poland does not agree to this". Renewables 33 V.12.Denmark, taking some time off Denmark was the first to commercially develop offshore wind projects, and is the largest offshore wind market with 430MW installed end 2006. Another 400MW spread over two regions (Horns Rev and Rodsand) is expected to become operational between 2007/'12. This would bring the total offshore installed capacity at 830MW. A government document recently reported a further 4.6GW potential at 23 sites. DONG is the main offshore wind project developer and will finish Horns Rev 2 while E.ON is likely to complete Nysted 2 (Rodsand). Three consortia were bidding for the proposed extension of the Nysted offshore wind farm: i) a consortium with Energi E2, DONG and E.ON who were the original consortium for the Nysted windfarm; ii) Dutch consortium Ballast Nedam, Infra and Evelop and iii) the Horns Rev 2 consortium, comprising amongst other Vattenfall as the main shareholder. The Danish Energy Authority, however, chose Energi E2, DONG and E.ON as the building owners because it was their offer that had the lowest settling price. One other 455MW wind farm is in the pipeline although outside the tender process. In addition to the above described projects no other offshore wind projects are in the pipeline. Thanks to the current projects announced electricity from offshore wind is expected to represent ~10% of total Danish electricity consumption. It is likely that between 2010-'15 3 to 4 offshore wind farms of approximately 200MW each will become operational. Graph 34: Projected production from offshore wind farms as % of electricity consumption 10% 9% Nysted 2 (E.ON) 8% 7% 6% Horns Rev 2 (DONG) 5% Fredrikshavn (DONG) 4% Nysted 1 (DONG) 3% Vindeby Tuno Knob Sam so (DEME, ABB) 2% (Elkraft) (DONG) Horns Rev 1 (DONG, Vattenfall) 1% 0% 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Source(s): Windpower.org Superior operating hours, ~4,000 The wind speed in Denmark offshore averages 8-9m/s against 6-7m/s onshore, or 3,500 to 4,500 p.a. depressed by low offshore operating hours p.a. (2,200 onshore and increasing to 2,400 operating hours p.a.) in line remuneration scheme with previous installed offshore wind farms. Initially Denmark had a feed-in tariff based on turbine capacity and operation hours for onshore wind farms. The government stepped down from this approach and farms installed after 1 January 2005 get a fixed premium of € 13.3/MWh on top of the spot market price (~€ 48/MWh) for 20 years. The turbine owner also receives € 0.3/MWh for balancing expenses. Further to this, the Danish regulation provides a scrapping certificate where old turbines are replaced with new ones. The scrapping certificate entitles the owner of the old turbine to obtain a subsidy for the price of electricity produced from the new turbine. The Danish offshore wind tariffs are set through a tender procedure and will fluctuate from project to project. With the second offshore wind farm located at Horns Rev a € 69/MWh feed-in tariff agreement was signed for 50,000 operating hours (12-13 years of electricity production). Once the 50,000 operating hours period is finished, a ~ € 48/MWh through the cycle market place will take its place. The price determined with the consortium around the Nysted 2 wind farm located at Rodsand a € 66.5/MWh at the amount of 50.000 full load hours was agreed. This equals approximately 14 years of electricity production. The new offshore wind farm will provide approximately 200.000 households with electricity on a year basis, which roughly equals 2 % of the Danish electricity consumption. Renewables 34 VI. THE OFFSHORE WIND PLAYERS Together with those countries' targets, a carbon emission trading system is up and running, where utilities each need to cut their CO2 emissions. They can do this by producing green electricity or they can buy CO2 certificates on the ETS market. The most emitting utilities will need to invest heavily in green electricity. We believe that one of the best ways to do this, especially in Germany, is through offshore wind. Offshore wind offers huge potential with wind farms often in the range of coal, gas and nuclear power plants. RWE is one of those players who need to invest heavily in green electricity. They can be seen as a potential client of offshore wind farm developers, or as an acquirer of such companies. In this context, RWE's CEO Juergen Grossman said: "acquisitions in the renewable energy sector are possible and RWE intends to boost its investment in RE sources and plants to set up a new business unit in that area. RWE wants to invest in RE to lower its exposure to the trade of CO2 emission allowances". Graph 35: Emissions profile 2006 (kg/MWh) 1,000 900 800 700 600 500 average for Europe 450kg/MWh 400 300 200 100 - E P E N m E F R E E W n nFe sa D I C Z SE n sa la E rax ritishE ergy E el uz V rbu d S ttishP er atte ll ou rn W D D E .O S V nfa Se n rdro Fortu e n nB no ow E de cottish&S the D n Ibe U io co B S Source(s): Dexia calculations (2006 annual reports) VI.1. European wind farm ownership evolution The European wind energy market is on the road to consolidation, with M&A proving a key growth strategy. The bulk of European wind power is expected to be increasingly concentrated in the hands of utilities, which have amassed the largest pipelines in the region and can finance and digest big acquisitions. The last four years indicate a clear shift in ownership from German private investors, which held over 50% of MW installed in 2002, to utilities and IPPs, which controlled 57% of the market in 2005. Consolidation of wind plant ownership largely reflects the shift in market growth from Germany to other European markets where institutional investors and utilities own the lion's share of MW installed. Graph 36: Europe wind farm ownership evolution 100% 5% 20% 41% German Investors 24% 10% 80% 6% 44% 20% 21% Other European 60% 10% IPP's/Investors 6% 47% 22% 18% Other Spanish 40% 7% EPP's 6% 49% 19% Top IPP's 20% 6% 20% 7% 19% 50% 17% 6% Utilities 0% 2002 2003 2004 2005 2006 Source(s): Dexia Renewables 35 Utilities and top European IPPs have seen their participation in the European wind power market grow through consolidation in the region's key mature and scaling markets. While the first asset ownership group has seen its participation increase from 17% in 2002 to 24% in 2006, the second group (IPPs) has seen its share increase from 6% to 10% in the same time period. Utility growth will be driven largely by pan-regional players including Iberdrola, EDP, DONG, EDF, E.ON, and Enel, as they realize their near-term pipelines, which currently range from 1,000 MW to 4,000 MW. Top IPPs include Europe's seven largest IPPs, all of which own at least 250 MW. These are: Acciona, Babcock & Brown, Enerfin, Gas Natural, Eurus, International Power, and Trinergy. Going forward, top IPP growth will be led by key firms Acciona and Babcock & Brown, which are expected to realize between 600 MW to 1,000 MW in the near future, as well as by expected new rankings entrants like Falck, RES, and Aitricity, which don't have a large installed base at the moment but have a significant number of projects at advanced planning stages. Graph 37: Offshore pipelines by type of player Source(s): Emerging Energy Research Smaller 100 MW to 200 MW asset owners in Europe will be acquired by expanding utilities such as Iberdrola, while large IPPs like Acciona Energia and Babcock & Brown are likely to pursue similar deals as opportunities arise. With little greenfield potential remaining in Western Europe, these firms will also push east and deal with smaller develop-and-sell players when possible to add capacity. Graph 38: Utility Wind Strategy Positioning Global A P P R O Pan A European C H Local MARKET POSITION Avoid, Adopt, Leadership, not yet core become core early mover Source(s): Dexia Renewables 36 VI.2. The next step is offshore Several firms with current portfolios under 300 MW, including RWE, EDF, and ScottishPower, are set to add well over 1,000 MW, mainly from UK offshore. Other large firms banking on major additions via offshore include DONG, E.ON, Centrica, Vattenfall and Amec Graph 39: Total Pipeline 2007-2010 Source(s): Utilities, IPPs, Developers, Emerging Energy Research Pure developers, the first players Near term wind project pipelines of Europe's top 30 utilities, wind developers, and IPPs indicate to move offshore that together, these firms are planning to add 23GW through 2010. The ability to realize this growth potential is expected to vary across players since project realization depends on a variety of factors, from permitting to financing. Continuing with the trends observed in 2005, leading player pipelines have become increasingly international in 2006, with several firms venturing offshore. In the first phase this will be done on their local markets, only once local opportunities are fully exploited, developers will more abroad to install their offshore wind farms or to grasp the remaining onshore opportunities. Below we recapitulate a range of offshore wind players, from developers over utilities to IPP's active in the field: Energiekontor (Neutral, TP € 4.7) and Plambeck (Buy, TP € 4.8) have secured investors for their projects, with EnergieKontor working with NIBC on Borkum Riffgrund and Plambeck on Borkum Riffgrund West with DONG. WPD is the biggest German developer with an amassed pipeline of >3,000MW spread over 6 projects. In the UK, AMEC with a pipeline of 1,250 MW, is the leading offshore developer and expects to activate its first project, the 180 MW Lynn/Inner Dowsing project, as early as 2008. Since the remaining ~1,070MW pipeline has yet to receive all required permits, these projects will likely be realized in the mid- to long-term. On the utility side, Iberdrola (Neutral, TP € 10.2) is set to continue leading the European wind power market through 2010, with a near-term pipeline of over 4,000 MW, including 1,000 MW belonging to ScottishPower in the UK. Among the most aggressive onshore players in the list are utilities EDF EN (Neutral, TP € 50), EDP, and Endesa as well as IPP Acciona and developer Gamesa Energia, all of which have pipelines of > 1,000 MW. E.ON (Add TP € 140) and RWE (Reduce, TP € 80) are almost exclusively internationally- oriented, with both utilities focusing on the UK onshore market as means of complying with renewables obligation. These two players are also moving offshore, with RWE focusing on the UK and E.ON adopting a more pan-regional approach. Renewables 37 Graph 40: Wind Opportunities for Wind Players by Market Maturity Stage Source(s): Emerging Energy Research Looking at the maps of existing offshore developers, we still see a fragmented market which will be consolidated soon. Lots of smaller players own promising pipelines but have a lack of financing & operational capabilities to go on their own. We refer to companies like WPD, Plambeck Neue Energien, Warwick, Energiekontor… Renewables 38 VII. VALUATION AND ECONOMICS VII.1.What does it cost? Offshore wind energy's cost range (based on present experience and estimations) amounts € 84.1/MWh for projects with an investment cost of € 2,400/kW and operating hours p.a. averaging 3,400. These costs will strongly depend on the wind speed and accordingly operating hours. The main culprit so far is the high investment cost, almost double of the onshore capex. Thanks to technical improvements and experience the investment cost will drop in the years to come similar to what happened with onshore wind. Furthermore, larger turbines (5MW and more) will increase the total output and reduce the cost per MWh. Graph 41: The effect of wind speed on the generation costs of wind power Source(s): Sustainable Energy Commission UK Full cost excluding Return on Still, for the moment offshore wind is one of the most expensive large scale energy sources Equity available with € 84.1/MWh against € 66.9/MWh onshore, € 58.6/MWh for new coal fired PF and € 54.1/MWh for base load gas fired CCGT. Governmental incentives will in this way be needed to support offshore wind given the large possibilities accompanied by the cost reduction potential. Graph 42: Full cost per energy source (MWh) ROE 19% 100.0 ROE 15% 80.0 € 84.1/MWh ROE 13% ROE 13% € 66.9/MWh 60.0 ROE 12% € 58.6/MWh € 54.1/MWh 40.0 29.7/MWh 20.0 0.0 of f shore w ind onshore w ind coal-f ired new Gas CCGT new Nuclear EPR fuel cost carbon O&M capex nuclear prov. ROE Source(s): Dexia ROE offshore is 19% against 13% Other than the economies of scale which vary with the size of the turbine, mentioned above, there on average for other energy may be economies of scale in the operation of wind parks rather than individual turbines (semi sources annual maintenance visits, surveillance and administration). Minor experience is gained so far, what can again result in strong cost reductions, since currently big wind farms of over 400MW are under construction). GWEC estimates the cost of producing onshore wind to fall to € 30-38/MWh at good sites to € 40-60/MWh at a site with low average wind speeds by 2020. This is almost half of the onshore costs now and would inflict a drop in the full offshore costs to € 50/MWh, lower than coal and gas-fired plants currently operational. Renewables 39 VII.2.Valuation of a reference offshore wind project per country Our generic WACC calculation is based on the following assumptions: Beta unlevered depends on the type of remuneration that is different per country. We use an unlevered Beta of 1.06x for countries using green certificates and an unlevered Beta of 0.7 for countries with feed-in tariffs given its lower asset risk. These Betas were provided by Green-X to the European commission. We use a D/E ratio of 65/35 against 75/25 for onshore wind. We also split-up the 65% debt by maturity in 60% long term and 40% short term debt. The cost of debt (COD) is calculated with an extra 175-225bps against 125-175bps for onshore wind to translate the higher risk. However banks are getting hungry for market share and are likely to go down to 140-150bps. We use a market risk of 4.5%. Our risk free rate runs from 4.5% in 2008 to 4.5-4.8% over 2009/'10 to 5.4% long term for Western European countries. Table 18: European offshore wind valuation per country Country EV (€m/MW) Capex (€m/MW) Added equity Value (€/MW) Comments Belgium 3.23 2.55 0.68 Green certificates, strong government support Germany 2.66 1.98 0.68 No grid connection cost, upwards feed-in tariffs revision France 2.86 2.40 0.46 Split North Sea and Mediterranean Sea UK 3.63 2.70 0.93 High operating hours Spain 2.16 2.40 -0.24 Lower wind quality, waiting for real support scheme Denmark 1.92 1.92 0.00 Higher tariff first 50,000 operat. hours, tender based Poland 2.34 2.20 0.14 No offshore wind regime installed, support limited Average 2.68 2.31 0.38 Source(s): Dexia Key assumptions for the generic business model per country: Assets life: We have assumed an average life of 20 years, assuming no residual value after the first 20 years. This is a conservative approach (even after dismantling costs), in line with industry standards. Development costs: The total development cost (incl. administration, permits, machinery, civil works and development) is on average € 2,300/kW throughout Europe. Due to current turbine supply chain problems, that will at least last 2 more years, this cost isn't expected to decrease in the years to come. The grid connection cost is around ~25-30% of this total development cost against around ~10% for onshore wind. Load factor: The load factor (operating hours divided by the total number of hours in a year) typically figures around 40% or 3,400h in Europe. Tariff rate per MWh: The tariff rates depend per country and will be or green certificates or feed-in tariffs. In Germany our revised tariff rate for offshore wind is at the lower range of the proposed € 110-150/MWh. Maintenance capex (O&M): The O&M costs for an offshore wind farm are (based on previous projects in the UK and Denmark) around 3-4% of the initial development cost and >3x the onshore O&M cost expressed in MW. The fixed costs embrace amongst other things turbine maintenance and other machinery related costs while the variable cost is the costs of operation and sales management. 20 years depreciation period: We have not taken into account accelerated depreciation which creates an NPV tax benefit. Accelerated depreciation is applicable in some European countries (France, UK and Italy). Renewables 40 Below a generic model for a 100MW offshore wind project in Germany is given. Debt calculation 2007 2008 2009 2010 2015 2016 2026 2027 Capex €m 198.0 Free cash flow €m -198 20.9 21.1 21.3 22.3 22.5 24.3 24.4 Debt/(repayment) €m 128.7 -6.4 -6.4 -6.4 -6.4 -6.4 -6.4 -6.4 Capital inflow €m 69.3 Dividends €m 14.4 14.6 14.8 15.8 16.0 17.8 18.0 Change in cash €m 0 0 0 0 0 0 0 0 Debt €m 128.7 122.3 115.8 109.4 77.2 70.8 6.4 0.0 Equity €m 69 66 62 59 42 38 3 0 Assets €m 198 188 178 168 119 109 10 0 D/(D+E) 65.0% 65.0% 65.0% 65.0% 65.0% 65.0% 65.0% 65.0% P&L year 2008 2009 2010 2015 2016 2026 2027 Operating hours p.a. 3,700 3,700 3,700 3,700 3,700 3,700 3,700 Output 000 MWh 370 370 370 370 370 370 370 Feed-in tariff €/MWh 110 110 110 110 110 110 110 Total price €/MWh 110 110 110 110 110 110 110 Revenues €m 40.7 40.7 40.7 40.7 40.7 40.7 40.7 Opex €m 6.9 7.0 7.2 7.9 8.1 9.9 10.1 Opex/unit €/MWh 18.6 19.0 19.4 21.4 21.8 26.6 27.2 EBITDA €m 33.8 33.7 33.5 32.8 32.6 30.8 30.6 EBITDA margin % 83.0% 82.7% 82.4% 80.5% 80.1% 75.8% 75.3% D&A €m 9.9 9.9 9.9 9.9 9.9 9.9 9.9 EBIT €m 23.9 23.8 23.6 22.9 22.7 20.9 20.7 Financials €m 8.3 7.8 7.4 5.2 4.8 0.4 0.0 EBT €m 15.6 15.9 16.2 17.7 17.9 20.5 20.7 _tax rate % 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% Tax €m 4.7 4.8 4.9 5.3 5.4 6.2 6.2 Net profit €m 11.0 11.2 11.4 12.4 12.6 14.4 14.5 Cash flow table year 2007 2008 2009 2010 2015 2016 2026 2027 Operating CF €m 33.8 33.7 33.5 32.8 32.6 30.8 30.6 Interest expenses €m 8.3 7.8 7.4 5.2 4.8 0.4 0.0 Taxes €m 4.7 4.8 4.9 5.3 5.4 6.2 6.2 Net operating CF €m 20.9 21.1 21.3 22.3 22.5 24.3 24.4 Sales of assets €m Investments €m 198.0 CF for investments €m 198.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Free cash flow €m 198.0 20.9 21.1 21.3 22.3 22.5 24.3 24.4 Change in financial liabilities €m -128.7 -6.4 -6.4 -6.4 -6.4 -6.4 -6.4 -6.4 Capital increase €m -69.3 Dividend payouts €m -14.4 -14.6 -14.8 -15.8 -16.0 -17.8 -18.0 CF from financing €m -198.0 -20.9 -21.1 -21.3 -22.3 -22.5 -24.3 -24.4 Balance sheet year 2007 2008 2009 2010 2015 2016 2026 2027 Fixed assets €m 198.0 188.1 178.2 168.3 118.8 108.9 9.9 0.0 Current assets €m 0 0 0 0 0 0 0 0 Total assets €m 198.0 188.1 178.2 168.3 118.8 108.9 9.9 0.0 Shareholders equity €m 69.3 65.8 62.4 58.9 41.6 38.1 3.5 0.0 Financial debt €m 128.7 122.3 115.8 109.4 77.2 70.8 6.4 0.0 Other liabilities €m 0 0 0 0 0 0 0 0 =Current liabilities €m 128.7 122.3 115.8 109.4 77.2 70.8 6.4 0.0 Total liabilities €m 198.0 188.1 178.2 168.3 118.8 108.9 9.9 0.0 Renewables 41 WACC calculation year 2008 2009 2010 2015 2016 2026 2027 Risk free 4.5% 4.5% 4.8% 5.4% 5.4% 5.4% 5.4% Beta U 0.7 0.7 0.7 0.7 0.7 0.7 0.7 Beta L 1.6 1.6 1.6 1.6 1.6 1.6 1.6 Risk premium 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% Tax 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% D/E 185.7% 185.7% 185.7% 185.7% 185.7% 185.7% 185.7% Cost of Debt 11.7% 11.7% 12.0% 12.6% 12.6% 12.6% 12.6% Cost of Equity 6.8% 6.8% 6.8% 6.8% 6.8% 6.8% 6.8% _ST Debt 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% _LT Debt 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% D/D+E 65.0% 65.0% 65.0% 65.0% 65.0% 65.0% 65.0% E/D+E 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% WACC 7.2% 7.2% 7.3% 7.5% 7.5% 7.5% 7.5% Valuation year 2007 2008 2009 2010 2015 2016 2026 2027 NOPLAT €m 16.7 16.6 16.5 16.0 15.9 14.7 14.5 + Depreciation €m 9.9 9.9 9.9 9.9 9.9 9.9 9.9 -WCR €m 0 0 0 0 0 0 0 -Capex €m -198.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 =Free cash flow €m 198.0 26.6 26.5 26.4 25.9 25.8 24.6 24.4 discount rate €m 1.00 1.07 1.15 1.23 1.77 1.90 3.91 4.21 discounted FCF €m 198.0 24.8 23.1 21.4 14.7 13.6 6.3 5.8 Enterprise value € m/MW 2.66 Added Equity Value € m/MW 0.68 In the next chapters we will go deeper into the three Belgian offshore wind projects, the Dutch Q7 project and our initiating coverage reports on the two German wind developers, Plambeck Neue Energien and Energiekontor. Renewables 42 VIII. LOOKING AT THE BELGIAN PROJECTS As for the German case we also calculated the probability rates for Belgian offshore wind farms. Currently we have a view on three wind farms: i) C-Power; ii) Eldepasco and iii) Belwind. Of these projects, the C-Power project is the only one fully permitted with turbines secured. The other two projects are in the permits pending phase although they got a domain concession in the Belgian North Sea. Graph 43: Offshore wind project timetable and probability Belgium 100% C-Pow er 85% 70% Belw ind Eldepasco 35% 15% 7.5% 2.5% 0% Measurement Project not permitted In operation Permits Turbines pending construction indentified secured identified Project Fully Under Source(s): Dexia Est. VIII.1. C-Power, the first Belgian offshore wind project The initiative by C-Power to build a farshore wind farm in Belgian coastal waters fits the context of the European and Belgian commitment to reduce greenhouse gas emissions. The C-Power project on the Thornton bank will have an installed capacity of 300 MW, an estimated annual electricity production of 986GWh or approximately 1 TWh. The total energy production in Belgium is approximately 87 TWh per year. At present only 3.2% of this total is generated from renewable sources. This means that Belgium must generate a further 2.8% of electricity from renewables or about 2.5 TWh by 2010 to comply with. C-Power estimates its total output for the 300MW wind farm at 1TWh being 3,350 hours p.a., which we regard as cautious when comparing to other consented Belgian offshore wind farm estimates (3,650 hours p.a. on average). We therefore apply 3,600 hours p.a. which still is prudent against our more generic expectation of 3,700 hours p.a. throughout the North Sea and the Baltic Sea area. The C-power project represents 1/3 The C-Power project on the Thornton bank represents 40% of the total Belgian obligation that has of Belgium's RE target by 2010 to be realised by 2010 and is particularly important for Belgium to reach its RE targets. Graph 44: C-Power contribution to Belgium's renewables energy target 7.0 % 6.0 % 5.0 % 4.0 % 3.0 % 2.0 % 1.0 % 0.0 % 20 04 20 06 -2 00 8 20 10 Exis tin g C -p ow e r co ntribu tion Obje ctive Source(s): C-Power Renewables 43 Positioning Development and operation backed In the wind value chain, C-Power is positioned as both a developer as an operator. Through the by shareholders expertise expertise of its shareholders the project has clear advantages compared to other companies setting up wind farms or even operating them. EDF EN has knowledge on the operation while DEME can use its offshore expertise to construct the offshore wind farm. Since C-Power is a project set up by these shareholders, we don't believe it will take on other projects, something we can't say about its shareholders. Shareholders and management background The C-Power consortium constitutes of several partners: DEME (Dredging International): a world class Belgian dredging company in which Belgian construction company CFE (Neutral, TP € 1394.0) and Ackermans & van Haaren (Reduce, TP € 64.0) both have a 50% stake. EDF-Energies Nouvelles (Neutral, TP € 50.0): a leader in renewable energy (50% equity partner), with a market capitalization of € 3.4bn. Ecotech Finance (SRIW): a company ultimately owned by the Walloon region, with green focus Socofe: a Walloon municipal holding, with a focus on energy. Nuhma, an investment fund formed by municipal and district governments in the Walloon region Graph 45: C-Power shareholder structure (estimated) 20% 20% 20% 20% 20% DE M E E c otec h S oc ofe Nuhm a E DF-E n Source(s): Dexia DEME and EDF EN have strong Supported by three financial investment companies (Socofe, Nuhma and Ecotech Finance), expertise in wind farm construction dredging company DEME and RE player EDF-EN (with both strong expertise in the construction and operation and the operation of wind farms), C-Power's shareholder structure is pretty solid. DEME, the Belgian dredging company with worldwide activities, already took part in five offshore/nearshore wind projects throughout Europe. Dredging International and other companies, part of the DEME group like Hydro Soil Services (contracted to install the monopoles and to assemble the wind turbines at Utgrunden, Sweden) participated in the instalment of a total of 450MW offshore and nearshore farms. As a comparison, end 2006, 904MW offshore wind farms were operational throughout Europe. Table 19: DEME-group offshore and nearshore project involvement Project MW km of coast Depth Year of Construction Utgrunden (S) 10.5 8 7-10 2000 Samso (DE) 23 4-8 12-18 2002 Horns Rev (DE) 160 14-20 6-14 2002 Nysted (DE) 158 9-14 6-9.5 2003 Noordzeewind (NL) 99 8-12 15-20 2005 C-Power (BE) 300 27 12-24 2007-2010 Source(s): C-Power Renewables 44 C-Power's project portfolio 300MW offshore wind park by 2011, C-Power is a project located on the Thornton sandbank, 27km outside the Belgian coast at a water developed through 3 planning depth of 12 to 24m. The project was proposed in 2002 and permissions to go ahead were received phases May 2004. Initially the project was approved for construction 6km outside the Belgian coast but failed to secure approval from the local council. After negotiations the project got approval to be constructed outside the 12nm zone, where Belgium is fully authorized for operation and exploration of marine areas (Exclusive Economic Zone). The project consists of several steps: i) in the test phase, 6x 5MW windmills will be elevated and first connection will be made (2007-'08), construction is expected to be completed 1 October 2008; ii) once the test phase has been finished, phase 2 construction starts with the instalments of an extra 18 5MW windmills (Operational 1 October 2010) and iii) in a final phase the second grid and an extra 36 5MW windmills will be installed (Operational 1 October 2011), iii) the exploitation phase finally is a 20 year concession. However, C-Power can apply for an extension of their concession period and set-up a new remuneration agreement with the Belgian government or Elia. Graph 46: Location Thorntonbank (shipping routes in green) Source(s): C-Power Based on data provided by C-Power, the total budget should run up to € 800m for 300MW (€ 2.66m/MW) with € 153m initially paid in the testing phase (€ 5.1m/MW). Projectfinancemagazine reports of an undisclosed O&M agreement with REpower who agreed with C-Power on providing a certain level of availability (> 90%) for a period of 10 years. We feel through this agreement C- Power has build up a lot of certainty towards banks, although will need to pay extra expenses by means of O&M costs. We calculate these at € 25/MWh in line with an average European offshore wind farm. Table 20: Planning stages Phase 1 2007-'08 Demonstration phase: construction of 6 turbines, 1st wind measuring mast and the 1st electricity cable: 150 kV (40 km) Phase 2 2009 construction of 18 turbines and the offshore transformer station Phase 3 2010-'11 construction of 36 turbines, 2nd wind measuring mast, 2nd electricity cable: 150 kV (40 km) Source(s): C-Power Strong governmental support The C-Power project enjoys strong Belgian/Flemish support, with €107/MWh green certificates over through GC of €107/MWh and grid a period of 20 years for the first 216MW and €92/MWh thereafter. These green certificates will be subsidy sold to Elia (the high voltage Belgian grid operator) through an agreement between the two companies. This contract makes C-Power less susceptible to political risk. C-Power will furthermore benefit from a grid subsidy representing 1/3 of the connection costs with a maximum of € 25m over a period of 4 years. This contract is subject to completion of the whole project. Renewables 45 Graph 47: Time line licensing (4.5 years) and engineering (1 year) Source(s): C-Power Graph 48: Time line construction and operation Source(s): C-Power, Dexia The first phase is estimated to cost around € 153m consisting of senior debt of € 111m (15 year facility and € 74m short term facilities for the construction letters of credit which will be repaid from the senior, Euribor +100-200bps), € 20m short term debt for the grid subsidy and the equity invested in the first phase is estimated at € 22m. This brings the D/E ratio at 86/14. C-Power will get a grid subsidy of € 25m in the first phase. Table 21: Belgian offshore wind farms Project Thornton Bank Eldepasco Belwind Developer C-Power Electrawinds Econcern Size (MW) 300 216 330 Nr. Of turbines 60 36 66 Distance from shore (km) 27-30 37-38 46-48 Load factor (%) 38% 39% 42% Operating hours Company Est. 3,350 3,403 3,636 Operating hours Dexia Est. 3,600 3,650 3,700 Investment costs (€ m) 800 600 800 Inv. Cost €/kW Company Est. 2,667 3,333 2,424 Inv. Cost €/kW Dexia Est. 2,500 2,600 2,700 Source(s): 3E We estimate the total investment cost at € 750m (€ 2,500/kWh) divided over € 315m long term financing, short term debt of € 210 m and a total of 30% equity of € 225m. Minus the grid subsidy the total investment cost is € 725m (€ 2.41m/MW). The grid connection costs over the whole project are estimated at around € 170m (22.5% of total investment cost). Currently negotiations are ongoing between the Belgian offshore wind farm developers and Belgian TSO Elia on the possible take-over purchase of the offshore grid. Elia, the Belgian TSO monopolist previously was not willing to take the offshore grid on its account due to its IPO that was taking place and the, at that moment, limited know-how on offshore grid connections for offshore wind farms. Now most has become clear and offshore wind is ready to take off Elia will possibly take the grid back from C- Power also in the context of a BelBrit connection. Minus the already received € 25m grid subsidy an extra € 145m could possibly be paid back to C-Power. This would result in an investment cost of € 580m (€ 1.95m/MW). However, we do not expect Elia to take over the whole grid.. Renewables 46 Note we do not take into account dismantling costs since we have also not taken into account repowering or an extension of the 20 years timeframe, what we believe to be very likely. Graph 49: Investment cost phase 1 (6WTG's) Graph 50: Investement cost, total project (60WTG's) 15% 12% 33% 23% 43% 25% 28% 23% W ind turbines Grid Infrastructure and engineering Other W ind turbines Grid Infrastructure and engineering Other Source(s): C-Power, Dexia Est. Source(s): C-Power, Dexia Est. P&L and valuation To value C-Power we use a WACC of 7.5% based on an unlevered Beta of 1.06 (green certificates), a D/E of 70/30 taking into account the 80/20 in the first phase and 65/35 on average throughout Europe for offshore wind investment. Key assumptions for our C-Power model are: i) asset life of 20 years (this is a conservative approach given the limited experience); ii) a development cost (incl. administration, permits, machinery, civil engineering and development) of € Added value of € 186.5m and EV of 2,500/kW; iii) a load factor of 38% equalling 3,600 operating hours; iv) a € 107/MWh green € 625.2m certificate remuneration for the first 216MW produced and € 92/afterwards for a period of 20 years and v) a depreciation period of 20 years. Based on these assumptions, a WACC of 7.5% and probability adjusted for the different phases of the project, our implied DCF valuation hovers around € 173.7m added equity value. We also calculate an EV of € 612.8m. P&L year 2007 2008 2009 2010 2011 2012 2028 2029 2030 2031 Electricity price €/MWh 62 59 57 56 54 64 64 64 64 Green certificates price €/MWh 107 107 107 107 107 107 107 107 107 Green certificates price €/MWh 92 92 92 92 92 92 92 92 92 Total price €/MWh 169 166 164 163 156 166 167 168 179 Revenues €m 4.6 17.9 31.0 96.9 168.7 179.6 162.8 150.1 86.9 Opex €m 1 2 9 13 23 32 27 20 15 Opex/unit €/MWh 21 21 49 22 22 30 28 22 31 EBITDA €m 4.0 15.6 27.0 84.3 147.8 150.9 136.7 126.0 69.5 EBITDA margin % 87.7% 87.2% 87.0% 86.9% 87.6% 84.0% 84.0% 84.0% 80.0% D&A €m 6.4 6.4 23.9 37.5 37.5 31.1 31.1 13.6 0.0 EBIT €m -2.4 9.2 3.1 46.8 110.3 119.8 105.6 112.4 69.5 Financials €m 5.9 5.6 20.0 30.6 29.1 2.0 0.6 0.0 0.0 EBT €m -8.3 3.6 -16.9 16.2 81.2 117.8 105.0 112.4 69.5 _tax rate % 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% Tax €m -2.5 1.1 -5.1 4.9 24.4 35.3 31.5 33.7 20.9 Net profit €m -5.8 2.5 -11.8 11.3 56.9 82.4 73.5 78.7 48.7 Renewables 47 Cash flow table year 2007 2008 2009 2010 2011 2012 2028 2029 2030 2031 Operating CF €m 4.0 15.6 27.0 84.3 147.8 150.9 136.7 126.0 69.5 Interest expenses €m 5.9 5.6 20.0 30.6 29.1 2.0 0.6 0.0 0.0 Taxes €m -2.5 1.1 -5.1 4.9 24.4 35.3 31.5 33.7 20.9 Net operating CF €m 0.6 8.9 12.1 48.8 94.4 113.5 104.6 92.3 48.7 Sales of assets €m Investments €m -128.0 -350.0 -272.0 CF for investments €m -128.0 0.0 -350.0 -272.0 0.0 0.0 0.0 0.0 0.0 0.0 Free cash flow €m -128.0 0.6 -341.1 -259.9 48.8 94.4 113.5 104.6 92.3 48.7 Change in financial liabilities €m 102.4 -5.1 239.9 173.0 -26.9 -26.9 -21.8 -21.8 -9.5 0.0 Capital increase €m 25.6 105.0 81.6 Dividend payouts €m 4.5 -3.8 2.6 -67.6 -68.0 -92.8 -83.8 -72.9 0.0 CF from financing €m 128.0 -0.6 341.1 257.2 -94.5 -94.9 -114.6 -105.6 -82.5 0.0 Change in cash €m 0.0 0.0 0.0 -2.7 -45.6 -0.5 -1.0 -1.0 9.8 48.7 Balance sheet year 2007 2008 2009 2010 2011 2012 2028 2029 2030 2031 Fixed assets €m 128.0 121.6 465.2 713.3 675.8 638.3 44.7 13.6 0.0 0.0 Current assets €m Total assets €m 128.0 121.6 465.2 713.3 675.8 638.3 44.7 13.6 0.0 0.0 Shareholders equity €m 25.6 24.3 128.0 203.1 192.5 181.9 13.4 4.1 0.0 0.0 Financial debt €m 102.4 97.3 337.2 510.2 483.3 456.4 31.3 9.5 0.0 0.0 Other liabilities €m =Current liabilities €m 102.4 97.3 337.2 510.2 483.3 456.4 31.3 9.5 0.0 0.0 Total liabilities €m 128.0 121.6 465.2 713.3 675.8 638.3 44.7 13.6 0.0 0.0 Renewables 48 VIII.2. Eldepasco Strong shareholders pack with Eldepasco is one of the three Belgian offshore wind projects located in the North Sea. The project experience in wind development is an initiative of a range of partners: and operation Electrawinds produces, sells and distributes green power generated from inexhaustible clean energy resources such as wind, sun and organic matter. Apart from constructing and operating windmill farms, solar farms and biomass plants, Electrawinds also investigates and develops new renewable energy possibilities and applications. Depret is a construction company active in marine construction, civil engineering and buildings for the public and private sector in Flanders and across border. Aspiravi is initiated by the Flemish intermunicipal companies without private participation like Interelectra, IVEG, PBE and WVEM. The group invests, realizes and operates projects for the production of renewable and environment friendly energy. Colruyt is a Belgian discounter in food and non-food products with more than 190 shops throughout the country. If operational by 2010, the project will represent around one third of Belgium's 2010 objective. Graph 51: Eldepasco contribution to Belgium's renewables energy target 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2004 2006-2008 2010 Exis ting Eldepas co contribution Objective Source(s): Dexia Est. Higher investment cost than The Eldepasco project will be built on an area of ~ 8km² at water depth of 15-20 meters. The total European average, awaiting full expected installed wind capacity is targeted at 216MW and the projected electricity output 735GWh permits (3,403 operating hours p.a., Dexia Est. 3,650). With a total investment cost of € 600m, € 2,777/kW (Dexia Est. € 2,600/kW) the project is higher than the € 2,400/kW on average throughout Europe. Graph 52: Time line construction and operation 2006 2007 2008 2009 2010 2011-'30 Eldepasco Consenting Construction Operation Source(s): Eldepasco, Dexia Eldepasco received an area concession in 2006 although they don't have a building permit and operation permit yet. The project intends to start construction 2009-'10 and to become operational by 2011. P&L and valuation To value Eldepasco we use a WACC of 8.8% based on an unlevered Beta of 1.06 (green certificates), a D/E of 65/35. Key assumptions for our Eldepasco model are: i) asset life of 20 years (this is a conservative approach given the limited experience); ii) a development cost (incl. administration, permits, machinery, civil engineering and development) of € 2,600/kWh; iii) a load Renewables 49 factor of 42% equalling 3,650 operating hours; iv) an expected € 107/MWh green certificate remuneration for the first 216MW produced and € 92/afterwards for a period of 20 years in line with the agreement made between C-Power and Elia and v) a depreciation period of 20 years. Based on these assumptions, a WACC of 8.7% and probability adjusted for the phase the Eldepasco project is in (Permits pending) our implied DCF valuation hovers around € 56.1m added equity value. P&L year 2011 2012 2013 2014 2028 2029 2030 Operating hours p.a. 3,650 3,650 3,650 3,650 3,650 3,650 3,650 Output 000 MWh 788 788 788 788 788 788 788 Electricity price €/MWh 53 54 54 55 64 65 66 Green certificates <216,00 MWh €/MWh 107 107 107 107 107 107 107 Green certificates >216,000 MWh €/MWh 92 92 92 92 92 92 92 Total price €/MWh 160 161 161 162 171 172 173 Revenues €m 126.1 126.6 127.1 127.6 135.1 135.7 136.3 Opex €m 15.1 15.4 15.7 16.0 21.2 21.6 22.0 Opex/unit €/MWh 19.2 19.6 20.0 20.4 26.9 27.4 27.9 EBITDA €m 111.0 111.2 111.4 111.6 113.9 114.1 114.3 EBITDA margin % 88.0% 87.8% 87.6% 87.4% 84.3% 84.1% 83.8% D&A €m 28.1 28.1 28.1 28.1 28.1 28.1 28.1 EBIT €m 82.9 83.1 83.3 83.5 85.9 86.0 86.2 Financials €m 23.8 22.5 21.3 20.0 2.5 1.3 0.0 EBT €m 59.2 60.6 62.0 63.5 83.4 84.8 86.2 _tax rate % 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% Tax €m 17.8 18.2 18.6 19.0 25.0 25.4 25.9 Net profit €m 41.4 42.4 43.4 44.4 58.4 59.3 60.3 Cash flow table year 2010 2011 2012 2013 2014 2028 2029 2030 Operating CF €m 111.0 111.2 111.4 111.6 113.9 114.1 114.3 Interest expenses €m 23.8 22.5 21.3 20.0 2.5 1.3 0.0 Taxes €m 17.8 18.2 18.6 19.0 25.0 25.4 25.9 Net operating CF €m 69.5 70.5 71.5 72.5 86.4 87.4 88.4 Sales of assets €m Investments €m 561.6 CF for investments €m 561.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Free cash flow €m 561.6 69.5 70.5 71.5 72.5 86.4 87.4 88.4 Change in financial liabilities €m -365.0 -18.3 -18.3 -18.3 -18.3 -18.3 -18.3 -18.3 Capital increase €m -196.6 Dividend payouts €m -51.3 -52.3 -53.3 -54.3 -68.2 -69.2 -70.2 CF from financing €m -561.6 -69.5 -70.5 -71.5 -72.5 -86.4 -87.4 -88.4 Balance sheet year 2010 2011 2012 2013 2014 2028 2029 2030 Fixed assets €m 561.6 533.5 505.4 477.4 449.3 56.2 28.1 0.0 Current assets €m 0 0 0 0 0 0 0 0 Total assets €m 561.6 533.5 505.4 477.4 449.3 56.2 28.1 0.0 Shareholders equity €m 196.6 186.7 176.9 167.1 157.2 19.7 9.8 0.0 Financial debt €m 365.0 346.8 328.5 310.3 292.0 36.5 18.3 0.0 Other liabilities €m 0 0 0 0 0 0 0 0 =Current liabilities €m 365.0 346.8 328.5 310.3 292.0 36.5 18.3 0.0 Total liabilities €m 561.6 533.5 505.4 477.4 449.3 56.2 28.1 0.0 Renewables 50 VIII.3. Belwind Belwind is one of the three Belgian offshore wind projects located in the North Sea. The company is a project from Evelop Belgium, part of the Econcern group. Econcern is a 100% private player active in renewable energy and divided in separate business units: Ecofys: An engineering group active in 11 countries focussed on renewable energy. Evelop: A European project developer building energy installations. Ecoventures: A participation company active in financial structuring of projects with the financing of spin-offs. Econcern is furthermore active in the construction of the Dutch Q7-project, the Scira project in the UK and has several projects in the consenting phase. Marc Coenen is the Managing Director of Belwind. Graph 53: Belwind contribution to Belgium's renewables energy target 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2004 2006-2008 2010 Exis ting Belw ind contribution Objective Source(s): Dexia Est. Potential biggest contributor to Would Belwind be fully operational by 2010 the project will contribute over one third of the RE Belgium's 2010 RE target target set. At a capacity of 330MW (66 5MW turbines) and a company estimated total investment cost of € 800m (€ 2,424/kWh) Belwind is not only the biggest Belgian offshore wind farm to be built but also one of Belgium's biggest sustainable energy investments. The project is like Eldepasco and C- Power located in the EEZ zone off the coast of Belgium (BHS), 46km from the coast at depths of 20-35 meters and will be built on the Bligh Bank. The grid connection will be made through 2, 150kV offshore cables, at Slijkens Ostend. Graph 54: Location Bligh Bank (Belwind) Source(s): 3E Renewables 51 Hoping to come on stream by 2010 The application for a concession to build the wind farm was submitted in April 2006 and exclusivity although 2011 seems more likely obtained July 2006. The Belgian government granted the concession for the construction of the wind farm on the Bligh Bank June 2007 for both the wind park as the sea cables. The project also got consented by Elia to come on land in Ostend. Construction will at the earliest start in 2010 and as a consequence the project will only come on stream by 2011-'12. Financing should start late 2007 or early 2008. Dirk Berkhout, one of the directors of Econcern already indicated it will be necessary to find Belgian project partners for the Belwind project in order to finance the deal. Partners for the Q7 project in the Netherlands could come to the rescue here. Graph 55: Time line from consenting till operation 2006 2007 2008 2009 2010 2011 2012-'30 Belwinds Consenting Construction Operation Source(s): Belwind Belwind foresees to supply 345,000 household with green electricity and has an expected annual energy yield of ~1,200GWh. This represents 3,636 operating hours p.a. or a load factor of 42%. The operating hours are estimated as the highest in Belgium. P&L and valuation WACC calculation based on green To value Belwind we use a WACC of 8.7% based on an unlevered Beta of 1.06 (green certificates), certificates and a D/E ratio of a D/E of 65/35. Key assumptions for our Belwind model are: i) asset life of 20 years (this is a 65/35 conservative approach given the limited experience); ii) a development cost (incl. administration, permits, machinery, civil engineering and development) of € 2,650/kWh; iii) a load factor of 42% equalling 3,700 operating hours; iv) an expected € 107/MWh green certificate remuneration for the first 216MW produced and € 92/afterwards for a period of 20 years in line with the agreement made between C-Power and Elia and v) a depreciation period of 20 years. Based on these assumptions, a WACC of 8.7% and probability adjusted for the phase the Belwind project is in (Permits pending, although nearly close to be permitted, expected end '07, begin '08) our implied DCF valuation hovers around € 87.3m added value. P&L year 2011 2012 2013 2014 2028 2029 2030 Operating hours p.a. 3,700 3,700 3,700 3,700 3,700 3,700 3,700 Output 000 MWh 1,221 1,221 1,221 1,221 1,221 1,221 1,221 Electricity price €/MWh 53 54 54 55 64 65 66 Green certificates <216,00 MWh €/MWh 107 107 107 107 107 107 107 Green certificates >216,000 MWh €/MWh 92 92 92 92 92 92 92 Total price €/MWh 155 155 156 157 166 167 168 Revenues €m 189.0 189.8 190.5 191.3 202.9 203.8 204.7 Opex €m 22.3 22.7 23.2 23.6 31.2 31.8 32.5 Opex/unit €/MWh 18.2 18.6 19.0 19.4 25.5 26.1 26.6 EBITDA €m 166.8 167.1 167.4 167.7 171.7 172.0 172.3 EBITDA margin % 88.2% 88.0% 87.8% 87.6% 84.6% 84.4% 84.2% D&A €m 43.7 43.7 43.7 43.7 43.7 43.7 43.7 EBIT €m 123.0 123.3 123.6 123.9 128.0 128.3 128.6 Financials €m 37.0 35.0 33.1 31.1 3.9 1.9 0.0 EBT €m 86.0 88.3 90.5 92.8 124.1 126.3 128.6 _tax rate % 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% Tax €m 25.8 26.5 27.2 27.8 37.2 37.9 38.6 Net profit €m 60.2 61.8 63.4 64.9 86.9 88.4 90.0 Renewables 52 Cash flow table year 2010 2011 2012 2013 2014 2028 2029 2030 Operating CF €m 166.8 167.1 167.4 167.7 171.7 172.0 172.3 Interest expenses €m 37.0 35.0 33.1 31.1 3.9 1.9 0.0 Taxes €m 25.8 26.5 27.2 27.8 37.2 37.9 38.6 Net operating CF €m 104.0 105.5 107.1 108.7 130.6 132.2 133.7 Sales of assets €m Investments €m 874.5 CF for investments €m 874.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Free cash flow €m 874.5 104.0 105.5 107.1 108.7 130.6 132.2 133.7 Change in financial liabilities €m -568.4 -28.4 -28.4 -28.4 -28.4 -28.4 -28.4 -28.4 Capital increase €m -306.1 Dividend payouts €m -75.5 -77.1 -78.7 -80.2 -102.2 -103.7 -105.3 CF from financing €m -874.5 -104.0 -105.5 -107.1 -108.7 -130.6 -132.2 -133.7 Balance sheet year 2010 2011 2012 2013 2014 2028 2029 2030 Fixed assets €m 874.5 830.8 787.1 743.3 699.6 87.4 43.7 0.0 Current assets €m 0 0 0 0 0 0 0 0 Total assets €m 874.5 830.8 787.1 743.3 699.6 87.4 43.7 0.0 Shareholders equity €m 306.1 290.8 275.5 260.2 244.9 30.6 15.3 0.0 Financial debt €m 568.4 540.0 511.6 483.2 454.7 56.8 28.4 0.0 Other liabilities €m 0 0 0 0 0 0 0 0 =Current liabilities €m 568.4 540.0 511.6 483.2 454.7 56.8 28.4 0.0 Total liabilities €m 874.5 830.8 787.1 743.3 699.6 87.4 43.7 0.0 Renewables 53 IX. Q7, OFFSHORE IN THE NETHERLANDS IX.1. Positioning E-Connection as project initiator In December of 1999, property developer E-Connection applied for a permit for the construction sold the project to 3 RE groups and operation of the wind farm. The Economic Impact Evaluation started a few months later in May 2000. The permit was issued on February 18, 2002. The permits for the construction and the maintenance of the offshore and land cables were obtained in the spring of 2002. In October 2004, Econcern and Energy Investments Holding (EIH) signed a joint agreement to take over all permits and rights relating to the construction and operation of E-connection's windpark. To this end, Econcern and EIH established a holding company called Windpark Q7 Holding. This was soon followed by talks with ENECO Energie regarding its participation in the project. Later EIH was integrated in Econcern. In March 2005 the Q7 Holding signed a declaration of intent for the construction and operation of the wind farm. First of all, an onshore 50 kV cable connection was installed. On 11 July, the investors together with Q7 Holding and the banks Rabobank and Dexia signed a term sheet for non-recourse project financing. As a result, ENECO Energie officially received a 50% stake in the wind park on 26 July. On 10 October 2006, the first foundations were laid at sea. At the beginning of 2008, the wind park expects to start generating power and it will be officially delivered in the spring of 2008. IX.2. Shareholders and management background Econcern, Energy Investment The offshore wind park Q7 is a joint project of energy group Econcern and utility ENECO Energie. Holding and ENECO Energie jointed forces Graph 56: Q7 Shareholder structure (estimated) 50% 50% Econcern ENECO Source(s): Dexia Econcern is the holding company of Ecofys, Ecostream, Evelop and Ecoventures. The mission of these European companies is to ensure 'a sustainable energy supply for everyone. Econcern specializes in delivering expert services, products and projects in all areas of sustainable energy and energy efficiency. Besides its activities in the Netherlands, Econcern is also engaged in offshore wind farm initiatives in the United Kingdom, Belgium and Germany. ENECO Energie is one of the three leading energy companies in the Netherlands. ENECO Energie has an integrated distribution strategy and focuses on transport, trade and supply of energy (electricity, gas and heat) and related products and services Renewables 54 IX.3. Q7's project portfolio Graph 57: Location Source(s): Evelop Smaller than average offshore wind The Q7 project is located 27km outside the coast of Ijmuiden, in the Dutch continental shelf (> farm with average operating hours 12nm) at a water depth of 19 to 24m. The project has a capacity of 120MW (60x 2MW turbines) and construction was started during the second half of 2006. The first quarter of 2008 the project should come online. With an estimated annual electricity production of 435GWh the wind farm will have around 3,625 operating hours p.a. enough stream for 125,000 households. Graph 58: Time line construction and operation 2007 2008-'27 Q7 Construction Operation Source(s): Q7, Dexia Investment cost of € 3.19m/MW The total investment cost for the project is estimated at € 383m, while debt financing for the project clearly higher than European includes a € 189 million, 11-year, long-term project finance facility as well as a € 30m standby average facility to cover contingencies. The D/E ratio comes in at 57/43 against our 60/40 on average throughout Europe. The investment cost is higher than average, € 3.19m/MW which can point at the lower scale of the project compared to other European cases averaging 300MW. Another unique aspect is that the financing also covers the construction phase of the wind farm. This has resolved an issue which has bogged down a number of other similar projects in Europe, where contractors have been wary of providing fully wrapped Engineering, Procurement and Construction (EPC) contracts, normally a standard requirement of project finance and sponsors. Q7 furthermore has a maintenance contract with Vestas for a 5 year period, with an availability guarantee. Q7 was able to conclude an exception from the MEP (Dutch RE law) that was cancelled and gets a green certificate price of € 97/MWh for the first 10 years. A PPA with ENECO for 11 years has been set up although the price is not publicly communicated. Afterwards the project gets the electricity price in the Netherlands (€ 53.0/MWh through the cycle). IX.4. P&L and valuation To value Q7 we use a WACC of 8.6% based on an unlevered Beta of 1.06 (green certificates), a D/E of 57/43. Key assumptions for our Q7 model are: i) asset life of 20 years (this is a conservative approach given the limited experience); ii) a development cost (incl. administration, permits, machinery, civil engineering and development) of € 3,200/kWh; iii) a load factor of 42% equalling 3,625 operating hours; iv) an expected € 97/MWh green certificate remuneration for the first 10 years and the Dutch Electricity price from then onwards and v) a depreciation period of 20 years. Renewables 55 Based on these assumptions, a WACC of 8.7% and probability adjusted for the phase the Q7 project is in (Construction) our implied DCF valuation hovers around € 3.3m added equity value. We also calculate an EV of € 348.0m. P&L year 2008 2009 2010 2011 2025 2026 2027 Operating hours p.a. 3,625 3,625 3,625 3,625 3,625 3,625 3,625 Output 000 MWh 435 435 435 435 435 435 435 Electricity price €/MWh 73 73 73 73 64 64 65 Green certificates €/MWh 97 97 97 97 0 0 0 Total price €/MWh 170 170 170 170 64 64 65 Revenues €m 73.7 73.7 73.7 73.7 27.7 28.0 28.3 Opex €m 8.1 8.3 8.4 8.6 11.3 11.6 11.8 Opex/unit €/MWh 18.6 19.0 19.4 19.8 26.1 26.6 27.1 EBITDA €m 65.6 65.5 65.3 65.1 16.3 16.4 16.5 EBITDA margin % 89.0% 88.8% 88.6% 88.3% 59.0% 58.7% 58.4% D&A €m 19.2 19.2 19.2 19.2 19.2 19.2 19.2 EBIT €m 46.5 46.3 46.2 46.0 -2.8 -2.7 -2.6 Financials €m 14.2 13.5 12.7 12.0 1.5 0.7 0.0 EBT €m 32.3 32.9 33.4 34.0 -4.3 -3.5 -2.6 _tax rate % 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% Tax €m 9.7 9.9 10.0 10.2 -1.3 -1.0 -0.8 Net profit €m 22.6 23.0 23.4 23.8 -3.0 -2.4 -1.8 Cash flow table year 2007 2008 2009 2010 2011 2025 2026 2027 Operating CF €m 65.6 65.5 65.3 65.1 16.3 16.4 16.5 Interest expenses €m 14.2 13.5 12.7 12.0 1.5 0.7 0.0 Taxes €m 9.7 9.9 10.0 10.2 -1.3 -1.0 -0.8 Net operating CF €m 41.7 42.2 42.6 43.0 16.1 16.7 17.3 Sales of assets €m Investments €m 383.0 CF for investments €m 383.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Free cash flow €m 383.0 41.7 42.2 42.6 43.0 16.1 16.7 17.3 Change in financial liabilities €m -218.3 -10.9 -10.9 -10.9 -10.9 -10.9 -10.9 -10.9 Capital increase €m -164.7 Dividend payouts €m -30.8 -31.2 -31.6 -32.1 -5.2 -5.8 -6.4 CF from financing €m -383.0 -41.7 -42.2 -42.6 -43.0 -16.1 -16.7 -17.3 Balance sheet year 2007 2008 2009 2010 2011 2025 2026 2027 Fixed assets €m 383.0 363.9 344.7 325.6 306.4 38.3 19.2 0.0 Current assets €m 0 0 0 0 0 0 0 0 Total assets €m 383.0 363.9 344.7 325.6 306.4 38.3 19.2 0.0 Shareholders equity €m 164.7 156.5 148.2 140.0 131.8 16.5 8.2 0.0 Financial debt €m 218.3 207.4 196.5 185.6 174.6 21.8 10.9 0.0 Other liabilities €m 0 0 0 0 0 0 0 0 =Current liabilities €m 218.3 207.4 196.5 185.6 174.6 21.8 10.9 0.0 Total liabilities €m 383.0 363.9 344.7 325.6 306.4 38.3 19.1 0.0 Renewables 56 X. PLAMBECK: A ROCKY ROAD TO OFFSHORE SUCCESS Plambeck Neue Energien (PNE) is one of the two still remaining pure wind development plays, listed on the German stock exchange. The company is active in onshore wind development and turbine blade manufacturing and is shifting its model to exploit the vast offshore wind potential in Germany. A total offshore wind pipeline of over 2,500MW has been secured of which 565MW is already fully consented. th Q3'07 results to disappoint again, but does it matter? On Monday 12 of November the company will provide their 3Q'07 results, which we believe to disappoint on guidance expectations. PNE has set a sales guidance of € 160-180m full year '07 and an EBIT target in the range € 12-16m. Looking at the H1'07 results and taking into account the limited onshore pipeline to be handed over this year, it is unlikely guidance will be met. It will be necessary for PNE to improve its communication as they already disappointed investors on several occasions and a we feel a revision and more in depth view on the 2007-'08 guidance to be necessary. Impression of cheap valuation: Once the company has restored investor confidence (read: reaching guidance), we think PNE shares will attract lots of bargain/value hunters. Anyway the company is not yet at the stage to meet its expectations. But we can not ignore the long term value in offshore which is a business not well known yet by the market. We feel this fallen angel could become a new darling through offshore growth. In spite of likely Q3'07 disappointment, we would recommend to buy now as i) upwards potential with offshore feed-in tariff increase in Germany (€ 110/MWh € 4.8/share while € 150/MWh € 11.0/share); ii) PNE could find a financial partner regarding the Gode Wind project and secure offshore wind turbines and iii) big utilities, especially in Germany are eying the offshore wind market. E.ON indicated already "the future of wind is off our coasts", has a € 3bn RE capex plan and is known for several RE M&A deals in the past. Also RWE just last week stated it intends to act before year-end '07 in the RE market and knows the only way to reduce its CO2 output is through CDM/JI or renewable energies. In the coming period good news could come from the announcements of deals such as finding a financial partner for its Gode Wind offshore wind project or securing wind turbines for its offshore development. Last year PNE signed a contract with Babcock and Brown for the sale of 300MW onshore in Germany, and a deal with Dong on its Borkum Riffgrund offshore wind project. These deals provided financial security for the group and together with the onshore turbine order from Vestas will be of key importance in the next years. As a result we initiate coverage on PNE with a Buy rating and TP of € 4.8. Strengths: Weaknesses: Strong offshore wind pipeline of over 2,500MW with No operational model misses part of the full value 565MW consented. History with loss of investors trust. Not reaching Babcock & Brown deal of € 400m creates -together with guidance for several times in a row. the Vestas turbine order- both financial and operational Exposure to low profitable German onshore wind security. market. Opportunities: Threats: EEG revision for offshore wind from € 91/MWh to a range Not reaching their 2007 guidance. of € 110-150/MWh. Setting up onshore joint ventures in early Taking equity stakes in offshore wind farms it developed. development phase creates little short term value Takeover candidate, comparing to a similar trend in the The Hungarian market where Plambeck wants to onshore wind market. develop onshore wind farms has to endure grid constraints. SSP, blade manufacturing business turns out profitable and can in the end result in an IPO or divesture. Difficulties to repay their debt and continuation of capital increases that create dilution. Renewables 57 X.1. Regaining unconsciousness A long history of financial and To grasp Plambeck Neue Energien (PNE) in full we must become aware of its history. Founded in corporate governance difficulties 1995 and IPO'ed in 1998, PNE's history wasn't what one can call a panacea. It all started with the takeover of SSP Technology, a Danish rotor blade manufacturing company, mid 2003. The company was acquired from previous shareholder Plambeck Holding, with Norbert Plambeck as chairman of the supervisory board, in the meantime also the principal shareholder of PNE. From corporate governance point of view, several criticisms arose and the capital increase of 5.5m shares that went hand in hand with the acquisition furthermore created a huge dilution effect. Mid 2004, PNE increased its 50.1% stake in SSP to 90%, leading to goodwill of € 57m against around € 65m equity. In no time it became clear the value paid for SSP was too high and shortly afterwards difficulties at SSP eventually resulted in a write-off at the rotor blade subsidiary. Accompanied with the write-off due to a not favourable Renewable Energy Law (EEG) revision, the company posted a net loss of -€ 148.3m. On top, over the period 2003-'04 quarter after quarter PNE posted disappointing results due to a weak German onshore wind market. And last but not least in June 2005 BaFin (the German financial services regulator) started an investigation on insider trading at Plambeck. Norbert Plambeck shortly afterwards, announced to step down from the supervisory board due to personal reasons. PNE also needed to adjust its 2003 figures due to changes in the financial statements at Plambeck Norderland. This resulted in an extra € 6m loss in 2003. Due to the heaping up of both financial and corporate difficulties PNE decided to sell its French division Ventura to Theolia in H1'05 and previously disposed off its other renewable energy branches (i.e. Solar Technik H2'04). By far and large a history PNE can not be proud of. Graph 59: Plambeck Neue Energien price evolution 2003-2007 8.25 Inv es tigation f or ins ider dealing, Norbet Plambec k announc es to s tep 7.50 A cquis ition of SSP dow n, tw o new board members 6.75 appointed 6.00 Firs t order f or SSP, f ramew ork Increas e s take in 5.25 w ith Babc oc k and Brow n, signed, SSP, negative EEG s trong FY '05 f igures 4.50 law revision 3.75 3.00 2.25 1.50 0.75 0.00 03 04 05 06 07 03 04 05 06 07 y- y- y- y- y- ly- ly- ly- ly- ly- ar ar ar ar ar Ju Ju Ju Ju Ju nu nu nu nu nu Ja Ja Ja Ja Ja Source(s): DataStream A new era begins with new board From the moment of the aforementioned disposals, a new era was introduced. August 2004 Martin members and improved visibility Billhardt, previously in charge for private equity investments at holding level was appointed as CFO through Babcock & Brown of the company and mid 2005 two new members joined the supervisory board (Mr. Kunkel and Mr. Kuprian) filling in for Norbert Plambeck and Martin Billhardt. These appointments have already proved positive to the company, which now can fully focus on onshore and offshore wind development. In the first half of 2006 the first order for SSP was received and several capital increases secured the financial position of PNE. In addition a framework signed with Babcock & Brown Wind Partners for the realisation and operation of 30 wind parks over 300MW, and the turbine order with Vestas, has led to financial and operational security. The offshore wind projects currently in the pipeline, of which two with in total 157 turbines (565MW) consented, show PNE is back on the rails and is regaining unconsciousness. Renewables 58 X.2. Finding PNE's position in the wind value chain Plambeck's current core business is twofold: i) the development, financing, sale and operation of onshore and offshore wind farms and ii) the manufacturing of rotor blades and moulds. Supplementary PNE has a current generation business, embracing hiring people to and selling fuel to biomass plants, the operation of one wind farm and setting up businesses before developed wind farms change hands. Throughout the wind value chain PNE is active in the development, the financing the construction and the service of wind farms. They only don't take part in the operation of the wind farms, although we believe the company should take this in consideration. Operating wind farms would create constant sales revenues, which PNE tries to find through managing/servicing the wind farms sold. As for now their balance sheet doesn't allow them to take participations, although once the restructuring progress succeeds and PNE achieves its aforementioned guidance, a participation strategy could be a next step. On the financing side the company usually looks for a partner like Babcock & Brown onshore and Dong for the Borkum Riffgrund project. The large scale of offshore wind farms, together with the accompanied need for huge financing, results in the need for PNE to find partners for its other offshore wind farms. Graph 60: Value chain Source(s): Plambeck Neue Energien German onshore wind market gets Due to long delivery times for wind turbines, over one and a half year, planning the development saturated, time to move abroad and process becomes difficult. Furthermore the investment cost in Germany rose from € 1m/MW to play the offshore game around € 1.2 m/MW end 2006. As a result, onshore projects in Germany are reaching a marginal point where the number of extra additions is expected to tail of. The German draft experience report suggests remuneration to be raised by € 7/MWh if wind energy systems are used that can contribute to an increase of network stability due to their technical design. Degression would drop from 2% to 1%. It will be important for wind developers to diversify its portfolio by moving abroad or by moving offshore. This perfectly mirrors PNE's strategy of exploiting their remaining German onshore pipeline through the Babcock & Brown deal, targeting the local offshore market through 5 projects and by moving abroad to Hungary by means of a joint venture. We expect PNE to target other countries through Joint Ventures with local developers as in Hungary. A move to France, previously left with the sale of Ventura, would in our view be a possible next step for the company, given the vast potential France still has to offer as the country with the second most wind potential in Europe. But first things first. Renewables 59 Graph 61: Installed capacity onshore 700 645 628 600 528 493 500 419 400 360 300 254 180 200 100 52 18 41 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source(s): Plambeck Neue Energien In this context PNE purchased 112 (probably 2MW) wind turbines from Vestas in 2006 (300MW needed for framework agreement with B&B, or 150 turbines if 2 MW). Given the long delivery times of wind turbines, this contract is of key importance to PNE. Last year the company commissioned and participated in the commissioning of German onshore wind farms with 50 wind turbines and an installed capacity of 100 MW. In the first half of 2007, 3 other wind farms reached completion, with 9 turbines and 17MW installed. This brings PNE's total installed onshore capacity to 645MW. SSP Technology A/S finally on In 2003 PNE acquired Danish SSP Technology a rotor blades manufacturing company. This track subsidiary takes on the design, development and the mould construction for rotor blade production. After years of difficulties SSP got its first order in 2006 and in the first half of 2007 already posted sales revenue of € 4m and has orders for another € 6m. In 2007 a capital increase at SSP went ahead and New Energies Invest took a stake of 25% in SSP after the capital increase. This brings Plambeck's stake at 70% while the remaining 5% stays in hands of SSP's management. With this new capital injection the equity level of SSP is strengthened and the growth strategy can proceed. PNE itself values SSP at € 16m or € 11.2m for its 70% stake. End 2007 sales should be able to reach €10m, with a 15-20% EBIT margin. Through the current generation business, containing the operation of the Laubuseschbach wind farm on the one hand, this division entails Plambeck Biomasse AG holding company, which hires employees to the Silbitz timber fired power station. The hiring is done on the basis of a contract for services. This contract includes the delivery of fuels to the timber power station operating company. Through the current generation business, limited commercial partnerships are made with other companies, which act as its support company until the implementation of a wind farm project, which is then sold to investors. X.3. Shareholders and management background New management needs to restore With PNE's history in mind, investors became somewhat sceptic towards management and the confidence supervisory board. Since the investigation carried out by the public prosecutor from 2005 on was discontinued in February 2007 following a payment of charges the case was closed, a new direction is set (the majority of the investigation procedures were already discontinued in 2006 without payment of any charges). Several new appointments at PNE with a new CFO (Mr. Martin Billhardt) and 2 new supervisory board members (Mr. Dieter K. Kuprian and Mr. Horst Kunkel), were a first move to win back investors trust. Mr. Dr. Wolfgang von Geldern (chairman) and Mr. Martin Billhardt (CFO) are now in charge of management of PNE. Mr. Dr. Wolfgang von Geldern is furthermore a member of PNE Biomasse and DEWI (Deutsches Windenergie-Institut). Mr. Martin Billhardt on his turn was previously member of the supervisory board and in charge of private equity investments. He joined the management board August 2004 and an active member of PNE Biomass, SSP and Deutsche Rohstof. Renewables 60 Graph 62: Shareholder structure 9.87% 9 .5 4% 8 0.59% Free Flo at C redit Suis s e FMR C o rp . Fide lity Inves tm en t Source(s): Plambeck Neue Energien Even more impressive is the history of PNE's capital structure. PNE is a story of constant capital increases and even a decrease, convertible bond re-ratings and financial reshuffling. Not even two years after the December 15 1998 IPO, shares were split on a ratio 1:3. From then on, PNE became a story of constant capital reshuffling. At the first capital increase, May 2001, 2.25m new shares were issued and October/November 2004 a second capital increase was executed. November/December 2005 2.25m new shares were issued and before, a capital decrease in ratio of 3:2 was performed in order to remove their negative equity. Over the period 2006-2007 three other capital increases went ahead for a total amount of € 35m. With this money, PNE has the intention to grow its wind business and to repay part of its debt. Of course the capital increases have led to a severe dilution of the EPS. Table 22: Capital movements Issue December, 1998 Share split October 2000 in ratio of 1:3 Capital increase May 2001 for 2.25m new shares Script issue September 2003 in ratio 20:1 Capital increase October/November 2004 for 2.761m new shares at € 1/share Capital decrease November 2005 in ratio 3:2, around € 10m Bond reprising more favorable conditions than at issue Capital increase November/December 2005 for 2.25m new shares at € 1.1/share Capital increase April 2006 for 2.25m new shares at € 2.5/share Capital increase December 2006 for 12.4m new shares at € 1.5/share Capital increase August 2007 for 3.7m shares at € 3.75/share Source(s): Plambeck Neue Energien We understand investors trust was dented although believe PNE has the worst behind and is ready to regain that trust. Capital increases in the RE sector are common practice and needed if these companies want to accomplish their growing strategy. We will go deeper into PNE's investment program in the next chapter. X.4. Plambeck's project portfolio Feeling Hung(a)ry for wind Small gains and no certainty Through a joint venture with GM Umwelt- und Energiewirtschaft, Dresden, PNE will enter the Hungarian onshore wind market, with a project pipeline up to 260MW over 9 projects (130 wind turbines). PNE will get a majority stake of 79% in the joint venture and will be responsible for selecting and purchasing wind-energy systems, project financing and distribution as for the commercial and technical plant management in the wind farm's operating phases. Its partner is responsible for the development of the projects up to readiness of construction. The total project should be realized by 2011 and has an estimated investment volume of roughly € 365m (€ 1.4m/MW), what feel to be conservative. Renewables 61 Graph 63: Hungarian onshore wind probabilities 100% 91% 20% 5% 1% Project planning Perm its pending Fully perm itted Under cons truction In operation Source(s): Dexia Est. Grid constraints a culprit for We estimate the onshore EV in Hungary at € 2.23m/MW for project becoming operational in 2010. Hungarian wind developers Hungary has one of CEE's best incentive schemes with a feed-in tariff of € 90/MWh, increasing with CPI (2.5%). This gives us an value creation of € 1.03/MW, taking a € 1.2m/MW investment cost. Although the remuneration scheme in Hungary is very supportive, we regret the Hungarian market suffers from limited grid capacity as is the case for most CEE countries. PNE believes the European Commission will intervene and give extra subsidies and support. Their wind farms are located in areas where grid connection is possible. Nevertheless we feel the 260MW by 2011 is overenthousiastic given the Hungarian cap of 330MW through 2010 due to grid constraints. To ensure that all fully permitted projects can be developed by 2020, developers needed to reduce their project size even to half of what was intended. In our view 200MW can be added by 2010 and over the period 2011-2015 another 60MW per year is likely to become operational. Of this total of 500MW by 2015, PNE wants to install more than half (260MW), what we believe to be overconfident, especially knowing there is currently a pipeline of over 1,100MW in Hungary. We use a probability rate of 1-5% for the projects since they are only still in the permits pending/planning stage and given the aforementioned grid constraints. Contract Babcock & Brown Important € 400m deal, although March 2006, a framework agreement on the sale of wind farms with B&B Wind Partners Limited small added value was signed. The contract encloses 30 wind farm projects, with approximately 108 turbines totalling a capacity of 300MW running over the period 2006-'09. The projects will be built in Germany by PNE on turnkey basis while B&B arranges the financing from construction phase onwards. PNE has furthermore received the mandate for the 20 year technical and commercial management of the delivered wind farms. With a total investment volume of € 400m, the price per MW paid by B&B is € 1.33m/MW. The contract was won after a global tender procedure. With an average investment cost of € 1.2m/MW, a small € 0.13/MW value creation will be made by PNE. We strongly support this contract on PNE's domestic market, especially in support of financial security, although believe it's time to move abroad and offshore. In January PNE delivered the first wind farm, the 10 MW Kaarst wind project, to B&B for € 17.5. The project is expected to have a further 2MW added capacity built this year. The € 1.46m/MW paid is higher than the average € 1.33m/MW what can point at an agreement between B&B and PNE where the latter will get paid a higher amount over its first contract in order to have enough financial means to pre-finance the other projects. The contract will be paid through milestone payments. The contract also includes several clauses amongst others and adjustment in the context of the EEG revision. Renewables 62 Graph 64: German onshore wind probabilities 100% 91% 73% 46% 23% 11% 5% 0% Project not indentified pending In operation Measurement Land lease permitted construction Permits identified arranged Project Fully Under Source(s): Dexia Est. Other German onshore wind project developments PNE has 400MW in the planning phase in Germany in addition to 70MW consented. If all contracts would go through, PNE would have a 170MW pipeline in addition to the 300MW B&B deal. We value a German project at € 1.25m/MW and investment costs at € 1.2m/MW. With decreasing feed- in tariffs by 2% each year the extra pipeline would thus create limited value for the company. Note there is a possible revision on its way, and a potential extra € 7.0/MWh could be added to the current feed in tariff while degression would drop from 2% to 1%. Since PNE is active in the servicing and management of onshore wind farms, long term stable revenues can be generated. The future lies in offshore wind development Graph 65: Offshore wind project probability in Germany Bor k um Riffgr und, turbine manuf acturing 100% negotiations ongoing (45%) 85% Gode Wind,f inancial partner 65% negotiations ongoing, 1 year consented (35%) 25% 10% 5% 2.5% 0.0% Measurement permitted In operation Project not Permits Turbines pending construction indentified ordered identified Project Fully Under Source(s): Dexia Est. Borkum Riffgrund PNE's first offshore farm needs to The Borkum Riffgrund project got its building permits in February 2004 and is the third offshore pave the way wind farm that got consented in Germany. The project will be built 38km North of the island Borkum at a water depth of 23-29m and is built in a joint venture with Danish Dong energy for both construction phases. The cost for Borkum Riffgrund is estimated at € 1.0bn for 720MW which brings us to a low cost of € 1.4m/MW excluding the grid connection. Wind developers are excluded from paying the grid connection cost in Germany. However, even without the grid connection cost of around 25% of the total investment cost, the initial investment would only be € 1.85m/MW against our € 2.4m/MW on average throughout Europe. We take into account a € 1.88m/MW investment cost (excluding grid connection cost) in line with German projects. Renewables 63 The project will run over two construction phases: in phase1 77 probably 3.6 turbines will be erected during the first construction phase and 103 probably 3.6 turbines in a second phase will be added to that. Total installed capacity would in this way run up to 650MW. PNE intends to start construction 2008/2009, although we are sceptical if this target will be achieved since turbines still need to be ordered and will result in construction delays. We foresee construction to start end 2008 with a start of operation in the second half of 2010. In this way PNE can still profit from the renewed EEG and is excluded from paying the grid costs. Since the company believes to deliver 750,000 households from electricity and knowing the average electricity use per household per year is 3,500kWh, we calculate 3,650 operating hours, in line with our generic model of 3,700 operating hours for Germany. Gode Wind PNE commenced with the development of Gode Wind in 2000, with preliminary applications Strong potential, operational by submitted mid 2005. After completing the environmental impact study, approval of the 80 turbine 2011 pilot phase was requested mid 2005. August 2006 the BSH gave approval for construction. Gode Wind will be built in depths of between 28 to 33 meters, 38km North of Juist. The project will be built in two phases, one of 80 turbines (3.6MW estimated) and a phase of another 101 (5MW estimated) turbines. This brings the total capacity of Gode Wind at 793MW. Infrastructure Journal estimates the construction costs for the Gode Wind farm with 5MW turbines (management indicated probably 3.6MW turbines will be used) at € 750m. This would raise costs to € 2.6m/MW (€ 2.0m/MW excluding grid connection costs). Just like was the case with Borkum Riffgrund, construction is expected to start 2008-'09. Due to the same reasons (mainly turbine delivery time), and the fact that no financial partner is selected yet, we expect construction will be postponed with a year. We foresee Gode Wind to be handed over to the investors as of 2011. Opposing to Borkum Riffgrund, no partner has been selected yet, although far going negotiations are currently in process with a strong financial partner for a partnership. This would raise credibility in management and the company. Still some extra offshore projects in the pipeline Other projects are currently in the project planning phase and of little importance to our valuation. Given the lengthy development process of offshore wind farms, little visibility is given. PNE provides us with a brief view on these projects which are 1,228MW in total located in the Baltic and North Sea. Table 23: Offshore project pipeline Offshore projects Location Year operat. MW Probability Borkum Riffgrund phase 1 Noth Sea 2010-2011 277 45.0% Borkum Riffgrund phase 2 Noth Sea n.r. 370 10.0% Gode Wind phase 1 Noth Sea 2010-2011 288 35.0% Gode Wind phase 2 Noth Sea n.r. 505 10.0% Project 5 Baltic Sea n.r. 228 5.0% Project 6 Noth Sea n.r. 500 5.0% Project 7 Noth Sea n.r. 500 5.0% Total 2,668 Source(s): Plambeck Neue Energien, Dexia Est. X.5. Financials: Focus on guidance Table: Company guidance PNE will have difficulties to reach its 2007 guidance of € 160-180m revenues given the already €m 2007E 2008E weak 1H'07 reporting, € 26.5m revenues ant € 0.29m EBIT, and no onshore projects under Revenues 160-180 180-200 construction. The only revenues in this way come from SSP, the current generation division (non- EBIT 12-16 16-20 core) and the servicing and management of wind farms sold. EBT 10-14 14-18 EPS 0.24-0.34 0.32-0.40 We only have a view on 70MW projects consented, and taking into account a 10 months to 1 year construction period it won't be possible for PNE to achieve this guidance. On the EBIT front on the other side, a surprise could come from the offshore wind farm division. PNE is currently negotiating with an investment bank to take a participation in the Gode Wind farm. Such a deal could possibly lead to a down payment from the partner. Taking abstraction of the minor depreciation in the Renewables 64 offshore wind division (~ € 1m) a € 10m fee would make Plambeck to reach its EBIT guidance. Focus will in our view be on this EBIT target although reaching guidance through offshore wind farm down payments could also mean the financial partner will be able to achieve a better pricing than what they would need to pay prior to start of construction. The hunger of PNE to live up to their guidance and to get a financial partner as soon as possible can result in sales and margin loss in the future. Table 24: P&L €m 2005 2006 2007E 2008E 2009E 2010E Consolidated sales 68.0 87.8 55.3 85.8 147.2 348.7 EBITDA 5.6 2.2 4.4 7.3 9.5 90.0 % margin 8.2% 2.5% 7.9% 8.5% 6.5% 25.8% Depreciation 1.9 1.9 1.9 2.0 2.2 2.4 EBIT 3.7 0.3 2.5 5.2 7.3 87.7 Financial income 0.7 0.3 0.3 0.2 0.1 1.0 Financial expense 7.0 6.7 6.0 6.2 5.3 5.5 EBT -2.6 -6.1 -3.1 -0.7 2.1 83.2 Taxes -0.1 -0.2 1.0 0.2 -0.7 -27.2 Consolidated profit -2.7 -6.3 -2.1 -0.5 1.4 57.8 Minorities 0.0 0.0 2.5 3.8 6.1 9.8 Net profit, group -2.7 -6.3 -4.6 -4.3 -4.7 48.1 Source(s): Plambeck Neue Energien, Dexia Est. Debt repayment through capital If we look at PNE's balance sheet it becomes clear that PNE has a hefty amount of debt increases and a possible IPO of outstanding. In July this year a new capital increase went through in order to reduce this debt SSP position. PNE's difficult history and the difficult circumstances in Germany were at the basis. PNE will definitely need to perform better to achieve the aforementioned guidance, especially on the EBIT front. An IPO of SSP could be another way next to capital increases and selling offshore wind projects, to optimize its balance sheet. However, achieving their guidance and prove profitability through their own business model still remains the best way to do this. Table 25: Balance sheet €m 2005 2006 2007E 2008E 2009E 2010E Fixed and financial assets 64.2 60.9 59.3 60.8 62.1 80.5 Cash 3.0 7.8 10.9 6.4 2.2 31.3 Current assets (net of cash) 50.0 56.6 59.9 65.0 73.9 94.8 Sh. Equity -3.5 14.9 28.9 28.4 29.8 87.6 Minority interest 0.0 0.2 4.1 8.0 14.1 23.8 Other provisions 21.3 17.0 6.2 6.4 6.5 6.7 Net debt 74.3 60.9 57.8 62.3 66.5 37.5 Source(s): Plambeck Neue Energien, Dexia Est. PNE only has minor capex expenses, as most of the investments are recorded as work in progress, and in PNE's case paid by partners they work with. We believe PNE will be able to pay back a part of its debt in 2007, thanks to the capital increase and a first payment for the Gode Wind project. This should result in a low change in cash for the coming years. From 2010 we foresee PNE to sell 1 offshore project each year, probability adjusted based on the phase the projects are in. Table 26: Cash Flow Statement €m 2005 2006 2007E 2008E 2009E 2010E Funds From Operations (FFO) 3.3 -18.0 -11.1 1.6 3.7 60.3 Change in working capital -14.2 7.8 -1.7 -2.6 -4.4 -10.5 Cash from operating activities -11.0 -10.2 -12.8 -1.0 -0.7 49.9 Cash for investing activities 1.0 -1.5 -2.3 -3.5 -3.5 -20.8 Of which capex -1.9 -1.7 -2.3 -3.5 -3.5 -3.5 Free cash flow before financing -9.9 -11.6 -15.1 -4.5 -4.2 29.1 Recurring FCF before financing -12.8 -11.9 -15.1 -4.5 -4.2 46.4 Cash from financing activities 3.9 16.5 18.1 0.0 0.0 0.0 Change in cash -6.0 4.8 3.0 -4.5 -4.2 29.1 Source(s): Plambeck Neue Energien, Dexia Est. Renewables 65 X.6. All eyes on the offshore division To value PNE we have made a DCF model for each division separately: As discussed, the onshore wind division will profit from the B&B deal, although given the novelty of the pipeline, most of the onshore value lies in the servicing and management of the wind farms sold. We furthermore value the "pipeline beyond pipeline", taking into account the country targets in onshore instalment and PNE's constant market share (~3%) in Germany. The offshore wind division will be able to profit from the boom in offshore wind instalments in the years to come, assisted by revenues from the offshore wind farm servicing contracts. We furthermore feel PNE will take a ~7% equity stake in the offshore wind farms they develop. SSP's business model is finally up and running and first orders are won. Nevertheless we remain cautious as the division is just gaining ground and needs to prove itself. The operating margins in the first year half came in at 17% and will maybe be difficult to achieve in the future. If we compare to LM Glassfibre a competitor of SSP we witness 11% EBIT margin. Given the limited view on the current generation division, we value the business on a DCF basis. As a result we come in at an EV of € 8.9m. Table 27: SoTP €m Comment _Onshore 83.8 300MW B&B deal, 216MW in planning in Hungary _Offshore 214.3 565MW consented, 2,670MW pipeline, Incl. servicing & mgmt. _SSP 18.3 Turbine blade manufacturing, 1.5% long term growth _Current generation 8.9 _Holding Cost -48.8 Fair EV 276.5 - net debt '07 57.8 - minority interest '07 6.1 - provisions '07 3.0 - deferred tax '07 0.0 + equity stake 15.1 7% offshore wind operating + associates '07 0.7 = Fair equity 225.3 number of shares 46.6 Diluted, convertible bond of 5.35m shares =Value per share 4.8 Source(s): Dexia Est. Taking participations to create PNE could be valued at higher multiples if they would take into consideration taking participations extra value in their developed wind farms and be active as an operator. From talks with management we are confident PNE will take equity stakes in their offshore wind farms, although for the time being limited visibility is given as only one project has found a partner. The cash flows generated by selling offshore wind farms will offer PNE the financial means to put this into practice for future offshore projects. Graph 66: Feed-in tariff sensitivity analysis 12.0 € 11.00 € 10.10 10.0 Current share price € 8.30 8.0 TP (€/share) € 6.60 6.0 € 4.80 4.0 2.0 € 1.60 0.0 91 110 120 130 140 150 Feed-in Tarif f (€/MWh) Source(s): Dexia Est. Renewables 66 Our price target is highly sensitive to the German feed-in tariff. Currently this feed-in tariff is € 91/MWh for the first 12 years, while through the renewed German Electricity law (EEG) feed-in tariffs intend to increase to a range € 110-150/MWh for the first 12 years. This range is a proposal made by the German government in the beginning of 2007 and an official decision on the tariff needs to be made by the end of the year. In our model we apply the lower end of this range, € 110/MWh (for a 20 year period or € 120/MWh for 12 years adjusted by the base rate and average water depth and distance from coast), and come in at a TP of € 4.8. An increase to the middle of this range, € 130/MWh would increase our TP to € 8.3 while the high end of the range inflects a rise to € 11.0/share. Renewables 67 X.7. Financial Profile Consolidated P&L (€ m) 2006 2007E 2008E 2009E 2010E Consolidated Sales 87.8 55.3 85.8 147.2 348.8 EBITDA 2.2 4.4 7.3 9.5 90.1 % margin 2.5% 7.9% 8.5% 6.5% 25.8% Depreciation 1.9 1.9 2.0 2.2 2.4 EBIT 0.3 2.5 5.2 7.3 87.7 Financial income 0.3 0.3 0.2 0.1 1.0 Financial expense 6.7 6.0 6.2 5.3 5.5 EBT (6.1) (3.1) (0.7) 2.1 83.2 Taxes (0.2) 1.0 0.2 (0.7) (27.2) Consolidated profit (6.3) (2.1) (0.5) 1.4 57.9 Minorities 0.0 2.5 3.8 6.1 9.8 Net profit, group (6.3) (4.6) (4.3) (4.7) 48.1 Funds Flow (€ m) 2006 2007E 2008E 2009E 2010E Funds From Operations (FFO) (18.0) (11.1) 1.6 3.7 60.3 Change in working capital 7.8 (1.7) (2.6) (4.4) (10.5) Cash from operating activities (10.2) (12.8) (1.0) (0.7) 49.9 Cash for investing activities (1.5) (2.3) (3.5) (3.5) (20.8) Of which capex (1.7) (2.3) (3.5) (3.5) (3.5) Free cash flow before financing (11.6) (15.1) (4.5) (4.2) 29.1 Recurring FCF before financing (11.9) (15.1) (4.5) (4.2) 46.4 Cash from financing activities 16.5 18.1 - - - Change in cash 4.8 3.0 (4.5) (4.2) 29.1 Balance Sheet (€ m) 2006 2007E 2008E 2009E 2010E Fixed and financial assets 60.9 59.3 60.8 62.1 80.5 Cash 7.8 10.9 6.4 2.2 31.3 Current assets (net of cash) 56.6 59.9 65.0 73.9 94.8 Sh. Equity 14.9 28.9 28.4 29.8 87.6 Minority interest 0.2 4.1 8.0 14.1 23.8 Other provisions 17.0 6.2 6.4 6.5 6.7 Net debt 60.9 57.8 62.3 66.5 37.5 Per share data 2006 2007E 2008E 2009E 2010E EPS (0.3) (0.1) (0.1) (0.1) 1.2 CFPS (0.2) (0.0) 0.0 0.1 1.5 DPS - - - - - Book value per share 0.6 0.6 0.5 0.4 1.5 pay-out 0.0% 0.0% 0.0% 0.0% 0.0% Ratios 2006 2007E 2008E 2009E 2010E ROE % -42.7% -18.6% -21.1% -30.0% 75.3% ROCE % -8.4% -2.6% -0.6% 1.7% 57.1% Net gearing % 407.7% 200.1% 219.4% 223.3% 42.8% Net debt/EBITDA 28.0 13.2 8.6 7.0 0.4 Valuation ratios 2006 2007E 2008E 2009E 2010E P/E -8.72 -25.02 -26.68 -24.42 2.40 P/BV 3.7 4.7 5.6 7.3 1.8 Div Yield - - - - - EV/Sales 1.3 3.1 2.1 1.2 0.4 EV/EBIT 457.9 69.0 33.9 24.9 1.7 EV/EBITDA 53.3 39.6 24.4 19.1 1.7 EBIT/int exp 0.0 0.4 0.8 1.4 15.9 D/(D+E) 82.1% 70.4% 70.8% 69.8% 44.0% Renewables 68 XI. ENERGIEKONTOR, TAKING ON THE OFFSHORE CHALLENGE Energiekontor is a wind farm developer, listed on the German stock exchange. Recently it contrary to PNE also became active in the operation of onshore wind farms. The company intends to build offshore wind farms in Germany, where it has a consented pipeline of a possible 378-525MW (3.6MW Siemens or 5MW turbines) and has 80 turbines in the permits pending phase. For one of its offshore wind projects, Nordergründe, Energiekontor already found a partner with NIBC and intends to start construction by 2009. The other offshore wind farm, Borkum Riffgrund West also got consented although a financial partner still needs to be found or the project would be finished on a non-recourse financing basis. In addition far going negotiations with a wind turbine manufacturer could result in a first offshore wind turbine order. The company furthermore has a diversified international onshore wind portfolio with assets in Germany, the UK and Portugal, two remunerative wind countries. Through the operation of onshore wind farms the company has secured itself of stable revenues in the years to come in addition to its servicing and management activities. We support i) the internationally oriented strategy of the group, mainly in a growing market like the UK and ii) the offshore strategy and move to take part in the operation of wind farms. But still many uncertainties remain. The Portuguese market has to endure grid constraints while land acquisition and permitting is consequently witnessing serious delays. Furthermore the continued focus on the German onshore market is not a strategy we applaud given the lack of equity value creation. The onshore market is "drying up" and offshore wind farms are ready to take over. The company also can't be proud of its communication towards investors and its uninspiring history. Energiekontor left the "Neuer markt" back in 2002 and is now listed on the less regulated Frankfurt stock exchange. In this context the company only reports in German, making it more difficult for international investors to grasp its business. What's more, EnergieKontor already saw some of its offshore wind project pipeline fade away. Compared to Plambeck Neue Energien, the other listed wind farm developer in Germany, Energiekontor has only a limited offshore pipeline and we don't have a view on extra projects in addition to the ones consented. In the past we also remark that the company had some problems in securing turbines, what is something we didn't saw at Plambeck Neue Energien. As a result we initiate coverage on Energiekontor with a Neutral rating and TP of € 4.7. Strengths: Weaknesses: Two consented offshore wind projects. Limited offshore pipeline compared to Plambeck. Diversified onshore wind portfolio, active in the UK as History with loss of investors trust. one of the most profitable countries Exposure to low profitable German onshore wind Operating onshore wind farms market. Listed on less regulated Frankfurt stock exchange, communication in German. Opportunities: Threats: EEG offshore feed-in tariff revision from € 91/MWh to Grid constraints in Portugal can put pressure on the € 110-150/MWh. development of its onshore pipeline. Taking stakes in offshore wind farms. Not being able to get turbines in time. Takeover candidate, equal to a similar trend in the onshore wind market. Renewables 69 XI.1. A little history lesson not to be proud of Although the German onshore wind market has been growing at an incredible pace, it was not always "clear skies ahead" for the wind farm developers. In the case of Energiekontor, initially issued at € 32 in May 2000 and rising to an all time high of € 121 things looked quite bright. It was in November 2000 shares first started to slip after the postponement of some wind farms and reporting below guidance. It went even to the point that the price dropped to an all time low of € 0.86 ((shares were split 4:1 giving a rebased IPO price of € 8 to compare with). Although with seriously dented investors trust, because of difficulties to achieve guidance and further external political pressure (tax law revision for private RE investments), Energiekontor will need to prove what its worth. We feel confident the company has what it takes to keep its head above water, and even more to regain the lost trust. The new upwards revision of the EEG law will possible create extra value for both their onshore as offshore plants and the decision to take wind farms on their books has already created and will furthermore offer financial security. Energiekontor has also decided to step down from new wind energy technologies, like a hybrid storage wind power plant and offshore wind monitoring and operating systems and now fully focuses on the wind development chain. Graph 67: Energiekontor price evolution 2000-2007 35 IPO, s ev eral brokers iniate c ov erage w ith a "Buy " rating 30 Pos tponement of w ind f arms and 25 res ults c ome in below guidanc e Fears on detoriation of the regulatory env ironment f or projec t dev elopers . 20 A llegations of legal ac tion to reac quire Propos al upw ards EEG 15 3 projec ts , prof it w arning ==> dented rev is ion inv es tors trus t A nother prof it w arning w ith reduc tion of 2002 10 s ales guidanc e f rom €200m to €130-140m Leav ing the Neuer Markt 5 0 0 0 1 1 2 2 3 3 4 4 5 5 6 6 7 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 ay ov ay ov ay ov ay ov ay ov ay ov ay ov ay M N M N M N M N M N M N M N M Source(s): Energiekontor, Dexia XI.2. Wind development, from the cradle to the grave Energiekontor was founded in 1990 and is one of the market leaders in Germany for the development of onshore wind farms. With more than 450MW installed, Energiekontor is one of the leading German wind farm developers. The company is active in the full development chain and is always on the lookout for acquiring good wind locations, which are leased from the current landowners. The latter receive payments based on the amount of electricity generated. Once the project receives planning permission Energiekontor finances, builds and often operates the wind farm, what shows the company is active in the wind value chain from the cradle to the grave. By the end of 2006 Energiekontor developed 65 wind parks totalling around 450MW in Germany, Greece, the UK and Portugal for a total investment amount of € 640m (€ 1.4m/MW). Renewables 70 Graph 68: Value chain Source(s): Energiekontor In the past Energiekontor had one of the biggest pools of private investors who were able to profit from tax exemptions. Now things have changed and Energiekontor is looking for bigger institutional investors, especially for their offshore wind farms completing the private investors. From the context of internationalisation and the move offshore, we definitely support Energiekontor's strategy. The German onshore market is currently consolidating with the best sites already claimed and repowering is on its way. The future of the German market is offshore and through Nördergründe (125MW) and Borkum Riffgrund (400MW) Energiekontor has already two offshore wind farms consented. XI.3. Shareholders and management background Dr. Bodo Wilkens and Günter Lammers founded Energiekontor back in 1990 and are with 32% Graph: Shareholders structure and 35% the biggest shareholders. They were also the initial managing directors of the group Lammers and in the first place targeted onshore development in Germany, although through the opening Fr ee Günt er of several international offices, became active in Portugal, Spain, the UK and Greece. Early Float 34% 32% 2000, Energiekontor also announced its first offshore projects in Germany. Dr. Bodo Wilkins is one of the two founders of Energiekontor and previously operated as the company's CEO. He followed a PhD in economics and worked for the Association of Germany Electricity Producers. He is currently the chairman of Wilk ens B odo Energiekontor's supervisory board. 34% Günter Lammers is the other founder of the company. He previously worked in a number of companies active in the marketing of ecological products. Daily management is in hands of Mr. Dirk Gottschalk and Mr. Peter Szabo. Renewables 71 XI.4. Energiekontor's project portfolio Onshore development In 2006 Energiekontor had to endure longer waiting times (18 to 24 months) and higher turbine prices (30% rise y-o-y) just as any other wind farm developer. This led to the postponement of several wind projects, the lengthening of the construction period accompanied by the deferral in the issue of building permits. The realisation period of a wind farm project has in this way been postponed by a couple of months. Table 1: Energiekontor wind market evolution (MW) CAGR 3.9% Germ any Portugal UK CAGR 10.0% CAGR 14.2% 2006A 2007E 2008E 2009E 2010E 2015E Source(s): Dexia Est. Energiekontor has an onshore wind project pipeline in Germany, Portugal and the UK. While in Germany the onshore market is starting to slow down, we foresee strong growth in both Portugal and the UK. This is also something we see in the remuneration of the onshore wind farms. Table 2: German onshore feed-in tariff evolution (€ kWh) Source(s): BWE In Germany we only see limited added value of € 0.1m/MW, while in the UK, even with the higher investment cost (€ 1.65m/MW against € 1.2m/MW elsewhere in Europe), € 0.55m/MW value creation is created. The German onshore feed-in tariffs for new installations are decreasing each year with 2% and a new EEG law revision expected in December 2007 should change this degression from 2% to 1% and increase the feed-in tariff with a proposed € 7/MWh for installations fulfilling the technical needs. Table 28: Onshore project pipeline MW Construction Consented Planning Land leasing Germany 10 15 28 100 Portugal 4 10 100 80 UK 0 0 50 280 Source(s): Plambeck Neue Energien, Dexia Est. Renewables 72 Offshore development Graph 69: Offshore wind project probability in Germany Norde rgründe , turbine manufacturing negotiations 100% ongoing, f inancial partner f ound (45%) 85% Bork um Riffgrund We s t, w ithout 65% partnership, 1 year consented (30%) 25% 10% 5% 2.5% 0.0% Measurement Project not permitted In operation Permits Turbines pending construction indentified ordered identified Project Fully Under Source(s): Dexia Est. Borkum Riffgrund West The start of construction is foreseen in May 2009, although given the long waiting times for turbines some delay can be expected. Energiekontor is currently on the lookout for investors for the Borkum Riffgrund project that will probably be built in three phases representing 80 (not determined what scale) turbines. In a first phase, 30 turbines are expected to be erected followed by two phases of 25 turbines each. Energiekontor is currently negotiating an extension phase for the Borkum Riffgrund project with another 80 turbines. Nordergründe Dutch bank NIBC will take up financing for the Nordergründe wind farm that has already been consented and since July the environmental study is done. Energiekontor plans the construction and operation in 2009 although we believe that long turbine delivery times will restrain the quick offshore expansion and operating will only start in 2011, especially in the context to profit from the grid cost exemption. The offshore farm will be built 15km North East of Wilhemshaven and will count around 25 wind turbines (size not decided). The project will thus be built in the 12nm zone at a depth of around 4 to 15 metres. Graph 70: Location offshore wind farms Source(s): Energiekontor We don't have a view on extra offshore wind projects for PNE although the company indicates they are currently looking into it. Renewables 73 XI.5. Financials, taking on some operation Last year Energiekontor transferred several Portuguese wind farms into its own balance sheet resulting in a rise in debt and financial stability. Currently the company operates ~80MW spread over 10 wind farms on their own balance sheet, divided over German and Portuguese assets. This led to a stabilisation of their sales revenues and earnings and gives Energiekontor less exposure to the volatile wind farm development. Last year the revenues from electricity came in at € 11.3m against € 5.3m in 2005. Knowing the group revenue in 2006 came in at € 14.9m, the electricity revenue made up over 75% of the total. This again points at the weak market circumstances in 2006 for onshore wind farm developers. The revenues for the sale of wind farms to third parties totalled € 1.9m in 2006 while revenues from services came in at € 1.7m. Graph 71: 2006 sales revenues split-up Graph 72: Onshore project pipeline Sale of Services w ind farms 11% 250 13% 200 150 150 UK 150 Portugal 100 Germany 50 75 70 40 10 Electricity 0 76% 2007 2008 2009 2010 Source(s): Energiekontor Source(s): Energiekontor, Dexia Est. The graph above on the right gives our underlying not probability adjusted MW rollout assumptions. While Germany and Portugal provide the short-term revenues, the 2009-'10 expected rollout will primordially come from the UK. The company will possibly endure risks from the delay in turbine deliveries, foreign governments restricting land acquisitions in their markets and the scaling down of the local German market. Table 29: P&L €m 2005 2006 2007E 2008E 2009E 2010E Consolidated sales 34.6 14.9 21.8 27.1 47.8 101.9 EBITDA 10.6 9.7 15.0 10.0 7.5 32.5 % margin 30.7% 65.0% 68.8% 36.8% 15.7% 31.9% Depreciation 7.4 6.6 7.2 8.0 9.2 9.3 EBIT 3.2 3.1 7.8 2.0 -1.7 23.2 Financial income 1.1 0.8 0.9 0.7 0.5 0.7 Financial expense 4.2 6.2 6.0 6.7 7.9 8.2 EBT 0.1 -2.4 2.7 -4.0 -9.1 15.8 Taxes 0.0 -0.5 0.9 -1.3 -2.8 5.2 Consolidated profit 0.1 -1.8 1.8 -2.7 -5.9 11.0 Minorities 0.0 0.0 0.0 0.0 0.0 0.0 Net profit, group 0.2 -1.8 1.8 -2.7 -6.0 10.9 Source(s): Energiekontor, Dexia Est. The "take on balance" approach for onshore wind farms changed both the P&L and cash flow statement of Energiekontor in a positive way. More certainty is now offered to investors, given the stable income from operating a wind farm compared to the development of these assets. In addition investors will change their view on Energiekontor and value the company in the range of operators, quoting at higher multiples. The group now carries high debt on its balance sheet, although this debt is due to non-recourse financing of its onshore projects and will thus be paid back by these projects. Renewables 74 Table 30: Balance sheet €m 2005 2006 2007E 2008E 2009E 2010E Fixed and financial assets 93.8 90.3 94.5 101.5 116.7 118.6 Cash 46.6 37.3 35.2 29.5 19.7 25.2 Current assets (net of cash) 21.4 25.4 26.7 28.0 29.3 30.6 Sh. Equity 49.5 41.0 39.6 33.9 25.0 32.9 Minority interest 1.3 1.3 1.3 1.3 1.4 1.4 Other provisions 9.2 7.0 7.2 7.3 7.5 7.7 Net debt 44.8 62.9 69.0 82.0 105.8 97.8 Source(s): Energiekontor, Dexia Est. In 2006, 541,400 shares were bought back and together with the amount of share bought back in 2005 and begin 2007 the total amount of shares comes in at 15.09m. In July 2007 the General Assembly of Energiekontor decided 10% of the share capital can be bought back with 23 November 2008 as end date. The shares will not be destroyed and the capital will be added back to the outstanding equity. Furthermore, Energiekontor offers its investors a small dividend of € 0.2/share. Table 31: Cash Flow Statement €m 2005 2006 2007E 2008E 2009E 2010E Funds From Operations (FFO) 55.7 -20.7 7.9 4.4 3.7 24.0 Change in working capital -24.1 12.7 0.7 0.5 -0.1 -1.8 Cash from operating activities 31.6 -8.0 8.6 4.9 3.5 22.2 Cash for investing activities -56.2 -3.2 -11.4 -15.0 -24.3 -11.2 Of which capex 56.2 3.2 11.4 15.0 24.3 3.2 Free cash flow before financing -24.6 -11.2 -2.8 -10.1 -20.8 11.0 Recurring FCF before financing -24.6 -11.2 -2.8 -10.1 -20.8 19.0 Cash from financing activities 18.3 2.1 0.8 4.4 10.9 -5.4 Change in cash -6.3 -9.1 -2.0 -5.7 -9.8 5.5 Source(s): Energiekontor, Dexia Est. XI.6. Valuation We have valued the company on a SoTP based approach valuing the development pipeline aside from the assets under operation and the servicing and management of onshore and offshore wind farms. As a result we initiate coverage on Energiekontor with a Neutral rating and TP of € 4.7. Table 32: SoTP Activities €m Comment _Development 119.0 Pipeline, DCF generic wind model offshore and onshore _Service and management 48.2 Onshore and offshore wind farm management _Operation 23.1 65MW onshore wind assets, 50% operating in the future _Holding Cost -45.1 DCF Fair EV 145.2 - net debt 69.0 - minority interest 1.3 - provisions 7.2 + equity stake 2.2 Equity stake of 10% in Nordergründe offshore farms + associates 0.0 = Fair equity 69.9 number of shares 15.0 =Value per share 4.7 Source(s): Dexia Est. Note we have incorporated Energiekontor will take a 10% equity stake in the Nordergründe project, representing the € 2.2m equity stake. Renewables 75 Graph 73: Feed-in tariff sensitivity analysis 14.0 12.0 12.0 10.9 Current share price 10.0 8.8 TP (€/share) 8.0 6.7 6.0 4.7 4.0 2.0 € 0.7 0.0 91 110 120 130 140 150 Feed-in Tarif f (€/MWh) Source(s): Dexia Est. Our price target is highly sensitive to the German feed-in tariff. Currently this feed-in tariff is € 91/MWh while through the renewed German Electricity law (EEG) feed-in tariffs intend to increase to a range € 110-150/MWh. This range is a proposal made by the German government in the beginning of 2007 and an official decision on the tariff needs to be made by the end of the year. In our model we apply the lower end of this range, € 110/MWh, and come in at a TP of € 4.3. An increase to the middle of this range, € 130/MWh (20 years operation or € 140/MWh for 15 years) would increase our TP to € 8.8 while the high end of the range inflects a rise to € 12.0/share (~ € 150/MWh for 15 years). Renewables 76 XI.7. Financial Profile Consolidated P&L (€ m) 2006 2007E 2008E 2009E 2010E Consolidated Sales 14.9 21.8 27.1 47.8 101.9 EBITDA 9.7 15.0 10.0 7.5 32.5 % margin 65.0% 68.8% 36.8% 15.7% 31.9% Depreciation 6.6 7.2 8.0 9.2 9.3 EBIT 3.1 7.8 2.0 (1.7) 23.2 Financial income 0.8 0.9 0.7 0.5 0.7 Financial expense 6.2 6.0 6.7 7.9 8.2 EBT (2.4) 2.7 (4.0) (9.1) 15.8 Taxes (0.5) 0.9 (1.3) (2.8) 5.2 Consolidated profit (1.8) 1.8 (2.7) (5.9) 11.0 Minorities 0.0 0.0 0.0 0.0 0.0 Net profit, group (1.8) 1.8 (2.7) (6.0) 10.9 Funds Flow (€ m) 2006 2007E 2008E 2009E 2010E Funds From Operations (FFO) (20.7) 7.9 4.4 3.7 24.0 Change in working capital 12.7 0.7 0.5 (0.1) (1.8) Cash from operating activities (8.0) 8.6 4.9 3.5 22.2 Cash for investing activities (3.2) (11.4) (15.0) (24.3) (11.2) Of which capex 3.2 11.4 15.0 24.3 3.2 Free cash flow before financing (11.2) (2.8) (10.1) (20.8) 11.0 Recurring FCF before financing (11.2) (2.8) (10.1) (20.8) 19.0 Cash from financing activities 2.1 0.8 4.4 10.9 (5.4) Change in cash (9.1) (2.0) (5.7) (9.8) 5.5 Balance Sheet (€ m) 2006 2007E 2008E 2009E 2010E Fixed and financial assets 90.3 94.5 101.5 116.7 118.6 Cash 37.3 35.2 29.5 19.7 25.2 Current assets (net of cash) 25.4 26.7 28.0 29.3 30.6 Sh. Equity 41.0 39.6 33.9 25.0 32.9 Minority interest 1.3 1.3 1.3 1.4 1.4 Other provisions 7.0 7.2 7.3 7.5 7.7 Net debt 62.9 69.0 82.0 105.8 97.8 Per share data 2006 2007E 2008E 2009E 2010E EPS (0.1) 0.1 (0.2) (0.4) 0.7 CFPS 0.3 0.6 0.3 0.2 1.3 DPS 0.3 0.2 0.2 0.2 0.2 Book value per share 2.6 2.5 2.2 1.6 2.1 pay-out -250.8% 162.5% -111.8% -50.6% 27.4% Ratios 2006 2007E 2008E 2009E 2010E ROE % -4.6% 4.8% -8.3% -25.2% 34.7% ROCE % -1.8% 1.7% -2.3% -4.6% 8.5% Net gearing % 154% 174% 242% 424% 297% Net debt/EBITDA 6.5 4.6 8.2 14.1 3.0 Valuation ratios 2006 2007E 2008E 2009E 2010E P/E -16.72 35.29 -24.27 -10.98 5.94 P/BV 0.8 1.7 2.0 2.8 2.1 Div Yield 1.0 2.0 3.0 4.0 5.0 EV/Sales (16.7) 35.3 (24.3) (11.0) 5.9 EV/EBIT 30.5 17.3 73.2 (103.1) 7.0 EV/EBITDA 9.6 9.0 14.8 22.7 5.0 EBIT/int exp 0.5 1.3 0.3 (0.2) 2.8 D/(D+E) 71.0% 72.5% 76.7% 83.4% 78.9% Renewables 77 XII. ROUND-UP: PNE VS. ENERGIEKONTOR Table 33: PNE vs. Energiekontor Key business drivers Plambeck Neue Energien Energiekontor I Geographies onshore Hungary (=) Germany (-) Germany (-) UK (+) Portugal (=) II Pipeline offshore 2,670 MW, 10.5% of German pipeline (+) 778 MW, 3% of German pipeline (=) III Consented offshore (see table 34) 565 MW, 9% of consented projects (+) 378 MW*, 6% of consented projects (+)* IV Operating projects No (-) Yes (+) V Investor confidence/Track record Troubling (-) Troubling (-) VI Financial partners Babcock & Brown, Dong (+) NIBC (=) VII Contract with turbine manufacturers Vestas turbine order (+) Turbine capacity constraints (-) VIII Take-over candidate Yes, in spite of strong partnerships (= / +) Yes (+) IX Communication/reporting English (+) German (-) Recommendation Buy Neutral Current price € 2.8/share € 4.4/share Target price € 4.8/share € 4.7/share Source(s): Dexia Est. *Est. 3.6MW turbines, including Nordergründe <12nm zone Table 34: German consented offshore wind projects Project Location Developer Turbines Permit MW North Sea Test Field Borkum West 43 km north of Borkum E.ON, Vattenfall, EWE 12 Nov-01 60 Amrumbank West 37 km west of Amrum E.ON Energy Projects 80 Jun-04 400 Nordsee Ost 35 km NW of Helgoland Essent Wind 80 Jun-04 400 Sandbank 24 100 km west of Sylt Sandbank 24/Projekt 80 Aug-04 400 Nördlicher Grund 84 km west of Sylt Renergys and Geo 80 Dec-05 400 Global Tech 1 93 km north of Juist Nordsee Windpower 80 May-06 400 Hochsee Windpark Nordsee 90 km north of Borkum EOS Offshore 80 Jul-06 400 Bard Offshore 1 89 km NW of Borkum Bard Engineering 80 Apr-07 400 Airtricity/Offshore Bürger Butendiek 35 km west of Sylt Windpark 80 Dec-02 240 Borkum Riffgrund West 40 km NW of Borkum Energiekontor 80 Feb-04 288 Borkum Riffgrund 34 km north of Borkum Plambeck/Dong 77 Feb-04 277 Offshore North Sea Windpower 40 km north of Juist E.ON Energy Projects 48 Feb-05 240 Dan-Tysk 70 km west of Sylt Geo 80 Aug-05 400 Godewind 33 km north of Norderney Plambeck Neue Energien 80 Aug-06 288 Meerwind Ost 24 km north of Helgoland Windland, Berlin 40 May-07 200 Meerwind Süd 24 km north of Helgoland Windland, Berlin 40 May-07 200 Baltic Sea Kriegers Flak 30 km north of Rügen Offshore Ostsee Wind 80 Apr-05 400 Arkona-Becken Südost 35 km NW of Rügen E.ON Energy Projects 80 Mar-06 400 Ventotec Ost 2 35 km NE of Rügen Ventotec Ost 2 80 May-07 400 Source(s): Companies, Dexia ANALYST CERTIFICATION I, Dieter Furniere, hereby certify that the views expressed in this research report accurately reflect my personal opinion about the companies and the securities discussed herein. This report has been submitted to the issuer of the financial instrument it relates to before its publication. Like all employees of Dexia Bank Belgium, the remuneration can be base in part on the results of Dexia Bank Belgium as a whole, which may include investment banking revenues. I certify that I do not hold, directly or indirectly, any interest in the companies mentioned above. However, no part of my compensation was or is related to any recommendation or opinion expressed in this report. RELATED COMPANIES: Plambeck (PNE3 GY, €2.75, XETRA) Energiekontor (EKT GR, €4.40, FSE) COMPANY SPECIFIC REGULATORY DISCLOSURES Dexia Bank Belgium or any entity of Dexia Group can perform commercial banking, brokerage and advisory services for or on behalf of any of the companies or organisations referred to in this report. Furthermore, Dexia Bank Belgium or any entity of Dexia group may hold a position either independently or for the benefit of third parties, or trade in the securities of any company or organisation referred to this report, as a broker, market maker, or in any other role. The following disclosures relate to relationships between Dexia Bank Belgium or its subsidiaries and companies covered by the equity research division of Dexia Bank Belgium and referred to in this research. Dexia Bank Belgium may have from time to time non-securities related banking relationships with the companies covered by its research department. RECOMMENDATIONS We use four stock recommendations which reflect the share's expected absolute performance as follows: Buy: we expect this stock to generate a return of >15% over the next twelve months; Add: we expect this stock to generate a return of 5-15% over the next twelve months; Neutral: we expect this stock to generate a return of 0-5% over the next twelve months; Reduce: we expect this stock to generate a negative return over the next twelve months DISTRIBUTION OF RATINGS/INVESTMENT BANKING RELATIONSHIPS Rating distribution Investment banking relationship Rating Category Count Percent Count Percent Buy 20 33.3% 4 20.0% Add 14 23.3% 2 14.3% Neutral 18 30.0% 5 27.8% Reduce 8 13.3% 0 0.0% Rating distribution Total: 60 Investment banking relationship Total: 11 MEASURES PREVENTING CONFLICTS OF INTEREST Dexia Bank Belgium prohibits its analysts from owning securities of any company he/she is covering. Such restrictions are enhanced by the formal undertaking to perform all personal securities transactions through an account with Dexia Bank Belgium. Analysts' remuneration can be based in part on the results of Dexia Bank Belgium which may include investment banking revenues. Analysts are required to respect the information sharing policy that restricts disclosure of recommendations to third parties or to any other department of Dexia Bank Belgium or any other entity of the Dexia group prior to the distribution or the public disclosure thereof. Similar information barriers apply to the staff involved in the corporate banking, corporate finance and structured finance activity in order to prevent conflicts of interest. They are not allowed to enter into transactions involving securities of a listed company for their own account or for the account any third party, when involved in the customer relationship with such company nor communicate on the relationship with such company outside the corporate department without the prior authorization of the Compliance Officer. 9-11-2007 Rating and Target Price History for: Plambeck as of 08/11/07 BUY:EUR4.8 5 4 3 2 1 0 Q1 Q2 Q3 2007 Created by BlueMatrix 9-11-2007 Rating and Target Price History for: Energiekontor as of 08/11/07 NEU:EUR4.7 6 5 4 3 2 1 Q1 Q2 Q3 2007 Created by BlueMatrix Disclaimer This report has been prepared with necessary care under the responsibility of Dexia Bank Belgium, a Belgian bank licensed and supervised by the CBFA (the Belgian Banking, Finance and Insurance Commission). This report does not contain an offer or solicitation for the purchase or sale of any financial instrument. This report is for distribution in the United Kingdom only to persons having professional experience in matters relating to investments or to persons of the kind described in Article 49(2) (A) to (D) of the Financial services and Markets Act 2000 (Financial Promotion) Order 2001 of the United Kingdom and is not intended to be distributed or passed on, directly or indirectly, to any other class of persons (including private investors) in the United Kingdom. This report is distributed in the U.S. solely to "major institutional investors" as defined in Rule 15a-6 (U.S. Act of 1934). Each U.S recipient by its acceptance hereof warrants that it is a "major institutional investor", as defined, understands the risks involved in dealing in securities or any financial instrument, and shall not distribute nor provide this report, or any part thereof, to any other person. The information contained in this report is based on information obtained from reliable public sources with respect to the information barriers (Chinese walls) applicable within Dexia Bank Belgium. Dexia Bank Belgium or any entity of the Dexia Group is not liable for any damages that may result from any inaccuracy or incompleteness in/of this information. Dexia Bank Belgium or any entity of the Dexia Group is not liable for any investment decisions of whatever nature, which are in any way based on this report by the user of this report. Any entity of the Dexia Group can perform commercial banking, brokerage and advisory services on behalf of any of the companies or organisations referred to this report. Furthermore, Dexia Group or an entity thereof may hold a position either independently or for the benefit of third parties, or trade in the securities of any company or organisation referred to this report, as a broker, market maker, or in any other role. This report was based on current facts and conditions that can change from time to time. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report. Dexia Bank Belgium is under no obligation whatsoever to inform the user of this report, of any change to these facts, circumstances, and/or opinions upon which they are based. Save as indicated otherwise, this report has not been disclosed to the issuer of the financial instrument it relates to before its publication nor is there any agreement between Dexia Bank Belgium and the issuer or any other person related to the dissemination of the recommendation. The content of this report has not been disclosed to any entity of the Dexia Group prior to its public disclosure. Our salespeople, traders and other professionals may provide oral or written comments to our clients that reflect opinions that differ from the opinions or recommendations expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations expressed in this report. Our research is available on our website: www.dexia.be/EquityReports EQUITIES CONTACT LIST RESEARCH SALES HEAD OF EQUITY RESEARCH BELGIUM Steven De Proost +32 2 222 02 55 Manager Sales & Trading Benjamin Vierendeel +32 2 222 84 24 ENERGY & UTILITIES Alternative Energies Head of Sales Dieter Furniere +32 2 222 55 45 Guy Noerens +32 2 222 71 73 Peter Van Assche +32 2 222 33 16 Equity Sales Electric & Gas Utilities Wouter De Schrijver +32 2 222 70 82 Steven De Proost +32 2 222 02 55 Dennis Scheyltjens +32 2 222 70 68 Olivier Schoevaerdts +32 2 222 70 20 Electrical Equipment Dieter Furniere +32 2 222 55 45 Jo De Mil +32 2 222 01 67 FRANCE Environmental Utilities Manager Institutional and Corporate Sales Filiz Satik +32 2 222 33 16 Didier Chaudesaygues +33 1 5628 5001 Head of Institutional Sales INFRASTRUCTURE Philippe Plaa +33 1 5628 5121 Construction Jo De Mil +32 2 222 01 67 Equity Sales Jerôme Pascaud +33 1 5628 5114 Healthcare Infrastructure & Services Olivier Streichenberger +33 1 5628 5008 Koen Wuyts +32 2 222 33 18 Corporate Sales Transportation Infrastructure Patrick Berebi +33 1 5628 5116 Koen Wuyts +32 2 222 33 18 Philippe Cantelaube +33 1 5628 5111 Arnaud de Montlaur +33 1 5628 5004 REAL ESTATE Mickaël Van den Hauwe +32 2 222 33 95 STRATEGY Jean-Paul Pierret +33 1 5628 5267 TELECOM Rob Goyens +32 2 222 03 47 Kristof Lybaert +32 2 222 56 14 HOLDINGS Jan Moonen +32 2 222 47 04
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