[co-author: Jane Lui]
A floating wind turbine was recently registered in the Norwegian Ordinary Ship Register, which is believed to be the first such registration. This proof of concept presents new financing opportunities for floating offshore wind projects not previously explored or available to its fixed bottom counterparts.
Floating offshore wind is the next step in the evolution of the offshore wind market, attracting existing offshore wind developers who are experienced in fixed bottom projects and oil & gas companies with a long history of operating in deeper waters.
As the name suggests, floating offshore wind projects have turbines which “float”. This allows them to be towed to and from port for installation, repairs and possibly even between projects. As a relatively new technology, with deployments measured in the MWs rather than GWs, the durability of floating offshore wind turbines is unproven and flexibility is unlikely to be built into current project designs. The technology is developing, with multiple proprietary approaches – it is not (yet) ‘plug and play’.
Financing and security
Offshore wind projects in development today are very large, such as Vattenfall’s recently consented 1.8GW Norfolk Vanguard project, and the required amount of construction expenditure is growing substantially. Given the size of these projects, they are almost all procured on a project finance basis (the exception being the large PRC market), with security taken over the project as a whole rather than the individual project assets or assets of the sponsors.
Given the moveable nature of a floating turbine, the registration of these turbines in maritime registries had been discussed, at least conceptually. The purpose of such registration would then allow a lender to take security over the turbine by way of a mortgage, much in the same way the financing of ships is secured. One of the hurdles to this has been the unclear definition of “ship”, what constitutes as one, and whether a floating wind turbine is a “floating installation” (which is more commonly registrable in maritime registries such as Singapore’s Registry of Ships) for the purposes of registration.
The first such registration has reportedly taken place in Norway. A floating wind turbine was registered, for what is understood to be the first time, in the Norwegian Ordinary Ship Register (“NOR”) in September 2020 and in compliance with the existing Norwegian regulations on the registration of floating constructions in the NOR.
This is a significant step and is to be welcomed by lenders and project developers alike. The Norwegian Maritime Authority (“NMA”) has indicated that there may be, and it welcomes, more registrations of this type. However, given that NMA approval is required and approved on a case-by-case basis, this is not expected to become mainstream until it is further tested in the market and/or regulatory clarification is provided. Similarly, the possibility of registering floating turbines in other maritime registries remains to be seen.
Challenges and opportunity
The traditional rationale of project finance collateral packages, including for offshore wind, is to provide defensive security ensuring that other creditors cannot gain priority over project assets. Upon enforcement the main strategy for realisation of security would be the sale of the whole project as a going concern, involving enforcement over share security. The registration of a floating wind turbine in the NOR, and the possibility of taking a first-ranking and registrable security over it, opens the possibility for lenders to realise value from enforcement over valuable, asset level security. In the future, this may assist the parties with overall risk analysis from enforcement scenarios when putting together the financing package. The parties will have to consider if the ability to take such security is meaningful enough and whether it will have an impact on the efficiency of the financing. But if it doesn’t improve the financing terms, will it be worth doing?
If registrable, from a lender’s perspective, registration in a maritime registry has the advantage that the existing register has long been tried and tested. This helps to minimise the risks and alleviate doubts relating to the validity of the mortgage. If enforced against, a lender would theoretically be able to call on the security in the same way as a ship mortgage. Practically, whether a ship and a floating turbine can be treated equivalently following enforcement is a different question. Given the emergent status of floating turbines, and floating offshore wind projects generally, the re-purposing of floating turbines is conceptual and not even contemplated by developers.
The recent registration is a clear vote of confidence from the NMA and is an exciting step in unlocking the wider potential of floating offshore wind. This registration sends a signal to other jurisdictions with similar regulatory frameworks and experience in offshore work to consider the viability of registering floating turbines in maritime registries. The availability of a ‘new’ security may improve the bankability and/or financing terms of projects. As lenders increasingly turn to green and renewable energy, the parallels to conventional ship financing may attract lenders traditionally focused on oil & gas or who have been uncertain about branching out into new products.
Yet, this registration is only part of the bigger picture. The enforceability of a ship mortgage over a floating turbine remains untested and will continue to be a risk factor for lenders until it is played out in the market. The priority of security interests alone can be a tricky issue without the added complexities of teething problems arising from new technologies.
Given the capital intensive nature of floating offshore wind projects, financiers will need to have sufficient confidence that this approach is workable and is supported by the relevant bodies before diving in. Until these issues are addressed, and others which may come to light, only time will tell as to whether the registration of floating wind turbines in ship registries will be a significant force, accelerating the development of floating offshore wind.
https://www.mpa.gov.sg/web/portal/home/singapore-registry-of-ships/about-srs-and-what-new/pre-requisites-for-ship-registration and see definition of “ship” in the Merchant Shipping Act 1995
 Section 33 of the Maritime Code 1994 and associated Regulation of Other Floating Constructions 1994