Lenders are keen to bank on Japan’s growing offshore wind power sector given the relatively decent returns, abundant yen liquidity and sustainability story despite growing inflationary pressures and potential project delays.
Green Power Ishikari is the latest borrower to launch a renewable power project financing. It plans to develop a 122MW offshore wind farm in Hokkaido prefecture, making its loan the second such Japanese transaction to back a project located in a port.
The ¥66.6bn (US$454m) 19-year borrowing pays a margin of 110bp over Tibor, which is in line with a ¥80bn 20-year financing a Marubeni-led consortium raised in February 2020 to develop a 140MW offshore wind farm in the Akita and Noshiro ports in Akita prefecture in northern Japan.
Although Japan’s core consumer inflation rate accelerated to an eight-year high of 3% in September, challenging the central bank’s resolve to retain its ultra-easy policy stance as the yen’s slump to 32-year lows continues to push up import costs, loan margins remain stagnant.
“Prices for construction and wind turbines are affected [by inflation] but from the perspective of the loan market, while there have been fluctuations in the base rate, there has been no impact on margins,” said Asako Haga, a vice president in MUFG's renewable energy project finance department.
“Offshore wind power is a sector [Japanese] regional banks are also keen to work on in terms of the ESG trend, so the margins have not increased much,” Haga said.
Opportunities aplenty
The government has set a target to reach up to 10GW of offshore wind capacity by 2030 and up to 45GW by 2040 to achieve carbon neutrality by 2050.
Offshore wind power deals in open seas would require larger financings than the previous two deals located in ports, which could leave room for more international lenders to participate, but bankers expect fierce competition.
“Other international lenders will also be attracted by the business opportunities in Japan’s offshore wind market, and also appreciate the ESG perspective of financing renewables,” said Lei Zhang, head of the energy+ group for North Asia at Societe Generale, which has so far been the only international bank active in such deals in Japan.
“Lending appetite is definitely there [among Japanese lenders] for loans denominated in yen. As a result, pricing competition is bound to happen,” said Yoshiaki Inoue, managing director of the Project Finance Research Institute. “I think this will drive loan margins to extremely low levels that cannot be seen overseas.”
While pricing in Japan is lower than in the offshore market, an interest margin of over 100bp is considered attractive compared to single-digit margins for plain-vanilla corporate loans or around 50bp for other renewable power deals, bankers note.
The seven joint lead arrangers – Development Bank of Japan, Mizuho Bank, MUFG, Shinsei Bank, Sumitomo Mitsui Banking Corp, SocGen and Sumitomo Mitsui Trust Bank – which signed Green Power Ishikari’s loan last month are selling down their portions to various investors such as Japanese regional banks and insurers.
Revised auction rules
The government is reviewing auction rules for offshore wind farms in the open sea as the country needs to ramp up renewable energy production in the wake of Russia’s invasion of Ukraine.
The revisions proposed on October 14 include setting a limit on winning bids per consortium, giving higher scores to operators that can commit to earlier commercial operation dates and giving an equal score for all operators that bid below the market price, so that there is no advantage to being the lowest bidder.
“We think that early development of large-scale, inexpensive and clean offshore wind farms in general waters is important in light of social demand derived from the recent power supply shortage and soaring electricity price, and decarbonisation efforts,” said a spokesperson at Sumitomo Mitsui Banking Corp.
The revisions came about after a Mitsubishi-led consortium won all three offshore wind power projects in Akita and Chiba prefectures last December after offering the lowest bids, prompting speculation that the government is seeking to prevent the monopolisation of wind farm projects.
The next round of bids, which has been delayed by almost a year, is expected to resume by the end of the fiscal year in March.
“The lowest electricity price should be the top priority. It is good for both the Japanese people and the industry that electricity price goes down as low as possible,” said PFRI’s Inoue.
Additionally, Japan is now shifting from a feed-in-tariff system, where electricity is sold at a fixed incentive price for a period of up to 20 years, to a feed-in-premium scheme, where power is sold in the spot market at a premium to wholesale electricity prices.
The transition from FIT to FIP will increase the uncertainty and complexity of renewable projects, according to bankers.
“The economic environment has completely changed 180 degrees from the time of the first round of bids,” said Katsuhiro Yamanaka, deputy general manager of the project finance department at Mizuho Bank. “Operators’ risks have doubled rather than financiers.”
“The kind of financing we can offer depends on how much operators stretch themselves. With increased commercial risks, the next round of bids is going to be extremely challenging.”
Refiled story: Clarifies section