Bottom-fixed Offshore Wind in Italy
Finance in Cleantech | Imperial Business School Exchange Course Project
Project Overview
Timeline: May 9 - 11, 2025
Team Members: Zilu, Reika, Warit, Clarisse, Adil
Core Deliverables:
Executive investment report: market & policy fit, project definition, , sensitivity, risk register, sustainability, and go/no‑go triggers
Investor presentation deck: FER2 mechanics, site & ports map, assumptions, WACC/IRR/NPV exhibits, and mitigation plan
Financial model: both base case and upside case scenarios
Executive summary
We evaluated a 1.5 GW bottom‑fixed offshore wind project in the southern Adriatic (20–25 km off Puglia; 30–40 m depths) against Italy’s policy, grid, and industrial backdrop. The project fits FER2 25‑year CfD auctions (≥12 nm offshore; total offshore quota 3.8 GW to 2028; strike price €185/MWh less ≥2% bid discount) and leverages Italy’s 8,300 km coastline, 57 ports, and heavy‑industry base. Two valuation passes frame outcomes: a policy‑anchored CfD case (PPA price €181/MWh, WACC 8.01%) yields IRR 9.48% / NPV €728 m; a conservative report case (price €154/MWh, WACC 7.47%) yields IRR 7.71% / NPV €116 m. Both assume CAPEX €3.3 m/MW, CF ~40%, 25‑year operating life. Investment is recommended conditionally on winning an early FER2 auction, locking EPC and grid works, and securing O&M cost discipline.
Market & policy fit
Italy is moving from a near‑zero baseline in offshore wind (30 MW at Taranto, 2022) toward 2.1 GW by 2030, with policy discussions pointing to ~5 GW by 2030 and a longer‑term trajectory of 10 GW+ by 2035 and ~20 GW by 2050; the NECP also targets 131 GW of renewables by 2030 and ~65% renewable electricity, supported by €23.8 bn in PNRR grid/transmission upgrades. These shifts occur in a system that consumed ~306 TWh (2023), remains a net importer, and is now prioritizing domestic, clean capacity. Italy’s geography—8,300 km of coastline, 57 ports, shallow‑water windows in the Adriatic, and deeper zones for future floating—creates a credible platform for early bottom‑fixed projects, with a sizable project pipeline (131–143 proposals) but only one operational site to date. The FER2 decree introduces 25‑year CfDs for >12 nm sites with a €185/MWh strike ceiling (min 2% discount), staged auctions through 2028 (~3.8 GW), streamlined Single Authorization, and maritime spatial planning in the EEZ—together improving bankability and timeline certainty. Competitively, global names are probing entry alongside domestic players: Renexia, CIP, EDF, Iberdrola, RWE, and Saipem. But capabilities, permitting, and supply chains still lag Northern Europe, implying higher execution risk and dispersion in unit costs and returns.
Project definition
Location & design: Adriatic site off Apulia; ~100 turbines (15 MW class), modern rotors, standard spacing; 5.2–5.5 TWh/yr expected output (1.5% of national demand). Construction 3 years, operations 25 years; >95% availability target with CTV/SOV mix.
Industrial readiness: Ports (Taranto/Brindisi) and domestic steel/shipbuilding/electrical sectors support logistics and components, with some imports expected early on.
Revenue model
The project blends contracted and market‑based revenues: (i) long‑term PPAs with creditworthy offtakers; (ii) FER2 CfD top‑ups/paybacks against the strike (25‑year tenor, >12 nautical miles eligibility), which anchor debt capacity and hedge price volatility; (iii) spot sales for any uncontracted volume; (iv) capacity market payments; and (v) environmental credits (green certificates, EU ETS) as supplemental value. The FER2 construct (high ceiling price with mandatory discount; multiple auction rounds to 2028) is central to the bankability case, while capacity and certificate lanes diversify income and improve resilience.
Financial model & Projected cash flows
Common Assumptions: Capacity 1.5 GW; Net Capacity Factor 40%; CAPEX €3.3 m/MW; 3‑year build + 25‑year operations; OPEX at €30/MWh or €158m/year
1) FER2 CfD / Presentation Case – Assumes the project wins a 25-year Contract for Difference under Italy’s FER2 scheme at €181/MWh (2% below the €185/MWh cap), a capital cost of €3.3 m/MW, and a WACC of 8.01 % based on 70 % debt / 30 % equity (Re 14.9 %, Rd 7 %). Under these assumptions, the model yields an IRR of 9.48 % and an NPV of €728 m over the project’s life. This case reflects a more optimistic auction outcome, locking in higher revenues and a healthier spread over WACC.
2) Base-Case / Report Case – Uses a more conservative strike price of €154/MWh (15 % below the FER2 cap), the same CAPEX assumption of €3.3 m/MW, project beta (β) of 1.31 benchmarked against Ørsted (a comparable offshore wind developer) and a slightly lower WACC of 7.47 % (Re 13.1 %, Rd 7 %). This yields an IRR of 7.71 % and an NPV of €116 m, with the IRR only slightly above WACC, indicating marginal viability and high sensitivity to changes in tariff or cost structure.
Together, these scenarios frame the project’s bankability range: it is strongly positive under early-round FER2 pricing but becomes financially tight with more aggressive bid discounts or cost escalation, underscoring the importance of securing favourable auction terms and disciplined cost control.
Capital structure
Structure: Standard project finance 70/30 debt‑to‑equity, cost of debt 7%, WACC 7.47 or 8.01% across cases.
Uses: EPC/EPCI (turbines, foundations, array/export cables, offshore substation), grid tie‑in, construction period costs, development fees, contingency, and working capital (5%). Sources. Total initial investment €4.95 bn (≈€3.3 m/MW): indicative debt €3.47 bn, equity €1.48 bn at Financial Close.
Debt plan: Amortizing senior debt with sculpting to contracted cash flows; model assumes full repayment by 2038 (≈10 years after COD), aligning interest/principal with FER2‑anchored revenues and leaving later‑life cash largely unencumbered.
Returns (unlevered)
On an unlevered basis, the Base Case delivers IRR 7.71% / NPV €116 m @ 7.47% WACC, while the Upside/CfD Case delivers IRR 9.48% / NPV €728 m @ 8.01% WACC. Under the 70/30 leverage and 7% debt cost with ~10‑year amortization, equity returns are expected to exceed project IRR.
Risks analysis
Supply chain & construction: Italy’s port/industrial base is strong, but offshore wind execution is nascent, exposing fabrication, vessel, and port‑slot risks.
Permitting & grid: Despite Single Authorization and MSP/EEZ reforms, multi‑agency approvals and community challenges can delay timelines or jeopardize FER2 deadlines.
Revenue/offtake: FER2 stabilizes price but not inflation‑indexed; bid discounts and post‑25‑yr cash flows create thin margins.
Macro/finance: WACC sensitivity is acute, −2.5% price or +0.22% WACC turns NPV negative in the Base Case.
Primary mitigation options
Contracting & delivery: Full‑wrap EPC (design‑through‑commissioning accountability), experienced Tier‑1 contractors, early port reservations in Taranto/Brindisi, robust liquidated damages.
Permitting strategy: Front‑load EIA to MSP‑designated zones, local stakeholder engagement, and parallel processing of Terna interconnection to protect FER2 schedule.
Revenue durability: Target early FER2 rounds for higher strikes; hedge unindexed O&M exposures; line up post‑CfD PPA options to protect tail value.
Financing resilience: Conservative sculpting (robust DSCR headroom), standard reserve accounts (DSRA, MRA), and covenant packages aligned to CfD stability. (Structure and cost assumptions per report/deck.)
Sustainability & benefits
~1.7–2.1 MtCO₂/yr avoided (gas‑on‑the‑margin), EU‑taxonomy aligned (DNSH/EIA, circular decommissioning), air‑quality co‑benefits, and 2,000–3,000 construction jobs plus ~100 long‑term O&M roles anchored in southern ports.
Expected output (~5.3 TWh/yr) displaces marginal gas (~330–400 gCO₂/kWh basis), avoiding ~1.7–2.1 MtCO₂/yr (up to ~50 Mt over 25 yrs). The project is EU‑Taxonomy‑aligned (DNSH compliance: full EIA, biodiversity safeguards, circular decommissioning), improving access to green bonds and ESG‑linked capital. Co‑benefits include regional air‑quality gains (NOₓ/SO₂/PM reductions) and 2,000–3,000 construction jobs plus ~100 long‑term O&M roles, leveraging Italian ports and supply chains.
Recommendation: Proceed, conditionally
The project is investment‑worthy under the Upside/CfD case and marginal but positive under the Base Case, provided we (i) win an early FER2 CfD at minimal discount; (ii) execute a wrap EPC with firm schedules/costs; (iii) secure Terna grid connection; and (iv) maintain O&M cost discipline and inflation hedges; in parallel, prepare a post‑CfD offtake to protect tail value. Sensitivity to tariff/WACC argues for disciplined bidding and robust risk management, but policy tailwinds, industrial readiness, and first‑mover positioning make this a credible anchor asset in Italy’s offshore build‑out.