FINANCING TRENDS

Once seen as exotic fare, offshore wind investments have become a staple diet for pension funds. The crumbs that fall from their table are these days being eagerly fought over by new types of investor with healthy appetites and new ideas

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Money in the bank or placed in bonds is not an attractive investment in a world of historically low interest rates. Investments that deliver healthy revenues long-term are in demand and offshore wind station projects often fit the bill perfectly. But getting in as a new investor is difficult.

“There’s a lot of money out there and a lot of investors are very keen to get into offshore wind and are willing to compete on price,” says Henrik Stamer, CEO at K2 Management, a wind consultancy firm.

Some of the new investors are “very hungry” and they know they must lower their level of ambition and their expectations for internal rates of return (IRR), says Stamer. “We hear that some are willing to accept a return of just 2%, which is very low. But these IRRs are of course more a theoretical calculation and once the offshore park is up and running, you can optimise it and perhaps increase the return after some years,” he adds.

The lower returns on investment are a healthy sign that investors perceive lower risks in the sector, says Ivan Pineda of industry association WindEurope. “As the industry becomes more mature, the risk to return ratio is more balanced and investors are more confident in technology and industry to deliver long term revenue flows,” he adds.

Denmark’s DONG Energy, the world’s largest operator of offshore wind farms, has been a particularly successful investor with its partnership model, in which it sells off chunks of ownership in mainly completed projects to secure money to construct more.

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NEW MATURITY

“There’s an increasing interest for investing in offshore wind farms. It’s a more mature market, investors are now more confident with offshore wind and it’s become a more global market,” says Henrik Poulsen, DONG’s boss. The energy group sees new investors emerging, typically from North America, the Middle East and Asia.

DONG Energy’s traditional partners have been Danish and international pension funds or industrial players, among them Denmark’s PensionKassernes Administration (PKA). The PKA Alternative Investment Partner unit, started five years ago, has had annual returns, after costs, of just over 18%.

“We’ve been very successful,” says unit head Anders Dalhoff. He believes pension funds are ideal financial partners. “They have plenty of cash, there’s no need to gear investments, which makes the transactions less complex, and then pension funds have perhaps the longest investment horizon of all and can stay in the asset until it stops producing,” he says.

Like Poulsen, Dalhoff sees a trend in more new investors, with capital coming from the Far East, including Japan and China. “There’s no doubt that it’s difficult for a new investor to get into offshore wind. You need knowledge of the industry, yes, but you also need to be a credible partner,” Dalhoff says.

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MORE RISK, MORE GAIN

The early investors in offshore wind have accumulated a deal of experience and are looking to move further up the value chain, taking on construction risk or even pre-construction risk. “When you have been a passive investor on a couple of projects, then perhaps it’s time to try one of your own or with a partner, take bigger risks but ultimately also get a higher return,” says Stamer.

He believes that if traditional investors do strike out independently it would leave the door open for new investors to partner with experienced operators like DONG Energy. “It’s a safe investment. The return is lower, but you learn a lot and the next step may be to enter a project around the time of its financial close instead of when it has been fully constructed,” Stamer says.

Another potential opening for new investors may lie in offshore projects that this year have been contracted to sell their output at prices far lower than seen before. In Germany, contracts were awarded to offshore project owners without any government price subsidy. The prospect of lower earnings, plus taking on the risk of relying solely on revenue from sales of electricity on the wholesale power market, could scare off pension funds. “Obviously, when you don’t have subsidies to support the return, then it’s a different case you’re looking at,” says Dalhoff.

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HEDGING PRODUCTS

Pineda, too, sees a future role for private investors. “Offshore wind investments are too big for some institutional investors and whilst risks are lower, many do not feel comfortable with this type of asset, especially when you see the developments towards fully merchant projects like the three projects in Germany,” Pineda says.

“The great majority of projects, though, will need some sort of revenue stabilisation mechanism to go forward. We expect a more prominent role for long-term hedging products that allow for the same financial certainty that support mechanisms give today.”

The risk lies in whether the industry can bring down costs sufficiently for offshore wind to remain an interesting business case. Stamer is confident it will. “Electricity prices will go up and costs of energy for offshore wind will go down,” he says, helped by economies of scale in larger wind turbines. Industry talk is of future turbines with rated capacities of 13-15 MW, up from 8 MW as the largest in commercial operation today. “If everything goes according to plan, then I’m sure the energy companies will be more than happy to issue guarantees for the investors,” says Stamer.

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CUSTOMER POWER DIRECT

Offshore wind generation could also become a product sold directly to corporate customers in bi-lateral power purchase agreements (PPAs), as is common with large onshore wind farms in the United States. “Perhaps sell 40-50% of what you expect to produce to these long-term PPA contracts and the rest to the spot market, that would certainly work as an investor guarantee,” Stamer says.

Poulsen does not rule out the idea. “It probably won’t be long before we begin to see corporate PPAs in Europe, but it’s too early to say when this will happen,” he says.

Dalhoff points out that in Europe corporate PPAs have so far been associated with large US information technology companies building data centres. These companies have policies in place that requires the centres to be run on green electricity, making them obvious customers for offshore wind generation, he notes. •

TEXT Karin Jensen