Do offshore wind investors need a portfolio approach?

Gunnar Herzig is managing director at the newly-formed World Forum Offshore Wind (WFO), which is set to support the expansion of offshore wind around the world. In this article he argues investors should look at taking a portfolio approach to offshore wind investment.

Spreading the risk: Investors may see portfolio deals as a way to spread risk between assets in different markets and stages of the development process (Pic source: MHI Vestas)

2018 was the breakthrough year for offshore wind. Whether it is cost reductions, technical maturity or global expansion, offshore wind has impressively proven to be a technology that has sufficiently evolved to be a significant contributor to the global energy transition.

Now that new offshore markets are opening up around the world in countries such as Japan, India and Poland, there is a big question about how will investors approach this new globalised market.

Capital requirements for a global offshore wind industry are going to be enormous. IRENA estimates that global offshore wind capacity is set to exceed 520GW by 2050. This would mean adding almost 500GW to today’s global capacity of around 25GW. Assuming average installation costs somewhere between €1m and €2m per MW until 2050, this translates into global capital requirements between €500bn and €1tn .

What might be helpful to companies seeking to attract more investments to the offshore wind industry is to adopt more of a portfolio approach when buying and selling offshore wind projects.

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Portfolio investment in offshore wind

The way it currently works is that, whenever an investor is interested in buying into offshore wind, it is usually done on a stand-alone basis. The investor approaches the owner of an offshore wind farm and they agree on a price for a stake in one particular project.

As most investors are keen to buy stakes in operational offshore wind farms, there is great demand for such projects and less so for development or construction projects.

An alternative way to approach an offshore wind investment would be to adopt a portfolio perspective. Instead of just buying in to one particular project, the investor could buy into several at the same time.

For example, instead of acquiring 20% in an operational offshore wind farm in the UK, one could buy 10% of that project plus 10% in a German construction project and 20% in a Taiwanese development project. Given that many developers are now in possession of large and diversified international offshore wind portfolios, such a “package” could be bought from a single developer.

In a way, this is similar to what Macquarie's Green Investment Group does with its UK Green Investment Group Offshore Wind Fund. It allows institutional investors to invest in a dedicated offshore wind fund, which holds a portfolio of six operational UK offshore wind farms. Investors can spread their risk across several offshore wind farms in different geographical locations around the UK, to mitigate the wind risk.

Taking this approach one step further, by offering investors a portfolio of offshore wind farms in different project phases and different international locations around the world, would allow for an even greater diversification.

Mutual benefits

This portfolio approach would offer benefits to both sides, investors as well as developers.

Investors receive a diversified offshore wind portfolio. Instead of being fully exposed to the risks of weather, regulation and currency by owning a stake in one single project, they hold a diversified offshore wind portfolio across different geographical regions, different regulatory regimes, different currencies and even different project phases: development, construction, and operation.

Developers on the other hand could benefit from the fact that they would find it easier to attract investors for their development and construction projects. On a standalone basis it might be difficult to find an investor willing to acquire, say, a UK pre-auction development project.

However, if a stake in such a pre-auction development scheme is packaged with stakes in two or three other projects in different phases, regulatory environments and geographical regions the risk might be acceptable.

But there may be risks too.

Given the massive investments required to build hundreds of gigawatts of offshore wind capacity around the world, this approach seems almost inevitable. On the one hand, it would create a much broader investor base given that investor could create individual offshore wind portfolios that exactly matches their risk-return profiles.

On the other hand, developers would be able to attract investments for otherwise-difficult-to-fund projects, which could be in early development, in new markets or using innovative technologies such as floating foundations. If the industry were to solely rely on the conventional stand-alone investment approach, it might be challenging to attract sufficient funding required to reach the offshore wind capacity needed to significantly contribute to the world’s future energy mix.

Exploring such new approaches to financing offshore wind farms around the world is going to be one of the objectives of the newly-created non-profit organisation World Forum Offshore Wind, where we are dedicated to fostering the global growth of offshore wind.

The World Forum Offshore Wind’s debut event, its 1st Global Offshore Wind Summit, will be held in Taipei on 5th and 6th March. You can learn more here