Recession vs depression: investment experts discuss the great lockdown

The Covid-19 pandemic has forced wind businesses to make major changes to how they operate – but should they be preparing for recession or depression?

On Thursday 9th April, we were joined by a panel of experts to discuss that question and others in our inaugural webinar, ‘How will a Covid-led recession affect wind in 2020?’ This one-hour online discussion took in a wide range of talking points, from investment and development to policy responses and power purchase agreements. Our members can listen again here.

We started by asking a series of questions to our audience, which found:

• 82% of attendees had made major changes to their businesses as a result of Covid-19, in order to continue operating. Only 13% hadn’t.
• 80% expected a quick recovery for wind when lockdowns are lifted.
• 54% predicted wind investment would ‘significantly reduce’ in 2020.
• Just 46% said government responses would help wind in the medium-term, while 16% disagreed and 39% were neutral.

This combination of short-term positivity and longer-term reticence reflects the tough and uncertain situation facing companies around the world, and we also heard this from our panellists. Tom Carbone, president at US developer Tri Global Energy, said he was seeing delays to projects.

“Where we have projects approaching finance and construction, we are seeing delays," he said. "Our expectation is there is sufficient tax equity to get done this year what was meant to be done, but there is stress going forward.”

Carbone said a priority was to maintain relationships with investors and other firms despite pressure caused by the growing use of ‘force majeure’ clauses. He added that he’d like to see an extension of ‘safe harbor’ rules for projects that qualify for US production tax credits.

Debt and equity markets

Mortimer Menzel, partner at Augusta & Co., agreed that equity investors were largely continuing with deals in their pipelines, and said renewables may benefit as energy projects face fewer headwinds than other infrastructure assets.

“The equity response has been good. There are a lot more investment committees taking place than three or four weeks ago. We’ve got over that initial shock. On the debt side, we’ve seen a significant increase in the debt costs in the long-term project finance market, which has gone up 70-80 basis points in the European market,” he said. “For very large new deals, the banking sector is challenging right now.”

Overall, he was the most positive of our panellists.

Menzel said Covid-19 would cause a two-year shock but that it should end quickly as energy demand won’t stay low for the long-term.

“We will find a vaccine. This demand shock will end. The world will be changed for roughly 18 months, but it will go back to normal,” he predicted.

However, he added “all bets are off” if the recession turns into depression, and he is concerned that the lack of support for renewables in Covid-19 bailout packages is a sign that clean energy is slipping down governments’ priorities: “That money is no longer available for any other type of subsidy,” he said.

The marginalisation of wind

Jatin Sharma, president at GCube Insurance Services, echoed the concern about the lack of support for renewables in the US government’s bailout package. But he was more downbeat on the prospects for a quick recovery.

“This could go beyond a recession and into a depression, which would have a profound impact on industrials needing electricity and what that does to pricing,” he warned.

Sharma said this could also damage the burgeoning US offshore wind sector, if delays to development timelines result in a brain drain of experienced offshore wind professionals from Europe.

“I can’t see their families wanting to stick around. I think they’ll want to go back to their own countries with the way the crisis has been handled,” he said.

Felix Fischer, partner at law firm Chatham Partners, said there were major questions about the direction of wind schemes after the current “radical uncertainty”. He said: “Prices for projects are likely to fall… There will be more pressure on [developer premiums]; there will be more pressure on the supply chain; and there will be parties who are willing to take merchant risk for a period to then sell off the electricity.”

We see reasons to be positive – and we hope the 80% of webinar attendees that expect a quick recovery are correct. But investors in the wind sector are facing more uncertainty around the world than at any point in the last decade.

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