‘Resilient’ wind stack still needs CfDs

The cost of equity has been increasing with the cost of inflation in Europe, in some cases increasing returns by 50 to 100 basis points. In other cases, the mismatch of equity returns with opex or capex, which have also risen with inflation, saddles projects with inadequate returns.

Persisting post-crisis hunger for wind, particularly onshore, has proven the investments are “resilient” amid inflation, even with ongoing bottlenecks in permitting and grids lengthening timelines. European developers are observing plenty of liquidity for both offshore and onshore wind M&A. They say shareholder-driven ESG mandates still drive purchases of windfarm stakes, however, the balance of investors is changing.

Despite this enthusiasm, the rules of the game have gotten tougher, and while the past two years saw a peak in acquisitions of development pipelines, some expect more prudence going forward. Within wind project M&A processes, investors are getting “clever and conservative.” Some suppliers have seen market participants – equity investors, developers, and equipment providers – becoming more wary and more selective about projects. 

Observers have seen investors do more due diligence in M&A, whether on financial structuring, PPA contracting or possible optimisations such as repowering and lifetime extensions. As part of this, investors are looking at turbine foundations for wind farms in development to make sure the design will be sufficient for the long-term. 

At the same time, unlimited and strategic investors are becoming more competitive market participants. Another equity trend of note is that corporate offtakers are becoming increasingly sophisticated while seeking to gain an equity stake. These classes of investors compete with traditional equity investors.  

Different kinds of equity players offer different pricing, for example those which do not have capital available are running into competition with equity players who have already raised money and want set returns. Advisers see certain funds struggling to compete with pure financial players who have incredibly low cost of capital and which don't necessarily have a strategic aim, for example ESG.  

Some advisers have seen lifetimes for projects built in the 1990s, for example in Denmark, extended beyond 20 years. This factors into M&A processes as investors have seen that very long asset life being proposed in the financial model for acquired projects, for example 15 to 35 years of asset life.

Sometimes investors find equity valuation of PPA sales on long-life projects to be “alarmingly merchant.” They are making assessments on when they will sell the business, and taking precautions around PPA exposure for projects in development. 

Some developers argue that some states should perhaps have a power price floor and a CfD regime that awards actual subsidies so that large projects can attract large or institutional investment, reversing the trend of zero-subsidy auction bids for offshore that have been seen recently in countries like Germany and Denmark.