What project sales in the fourth quarter tell us about Sweden

When the 650MW Markbygden 1 reached its €800m financial close in November, we wrote that Sweden’s commitment to renewablesand interest of corporates have made it a thriving market for wind.

We see more evidence of that in our latest special report.

In our first Finance Quarterly report of 2018, published this week, we identified that over 1.4GW of wind projects changed hands in Sweden in the three months ending in December. This includes Markbygden 1, two more big deals, and a crop of small projects.

Project sale activity in the country has picked up since the second quarter of 2017. Our reports have shown that projects totalling 126MW changed hands in Q2 2017, which grew to 230MW in Q3 and to 1.4GW in Q4. Part of this can be explained by companies rushing to close transactions by the end of the year, but we think it is worth looking at the deals in more depth.

For example, German asset manager Aquila Capital bought three wind projects in Sweden totalling over 580MW in the last quarter of 2017. These include the 357MW Valhalla from Swedish developer OX2, and two wind farms with a combined installed capacity of 232MW from fellow local firm Eolus.

OX2 has started construction on Valhalla, which is located in the municipalities of Bollnäs and Ockelbo, and is set to commission it in 2020. As part of the deal, Aquila has provided construction financing, and OX2 has disclosed that Valhalla is set to feature a power purchase agreement with an as-yet-undisclosed company.

The other two projects acquired by Aquila are the 164MW Kråktorpet and the 68MW Nylandsbergen wind farms, both in Sundsvall municipality. Eolus is set to build both wind farms and commission them by 2020.

Why are these deals happening between these parties now? And what do they tell us about the market? Here are four points that we think can shed a little more light on what happened in Q4.

First, for firms such as Eolus and OX2, these deals are the result of working on the right projects, and being in the right places at the right times. Government policies have given certainty to investors in the short term, while rising power prices have boosted potential returns. This has made it easier for developers to attract investors for schemes that have been in the planning for a long time.

Second, these deals benefit Eolus and OX2, as they enable the firms to recycle capital to keep growing in the region. Both have sold a handful of small projects in Q4. OX2 has sold two schemes totalling 55MW to Swiss asset manager Fontavis; while Eolus has sold two projects totalling 47MW to German asset manager KGAL for €57.7m. Deals like these are the lifeblood of these developers, and they have seen good opportunities to exit their projects.

Third, the activity last quarter shows that wind is benefiting from the fact that Sweden generally is attracting some serious foreign investors. A demonstration of that can be found in the astonishing 2017 surplus of SEK61.8bn ($7.5bn), which Sweden has published this week. This is a result of high tax incomes, high employment, and high investment inflows – and wind also benefits from the supportive policies put in place in 2016 and 2017.

And fourth, the interest from Aquila and KGAL specifically can be better understood when you consider what is happening in their home market. Investors are seeing potential returns from projects in Germany squeezed because of the advent of competitive tenders, and this is making neighbouring countries including Sweden look attractive by comparison.

Motivated buyers, motivated sellers, strong fundamentals. At the end of 2017, Sweden had all three – and deals naturally followed.