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Wind Watch
By Richard Heap

Disgusting. Shocking. Unsurprising. The exposé by the Financial Times of sexual harassment of hostesses at a men-only charity gala dinner in London has sent shockwaves through the business world, and rightly so. It shows that we cannot simply dismiss such stories as ‘things done by top Hollywood film producers’.

The hostesses reported that they repeatedly found men’s hands up their skirts; that they were pulled onto attendees’ laps; and so on. It wasn’t an easy read, and I can’t imagine how it felt to be in the midst of it. And yet, I didn’t find it very surprising.

I started my career writing about UK commercial property, and I attended events with some of the people at this dinner. I never saw anything that extreme – they knew we were journalists! – but we all knew about the hookers touting for business at the annual Mipim conference in Cannes, both on the street and on Twitter. I can only guess how many talented women were put off working in property over the years because of its seedy reputation.

Put simply, we thought it was wrong but we turned a blind eye. If we are to learn anything from the Weinstein scandal and #MeToo, though, it is that ignoring the kind of harassment seen in Mayfair is not okay. And woe betide any business or industry that tries to hide anything like this under the carpet. It is potentially ruinous.

Likewise, we should not think this is an issue for just the property sector or just the super-rich. I spoke to a female friend yesterday who said she experienced the same sort of thing during regional business events where she waitressed 20 years ago. Is it ancient history? Not really. This was frowned upon then but people did it, and I see little reason why much would have changed since.

And, unfortunately, the problem doesn’t stop with the event itself. Most people I’ve seen have condemned the harassment, but there is a sizeable group of apologists out there. Readers who ask why this is front-page news; and complain about the spirit of puritanism they think it represents: ‘They were all adults. There’s no issue!’

No, there is. We can’t dismiss this is a bit of fun. It's an example – albeit an extreme one – of a culture of business networking and socialising in male-dominated industries that ends up explicitly or implicitly excluding those who find it uncomfortable, both women and men. It is a reminder that all of us have a responsibility to create a culture that is supportive and inclusive.

This is where we get to wind. In my experience, the wind sector is welcoming. The stars in this industry don’t have the same aura of untouchability as those in UK property, for example. But it doesn’t change the fact that women are a minority of the people we usually see at events – either on stage or in the audience – and made up only 15% of our Top 100 Power People 2017 report in November.

There is still more to be done to show that wind is open to all. We identified two ways in our Women’s Power List report last March, which we published in partnership with Green Giraffe.

The first is to highlight to girls the range of great careers available to women in wind; and the second is to implement policies that can help to attract women and retain them. This is key to embedding diversity throughout the whole of the wind industry, and building a reputation for being a sector in which everyone can work safely.

I am yet to hear about overt harassment in the wind sector of the type seen at The Presidents Club dinner. If you have, please say so. But it is a reminder that businesses and their staff are judged as much for their moral performance as their financial.

And frankly, if you can't treat others as you'd want your own family members to be treated, then you deserve all the scorn you get.

“Quebec used to have a high demand of megawatts; Ontario used to have a feed-in tariff programme; and British Columbia used to have what we call a Clean Power Call. All of these have vanished.”

Boralex chief executive Patrick Lemaire is talking about how the prospects for wind in Canada are looking less positive now than they were a couple of years ago – or, indeed, for most of the last decade. We interviewed Lemaire for the cover article in our latest Finance Quarterly report, which we published this month.

There are a couple of reasons why prospects for wind developers are looking tough: policies have become less favourable at state level, and electricity demand has been falling too.

In addition, Prime Minister Justin Trudeau has delivered little in the way of support for renewables, and it feels ironic that wind is feeling less positive under Trudeau than his climate-change-denying forerunner Stephen Harper. This article from August gave our concerns about Canada’s ‘pop star prime minister’.

Lemaire says one bright spot is Alberta, where the state awarded support in December for 600MW of wind projects. Boralex did not pick up any of that capacity, though. The winning bids came from Canadian firm Capital Power for a 201MW wind project; EDP Renewables for a 248MW scheme; and Enel Green Power for projects of 155MW and 31MW.

But there will be future tenders, including one due in the first half of 2018, and we expect Boralex to be back in the running. It is bidding in a joint venture with the Alberta Wind Energy Corporation and, in total, the Alberta Electric System Operator is looking to back the development of 5GW of renewable energy schemes by 2030.

Sluggish activity in Canada is also forcing Boralex to look outside of its home market. While most of its 1.2GW wind portfolio is in Canada (738MW), Boralex is also a leader in the French market with 583MW of installed capacity and a 600MW-700MW pipeline after its purchase of Enel Green Power France for €280m in 2014.

“France has 12GW-13GW [of installed wind capacity] now, and their objective is to be, in 2023, in the range of 25GW. That’s over 1GW a year,” says Lemaire.

Boralex is also expanding in the UK, specifically Scotland, after setting up a 50:50 joint venture with British developer Infinergy for wind projects totalling 325MW.

Finally, it is looking to expand its presence in the US, where it currently owns just 82MW. Lemaire says that Boralex is looking for a US partner and, in the meantime, is seeking to use cross-border deals to support its developments in Canada. Boralex is bidding with Gaz Metro to supply electricity from its 300MW SBx project in Canada to US state Massachusetts, and is due to learn in February if it has won. This project is in the 364MW Seigneurie de Beaupre wind complex, one of the largest in Canada.

In these plans, Boralex is likely to receive backing from Canadian pension fund giant La Caisse de Depot et Placement du Quebec, which owns 19.9% of Boralex shares and could also partner on individual firms. Lemaire says securing funding for projects will not be an issue: “We see many banks and other insurance and pension funds who are ready to finance us when we realise projects, so we don’t see this being problematic,” he says.

To read the original article, check out Finance Quarterly now.

The news that negotiations have begun ahead of the potential formation of a new German coalition could signal a favourable turn for the wind market.

Angela Merkel by FNDE via Wikimedia Commons

It has been a promising fortnight for European wind power. After the vote by the European Parliament to raise the EU’s target for renewables in the electricity mix to 35% by 2030, hopes have also been raised this week for the expansion of wind power in Germany.

On Sunday, the Social Democrats narrowly voted to enter into formal coalition talks with Angela Merkel’s Christian Democrats. Uncertainty remains as to whether party members will approve of the final deal, but the decision to enter into talks appears encouraging.

Last Friday, the government published a 28-page document giving an outline of potential policy, including insights into energy policy. A draft version of the document, leaked earlier in the week, had caused controversy due to its acknowledgement that the new government is planning to drop its 2020 carbon emissions target because it could no longer be achieved. It is now aiming to hit this target in the early 2020s instead. This is because the government has scaled up coal and cut nuclear in the wake of the 2011 Fukushima disaster.

As we explored in Friday’s Wind Watch, however, Germany could also reasonably claim that its renewable energy policy has been a success. The country has already exceeded its 2020 renewables target, and it has been suggested that the 2030 target could be raised from 50% renewables in the electricity mix to 65%.

This news came in the same week as the decision by the European Parliament to raise the EU’s 2030 renewables target to 35%, in order to maintain progress towards meeting the commitments of the Paris climate agreement. Wind professionals operating in the EU will be pleased to see that the trend for increasing renewables targets is not limited to Germany.

Due to the short length of Germany’s document and its provisional nature, the wind sector gets limited certainty from it. Coalition negotiations still need to happen. However, it does give reason for optimism. An additional 4GW of onshore wind and 4GW of solar are to be auctioned, as well as an unspecified amount of offshore wind, before 2020.

The ambitious nature of the renewables targets is likely to be welcomed by turbine manufacturers, as it gives greater confidence in long-term investment decisions. As we explained in Friday’s Wind Watch, 2017 was a discouraging year for German turbine manufacturers. Yes, they benefited from the tail end of a construction boom as a result of developers rushing to win approval for schemes before the new tenders took place, but they were also hit hard by the launch of competitive tenders for onshore wind.

During the last round of auctions, government regulation tended to favour community-led groups, leading to frustration for manufacturers due to the delay this caused in completing projects. The updated rules for the upcoming round of auctions mean that companies can compete on equal terms with community groups, creating great potential for new business.

Angela Merkel will no doubt be breathing a sigh of relief at the decision to begin formal talks: and, we think, so will the wind industry.

Wind Watch

Wind Watch is published every Monday and Friday.

In the meantime, have you signed up for our first Quarterly Drinks evening of 2018? If you have, great. We're looking forward to it.

And, if you haven't signed up yet, you'll want to after you've find out where we're hosting our London Quarterly Drinks evenings in 2018; and the identity of our first guest speaker.

On 1st March, we are set to host Quarterly Drinks in London in association with our partners at Foresight Group, at their iconic event space in the Shard. We will also be bringing the event to you with gold sponsor Totaro & Associates, and are delighted to welcome back supporting sponsor Papertrail in 2018.

The event will start at 5.30pm, and includes a 20-minute Q&A session from 7.30pm. This time, we will be joined by Richard Nourse, managing partner at Greencoat Capital, for the Q&A session. Richard is a seasoned investor and respected voice on the wind industry in the UK, Ireland and beyond.

To book your place, click here or use the button below. And, if you can't be there, please tell us who you'd like to attend instead...

The Republic of Ireland’s proposed Renewable Energy Support Scheme is finally set to give offshore wind projects a route to market, says Ken Boyne, Managing Director at Dublin-based engineering group Ionic Consulting.

Politicians in the Irish Parliament are looking to support offshore wind

What's happened to Irish offshore wind?

I’ve read a couple of recent opinion pieces giving reasons why the offshore wind industry in Ireland has never really materialised, and both cited the financial crisis of the last decade as being the main reason. This is incorrect, though it is certainly the root cause of a broad range of problems our recovering economy is only starting to remedy.

Rather, the main reason is the Irish government's specific exclusion of offshore wind from all renewable energy support schemes dating back to the mid-2000s, thereby removing any feasible route to market. Consequently, only a 25MW prototype development at Arklow Bank by GE and Airtricity – commissioned in 2004 – was ever constructed in Irish waters, despite development plans for several GWs across a range of sites primarily off the east coast.

The rationale behind the government’s stance at the time was essentially threefold:

• the large number of available onshore projects that could be delivered in support of Ireland’s EU 2020 RES target;
• the high cost of offshore wind compared to onshore wind; and
• the comparatively small scale of the potential Irish offshore market which was unlikely to lead to the establishment of manufacturing/assembly facilities in Ireland (which seemed to be a key justification for the initial level of support provided to the offshore industry by the UK government for example)

Could this be about to change?

However, it appears that this stance is about to change given the recent publication of the consultation paper by the Irish Department of Communications, Climate Action & Environment on the new proposed Renewable Energy Support Scheme (RESS).

This would be an auction-based system centred on a floating feed-in premium (similar to Contracts for Difference), which has been initially presented as a technology-agnostic process but with the option to include rounds of specific technology ‘pots’ if deemed appropriate.

This would appear to finally offer a potential route to market for Irish offshore projects – especially given the unprecedented recent auction results from around Europe. This will hopefully rekindle interest in those projects that have been idling for the past decade at a time when the latest figures indicate that Ireland could possibly fail to reach the EU 2020 RES targets – with of course more ambitious targets to follow for 2030 and beyond. For those countries still within the European Union, of course!

Good news for Irish renewables

From a transmission system perspective, it is also good news with electricity system demand forecasted to rise over the next decade as a result of general economic growth, the increased development of large-scale data centres, greater migration towards electric vehicles for transport, and potentially some new incentives in the area of electrification of domestic heating.

All of these factors are disproportionately focussed on the Greater Dublin area: hence significant new generation connecting into the transmission network both north and south of Dublin should be welcomed by the Transmission System Operator, EirGrid – especially given their achievements over the last number of years in increasing the level of renewable energy penetration on the system which is heading towards an SNSP of 75% and hopefully beyond.

So the time for the Irish offshore industry appears to be imminent, with perhaps the deal between Parkwind and Oriel Wind Farm being the first of a number of similar ones to follow.

This is good news for the renewable energy industry in Ireland which for too long has been reliant on the onshore wind community. The future of renewable energy generation in Ireland will undoubtedly be an appropriate mix of technologies, with offshore wind playing an increasingly important role and with a talented and eager domestic supply chain ready to embrace the challenge.

Now, perhaps, that trip that I made to the Middelgrunden offshore project back in 2002 will finally pay off.

Each year we host conferences discussing the biggest issues in European and North American wind. Click below to find out more...

Guest blogger Brooke Cary takes a look at the impact of federal policy on US wind in 2017, based on insights from last year’s Wind Power Finance and Investment conference.

A new administration inevitably brings a level of uncertainty to the market, regardless of who enters the Oval Office. Experts have expressed concerns that there could be a temporary hold on investments in 2017, as policy plays out and folks take stock of where the market is headed. Otherwise, federal policy is expected to have a relatively limited impact on the market, compared to the changes in demand generated by C&I buyers, utilities, new PPA’s, and state Renewable Portfolio Standards (RPS).

“Some of the federal policies around taxes will be important and we’ll see some kind of change there, but I don’t think that’ll be a major driver for wind and other renewables,” said Rob Morgan, President and COO of Agile Energy.

One of the key policy changes expected to impact the wind industry is the corporate tax rate. President Trump has outlined a policy blueprint which includes the likely reduction of the corporate tax rate to 25%, or even 15%. In most cases, this would seem like an excellent policy move for business. However, the wind market benefits from tax equity investors, who receive write-offs from their tax-equity investments. These investors could lose their incentive to invest if the corporate tax rate was reduced, which “may leave developers short,” according to Bloomberg. Tax equity financing for wind was equal to $6.4 billion in 2015, according to the Institute for Energy Economics and Financial Analysis. A loss in these funds could be a serious concern for the wind industry. However, in the longer term, the lower corporate tax rate would spur growth, create demand, and encourage new entrants into the market.

“I think the whole idea there is to bolster corporate America and manufacturing America—and commercial operations as well, which would, in theory, create demand,” said Thomas Carbone, Vice President of Tri-Global Energy, a Texas-based renewable energy developer. While the tax rate change may be seen as a challenge or a risk, “off-take is really the risk,” he continued. Ensuring that developers can secure off-take agreements and fulfil the growing U.S. energy demand will help balance other potential risks to the industry.

In addition, 2017 marks the first year of the Production Tax Credit (PTC) phase out. Prior to the phase-out, the PTC—worth $0.023 cents per kilowatt-hour of energy produced—was on and off. This created much uncertainty for both investors and developers as to how long the credit would be available. Though the phase out means the expiration of the PTC by 2020, it also means a clear sense of the policy’s trajectory, which allows developers to better plan for future projects and financing.

Developers who have begun construction of the project already, or incurred at least 5% of costs for a wind project, will be able to take advantage of the credit at incrementally reduced amounts of 20%, 40%, and 60% until it is phased out in 2020.

“Our forecast is about 37 GW between 2017 and 2020 for US onshore wind, and we model that between 41-69 GW were able to qualify [for the PTC] via safe harbor. Now, this doesn’t even consider the projects that have started construction physically either onsite or offsite,” said Alex Morgan, a wind analyst for Bloomberg New Energy Finance.

“We could see costs stay around 100% PTC levelized costs of energy until 2020,” Morgan added.

A boost in wind energy projects is also expected through 2020, as developers rush to take advantage of the credit before it expires.

The surge of cryptocurrencies could open up new opportunities for wind companies.

Last week, a research note from Morgan Stanley said that miners of cryptocurrencies including bitcoin would require up to 140TWh of electricity this year, which represents around 0.6% of the world’s total electricity consumption. That's more than Argentina.

So why would cryptocurrency miners consume all this energy?

Here's the crash course. Cryptocurrencies are digital currencies that allow people to pay each other without having to rely on third parties like governments or banks. Bitcoin is so far the most used cryptocurrency, representing around 62% of the market. Bitcoins are created when computers solve mathematical problems set by the currency’s founder, and each bitcoin is assigned a unique number so only one person can own it at a time.

All bitcoin transactions are recorded in the so-called blockchain, which is a list of all deals since the cryptocurrency was launched in 2009. Miners now compete to solve those maths problems – which get exponentially harder – so they can unlock new bitcoins, and also secure the fees tied to the bitcoin transactions.

It is also worth noting that, until the last month, bitcoin prices have been skyrocketing. Partly this is because of speculators, and partly because supply of bitcoins is set to be capped at 21million. As a result, its value rose more than 60-fold in the last three years to reach $19,000 per bitcoin in December. Incredible! It is now back at $11,500 per bitcoin, but it's tough to see where it'll go next.

The key point, though, is competition among miners is fierce and that is set to drive growth in electricity demand. Morgan Stanley says that the more bitcoin’s value increases, the more the mining increases. All this mining requires a large amount of computational energy use, which would drive up power demand, and represent important growth for companies developing or investing in wind and solar, especially if combined with energy storage.

We have been already seeing an interest from renewables firms. For example, a representative of Canada’s biggest hydropower producer Hydro-Quebec said last week that the company is in talks with over 30 miners and that it could announce power purchase agreements with them this year.

We see the potential of such a growing market, but we remain sceptical about whether it is wise for wind farm owners to make plans based on the future growth of the cryptocurrency.

Our main concern is that this is such a volatile market. For example, in the last four weeks bitcoin has lost over 40% of its value, trading now at around $11,500, and it is pretty much impossible to know where the price will head next.

This is crucial as an increase of energy consumption is strictly related to an increase in mining activity, and hence of the value of the cryptocurrency. If prices fall, some miners could go out of business – hardly a strong covenant that would help wind farm owners to sleep more soundly at night.

In addition, China has also moved to shut down Bitcoin mining operations to cut the risks associated with the currency, and we would expect others to follow suit.

And it is hard to predict how mining processes will evolve and what this means for the electricity needed to mine cryptocurrencies.

Finally, on top of all this, we can see why a number of analysts and investors think that bitcoin a bubble ready to burst. Maybe, as cryptocurrency enthusiasts would tell us, we simply don’t understand how revolutionary this market could be. Maybe we don't, but we think wind companies should exercise caution.

On Sunday, Germany’s political impasse could come to an end.

Chancellor Angela Merkel has struggled to form a government since her weak showing in September’s election but, on Sunday, the Social Democrats are due to vote on whether to enter formal coalition talks with Merkel’s Christian Democrats. It’s a key time.

It’s also not a foregone conclusion. Social Democrats leader Martin Schulz said this week that he didn’t know if he had enough support for a ‘grand coalition’ like the one between the parties from 2013 to 2017. Schulz has warned that some within the party fear that another tie-up with Merkel could do them irreparable damage.

If the party rejects talks, there are two likely outcomes: another election, or a minority government. And it'd cast a huge shadow over Merkel’s political future. We may have a very different European political landscape by this time on Monday morning.

For those in the wind sector, a return to the coalition could be attractive. Between the end of 2012 and the end of 2016, total
wind capacity in Germany grew from under 31GW to over 55GW, representing average installations of 4.9GW a year.

The initial coalition talks also give further optimism for wind, as they suggest that the parties will step up their goals for both renewables and cutting emissions.

They have suggested they could raise the target for renewables in the electricity mix in 2030 from 50% to 65% – although this could just be a recognition that Germany is on track to hit this anyway. It has already exceeded its 2020 renewables target.

The coalition has also indicated that it would award support for an extra 4GW of onshore wind in 2019 and 2020 on top of its existing goals, and an unspecified extra amount of offshore wind capacity. That would bolster turbine orders and give more certainty for the manufacturers that are making long-term investment decisions.

That would certainly be welcomed by manufacturers that have been hit by the launch of competitive tenders for onshore wind last year. While tenders are a necessary step for the market, the government’s target of tendering 2.8GW wind capacity each year has reduced the level of turbine orders; and preferential rules for community-led groups further compounded the uncertainty as it is unclear when winning developers will need to order turbines. Enercon’s Hans-Dieter Kettwig gave his views in November.

The government is levelling the playing field for 2018, which is welcome. But shows how the coalition hasn’t always got things right when it comes to renewables.

For example, the growth of wind can't gloss over the fact that around 30% of German electricity is powered by coal; and that the nation's carbon emissions have crept up in recent years. The country’s lignite plants still rank among some of Europe’s biggest polluters. And yes, this may be a natural result of Germany’s plan to phase out nuclear, but it highlights that the coalition has not always been the green leader it wants people to think it is.

And it is also worth noting that energy policy is only one of many priorities for Germany. The coalition has plenty of other priorities, including migration, taxes, defence, healthcare and so on.

On balance, we think it'd be beneficial for the wind sector if the coalition can carry on with the renewables policies it has started. But, if these coalition talks fall apart, it is absolutely not the end for renewables in Germany. Savvy businesses and public support for renewables will seek to keep the issue on the agenda.

We will have more clarity on all of this after Sunday.

If you’re thinking about signing up for a membership, or are renewing your existing package, here is our run-down of what you can expect from us this year.

When Adam set up A Word About Wind in 2012, he wanted to support the growth of the global wind sector with financial intelligence and personal connections.

And now, as we enter 2018, this mission is as important to us as it ever was. Yes, we have seen huge changes in the wind sector globally over that time as costs have fallen. And yes, the A Word About Wind service has evolved too, including a crop of some of the industry’s most forward-thinking special reports. But that initial goal hasn’t changed.

Now, some of you have noticed that we’ve had to adjust prices for the new year, to reflect the additional analysis and events that we are providing you with in 2018. On that basis, we thought it was a good time to spell out what you get from a membership this year.

What’s new for 2018?

The main change is that, this year, we’ll be launching a range of events and analysis with a focus on North America.

Why are we doing this? Well, over the course of 2017, we’ve become increasingly aware of the significance of the North American market to our members. The Top 100 Power People 2017 revealed that more than half of top influencers in the industry operate in North America, either exclusively or as part of their role. Consequently, we feel that the time is right to give our members a more detailed look at that market.

As of this month, all of our members have started receiving an extra weekly briefing focused on North America. This means that, over the course of the year, we are now producing 200 briefings, up from 150 in 2017 – or an increase of one-third. That works out as an extra 150-200 news stories in your inbox each year, and 50 analysis pieces from our team of experts. The new briefing goes out on Thursday mornings, at 8am New York time.

We’re also looking forward to publishing our inaugural North American Power List on 29th May, which will give an in-depth look at the 100 most influential people in wind in North America. We’re open for nominations until 14th February: editorial@awordaboutwind.com

And we’re also taking our events to the US for the first time. Pre-registration is open for our Financing Wind New York conference on 31st May: tickets are available to silver, gold and corporate members, and pre-registration ensures you’ll get all the latest info.

Finally, in September, we’ll start a new series of Quarterly Drinks in New York, helping silver, gold and corporate members connect with each other and find new business opportunities.

In conclusion, fifty new intelligence briefings, three events, and one special report more for 2018 – on top of what was already included in our packages in 2017.

In addition to everything you’re used to…

It’s also worth reiterating that this drive into North America will not detract from the events and analysis, focused on the global market, that our members benefited from in 2017.

We will still be publishing our global editions at 8am UK time on Mondays, Wednesdays and Fridays – 150 of these each year with a total of 750 stories and 100 analysis pieces.

We will still be running our Quarterly Drinks events in London every three months.

And we will still run our annual Financing Wind conference in London later this year.

To reflect the fact that we are including more in our membership packages this year, we’ve had to adjust the prices of our membership packages. Our pricing programme is available to view here. If you have any queries about your membership, please feel free to contact Matt or Zoe.

Wind Watch
Impact of Tax Reform on US Wind Tax Equity Deals
By David Burton & Jeff Davis, Partners, Mayer Brown

On 22 December 2017, President Trump signed the first major reform of the United States tax code since 1986. Here are some
of the ramifications of the reforms on wind tax equity transactions.

Corporate Tax Rate Reduced to 21%
In 2018, the corporate tax rate has been reduced from 35% to 21%. The rate reduction means that US corporations will pay significantly less federal income tax, so the supply of tax equity will decline. However, most tax equity investors are expected to still pay enough tax to merit making tax equity investments.

Importantly, the rate reduction means sponsors of wind projects will be able to raise less tax equity as depreciation deductions are worth only $.21 per dollar of deduction rather than $.35 per dollar.

100% Bonus Depreciation
A partial mitigant to tax rate reduction is that the act provides the option of claiming 100% bonus depreciation (i.e. expensing), so depreciation deductions can be available in the first year (rather than over multiple years). However, the partnership tax accounting rules hamper the efficient use of 100% bonus depreciation.

For instance, assume a wind project costs $105m. The sponsor and tax equity investor form a partnership with contributions of $45m from the tax equity investors and $60m from the sponsor. The project has $5m in revenue from selling power in 2018 and $3m of production tax credits (PTCs).

The partnership can deduct the full $105m in 2018. That means the tax equity partnership has a $100m tax loss in 2018 (i.e. $5m of revenue less $105m of depreciation) that is allocated 99% to the tax equity investor and 1% to the sponsor. The tax equity investor only contributed $45m. Therefore, the “outside basis” rules mean the tax equity investor can take a deduction for only $45m, and the remaining $54m (i.e. $99m less $54m) is “suspended”.

That “suspended loss” can be used in either of the following ways: (i) income is allocated to the tax equity investor in later years or (ii) the tax equity investor contributes additional capital.

Further, the ‘capital account’ rules mean that the equity investor must agree to a “deficit restoration obligation” whereby, if the partnership liquidates, the tax equity investor agrees to contribute $54m to the partnership. Although we are not aware of a wind partnership ever liquidating in a way to trigger payment on such an obligation, some tax equity investors have risk management constraints on how large an obligation they can agree to.

If, for instance, the tax equity investor was only permitted by its management to agree to a deficit restoration obligation equal to 60% of the capital it contributed (i.e. $27m, which is 60% of $45m), then it could be allocated only a $72m dollar loss (i.e. $45m of capital and $27m of deficit restoration obligation). That would mean the partnership could not elect 100% bonus deprecation. It would have to fall back to the 40% bonus depreciation available for projects acquired in 2018 prior to the enactment of tax reform. That would mean a $42m bonus depreciation loss and double declining balance depreciation over a five years on the remaining $63m.

Alternatively, the partnership could avoid bonus depreciation entirely and merely claim double declining balance depreciation over five years for the whole $105m.

The partners could opt to allocate less than 99% of the loss to the tax equity investor in 2018. For instance, the partnership could allocate 45% of the 2018 loss to the tax equity investor and avoid having a suspended loss or deficit restoration obligation. But that would mean that the tax equity investor would only be allocated 45% of the PTCs for 2018, so over $1.5m of the $3m in PTCs would be allocated to the sponsor. Wind sponsors for a variety of reasons typically do not have much use for tax benefits, so $1.5m of PTC value would be effectively lost.

Leasing Alternative?
The partnership rules could be avoided by the sponsor selling the project to the tax equity investor and leasing it back. However, in a lease structure, the PTC is not available.

An investment tax credit (ITC) equal to 30% of the tax basis of the project is available (assuming construction on the wind farm started before 2018) but, given improvements in wind turbine technology, the ITC amount for land-based projects is often less than the present value of the 10-year PTC stream. Therefore, sponsors are typically willing to wrestle with the partnership tax accounting rules in order to capture the PTC value.

PTC Inflation Adjustment: A Bullet Dodged
The version of tax reform initially passed by the House of Representatives would have removed the inflation adjustment from the PTC. For wind projects that started construction prior to 2018, the inflation adjustment results in PTCs generated in 2017 being worth 2.4 cents per kWh, rather than 1.5 cents per kWh.

Fortunately, the conference committee bill that reconciled differences between the House and Senate versions and was enacted into a law did not alter existing the inflation adjustment.

Base Erosion Anti-Avoidance Tax (BEAT): Hit By a Ricochet
The BEAT provisions target earning stripping deals between US corporations and related parties in foreign jurisdictions. This has relevance to the tax equity industry because some tax equity investors are banks or insurance companies with foreign parents or significant foreign operations.

The BEAT would be a tax (at a phased-in rate discussed below) on the excess of an applicable corporation’s (i) taxable income determined after making certain BEAT required adjustments, over (ii) its ‘adjusted’ regular tax liability (ARTL), which is its regular tax liability reduced by all tax credits other than, through the end of 2025, certain favoured tax credits. The favoured credits are research and development tax credits; and up to a maximum of 80% of the sum of the low-income housing tax credits and the renewable energy tax credits (including the wind PTC).

However, the ability to exclude the renewable energy credits from the ARTL calculation ends beginning in 2026. As the PTC is a 10-year stream, BEAT could discourage investment in wind farms by tax equity investors subject to BEAT. As a result, such tax equity investors could favour investment in solar projects that qualify for the ITC that arises in the first year, rather than wind projects with their 10-year PTC stream.

Alternatively, tax equity investors could try to use their market strength to persuade sponsors of wind projects to elect the ITC. As discussed above, this would also mean that a lease structure could be used, which is a more efficient means to monetise 100% bonus depreciation. However, for land-based projects the ITC is often less valuable than the 10-year PTC, so such a decision would typically mean a loss of project value for the sponsor.

The act provides a phase-in of the BEAT rate. Under the phase-in, the BEAT would be 5% for tax years beginning in 2018, 10% for tax years beginning between 2019 and 2025, and 12.5% thereafter. In the case of banks and securities dealers, the general BEAT rate would be increased by one percentage point.

As tax equity transactions are modelled, diligenced and executed, the full ramifications of tax reform will become more apparent. The wind industry has proven itself resilient over several decades and that resilience will serve it well as it adapts to the changes in the market’s landscape due to tax reform.

Guest blog from David Burton & Jeff Davis, Partners, Mayer Brown

We've recently published a complimentary ebook on North American wind: 5 Lessons on the North American Wind Business. Click here to download it.

On 22 December 2017, President Trump signed the first major reform of the United States tax code since 1986. Here are some of the ramifications of the reforms on wind tax equity transactions.

Corporate Tax Rate Reduced to 21%

In 2018, the corporate tax rate has been reduced from 35% to 21%. The rate reduction means that US corporations will pay significantly less federal income tax, so the supply of tax equity will decline. However, most tax equity investors are expected to still pay enough tax to merit making tax equity investments.

Importantly, the rate reduction means sponsors of wind projects will be able to raise less tax equity as depreciation deductions are worth only $.21 per dollar of deduction rather than $.35 per dollar.

100% Bonus Depreciation

A partial mitigant to tax rate reduction is that the act provides the option of claiming 100% bonus depreciation (i.e. expensing), so depreciation deductions can be available in the first year (rather than over multiple years). However, the partnership tax accounting rules hamper the efficient use of 100% bonus depreciation.

For instance, assume a wind project costs $105m. The sponsor and tax equity investor form a partnership with contributions of $45m from the tax equity investors and $60m from the sponsor. The project has $5m in revenue from selling power in 2018 and $3m of production tax credits (PTCs). The partnership can deduct the full $105m in 2018. That means the tax equity partnership has a $100m tax loss in 2018 (i.e. $5m of revenue less $105m of depreciation) that is allocated 99% to the tax equity investor and 1% to the sponsor. The tax equity investor only contributed $45m. Therefore, the “outside basis” rules mean the tax equity investor can take a deduction for only $45m, and the remaining $54m (i.e. $99m less $54m) is “suspended”.

That “suspended loss” can be used in either of the following ways: (i) income is allocated to the tax equity investor in later years or (ii) the tax equity investor contributes additional capital.

Further, the ‘capital account’ rules mean that the equity investor must agree to a “deficit restoration obligation” whereby, if the partnership liquidates, the tax equity investor agrees to contribute $54m to the partnership. Although we are not aware of a wind partnership ever liquidating in a way to trigger payment on such an obligation, some tax equity investors have risk management constraints on how large an obligation they can agree to.

If, for instance, the tax equity investor was only permitted by its management to agree to a deficit restoration obligation equal to 60% of the capital it contributed (i.e. $27m, which is 60% of $45m), then it could be allocated only a $72m dollar loss (i.e. $45m of capital and $27m of deficit restoration obligation). That would mean the partnership could not elect 100% bonus deprecation. It would have to fall back to the 40% bonus depreciation available for projects acquired in 2018 prior to the enactment of tax reform. That would mean a $42m bonus depreciation loss and double declining balance depreciation over a five years on the remaining $63m.

Alternatively, the partnership could avoid bonus depreciation entirely and merely claim double declining balance depreciation over five years for the whole $105m.

The partners could opt to allocate less than 99% of the loss to the tax equity investor in 2018. For instance, the partnership could allocate 45% of the 2018 loss to the tax equity investor and avoid having a suspended loss or deficit restoration obligation. But that would mean that the tax equity investor would only be allocated 45% of the PTCs for 2018, so over $1.5m of the $3m in PTCs would be allocated to the sponsor. Wind sponsors for a variety of reasons typically do not have much use for tax benefits, so $1.5m of PTC value would be effectively lost.

Leasing Alternative?

The partnership rules could be avoided by the sponsor selling the project to the tax equity investor and leasing it back. However, in a lease structure, the PTC is not available.

An investment tax credit (ITC) equal to 30% of the tax basis of the project is available (assuming construction on the wind farm started before 2018) but, given improvements in wind turbine technology, the ITC amount for land-based projects is often less than the present value of the 10-year PTC stream. Therefore, sponsors are typically willing to wrestle with the partnership tax accounting rules in order to capture the PTC value.

PTC Inflation Adjustment: A Bullet Dodged

The version of tax reform initially passed by the House of Representatives would have removed the inflation adjustment from the PTC. For wind projects that started construction prior to 2018, the inflation adjustment results in PTCs generated in 2017 being worth 2.4 cents per kWh, rather than 1.5 cents per kWh.

Fortunately, the conference committee bill that reconciled differences between the House and Senate versions and was enacted into a law did not alter existing the inflation adjustment.

Base Erosion Anti-Avoidance Tax (BEAT): Hit By a Ricochet

The BEAT provisions target earning stripping deals between US corporations and related parties in foreign jurisdictions. This has relevance to the tax equity industry because some tax equity investors are banks or insurance companies with foreign parents or significant foreign operations.

The BEAT would be a tax (at a phased-in rate discussed below) on the excess of an applicable corporation’s (i) taxable income determined after making certain BEAT required adjustments, over (ii) its ‘adjusted’ regular tax liability (ARTL), which is its regular tax liability reduced by all tax credits other than, through the end of 2025, certain favoured tax credits. The favoured credits are research and development tax credits; and up to a maximum of 80% of the sum of the low-income housing tax credits and the renewable energy tax credits (including the wind PTC).

However, the ability to exclude the renewable energy credits from the ARTL calculation ends beginning in 2026. As the PTC is a 10-year stream, BEAT could discourage investment in wind farms by tax equity investors subject to BEAT. As a result, such tax equity investors could favour investment in solar projects that qualify for the ITC that arises in the first year, rather than wind projects with their 10-year PTC stream.

Alternatively, tax equity investors could try to use their market strength to persuade sponsors of wind projects to elect the ITC. As discussed above, this would also mean that a lease structure could be used, which is a more efficient means to monetise 100% bonus depreciation. However, for land-based projects the ITC is often less valuable than the 10-year PTC, so such a decision would typically mean a loss of project value for the sponsor.

The act provides a phase-in of the BEAT rate. Under the phase-in, the BEAT would be 5% for tax years beginning in 2018, 10% for tax years beginning between 2019 and 2025, and 12.5% thereafter. In the case of banks and securities dealers, the general BEAT rate would be increased by one percentage point.

As tax equity transactions are modelled, diligenced and executed, the full ramifications of tax reform will become more apparent. The wind industry has proven itself resilient over several decades and that resilience will serve it well as it adapts to the changes in the market’s landscape due to tax reform.

Wind Watch

Wind Watch is published every Monday and Friday.

In the meantime, last week we published our first Finance Quarterly report of 2018. If you haven't read it, please do so.

These reports are published every three months to give a quick and focused overview of what's happening in wind globally, including insights from industry big-hitters and thought-leaders.

This first Finance Quarterly of 2018 includes:

• Analysis of wind investment in the UK
• Interview with Boralex CEO Patrick Lemaire
• Interview with RES CEO Ivor Catto
• Quarterly look at corporate M&A deals
• Project M&A, PPA and offshore activity in Q4
• Our NEW project finance deals tracker
• Q&A with Rich Furniss, Nordex's MD of UK & Ireland

As the Projects and Money conference begins this week and ahead of Wind Power Finance and Investment in February, guest blogger Brooke Cary fills us in on the market forces driving innovation in the financing of US wind, based on insights from last year’s conferences.

Where innovation can drive the market forward

Since 2017, many developers have been exploring ways unlock the expansive market of small to medium size C&I buyers. “If the wind industry figures out how to offer a product through its greater ecosystem that the smaller corporate can buy, that’s really going to keep this moving forward,” said Erin Decker, Senior Director of Strategic Renewables at Renewable Choice Energy.

One of the challenges in serving this market is that wind power is not yet cost-efficient when energy is being sold on a small scale. Developers will need to be flexible and creative in their offerings, which means sustainable pricing and the aggregation of small to medium C&I buyers.

“You have the well-known folks. The Amazons, the General Motors, the Googles, the Home Depots, that are doing these PPAs. It’s really the next tier, it’s their suppliers and a whole host of other types of potential C&I customers that are small, that are not very attractive to larger wind projects - which need to be large nowadays from a cost-efficiency standpoint. So the innovation needs to come around aggregating that group,” said Thomas Carbone, Vice President of Tri-Global Energy, a Texas-based renewable energy developer.

Future deals for this market may look more like “energy blocks.” Developers will need to manage a variety of off-taker credit portfolios, load profile requirements and diverse appetites for risk. The market will likely see new entrants such as insurance companies and banks help share those risks, Carbone added.

Key factors driving demand

Currently, primary drivers of demand are corporate sustainability targets, state and local government RPSs, and the PTC. Large corporations are leading the demand by setting aggressive RE100 goals. Companies like Amazon, who recently announced that they have reached just 40% of their renewable goals, will continue to purchase clean energy and be significant market leaders. In addition, many corporations have taken note of the movement toward renewables. Several of those who did not previously have sustainability goals are just beginning to set their targets.

States and local governments have also shown commitment to mitigating the effects of climate change and have acknowledged the need for renewables through public utilities and increasing renewable portfolio standards. According to the National Conference of State Legislatures, 29 states and three U.S. territories have set RPSs and are gearing up for a low-carbon economy. Eight states and one U.S. territory have also set renewable energy goals.

“You have increasingly aggressive renewable portfolio standards, you have the whole corporate-industrial side, where we see more and more corporations that want to contract directly for renewable power, and wind is one where they take great comfort,” said David Halligan, CEO of Goldwind Americas.

The PTC has already shown itself to be a key driver for wind, as demonstrated by the estimated 41-69 GW of new safe harbored projects. Short term demand will continue be driven in part by the PTC, and pricing should remain stable at least until 2020, according to Bloomberg forecasts.

Ultimately, wind energy demand and saturation will not be completely realized until the small to medium C&I market is unlocked. We look forward to seeing how the industry adapts to these challenges in 2018 and beyond.

It was in characteristically low-profile fashion that Enercon slipped out the news just before Christmas that it was acquiring shares in Dutch rival Lagerwey. The pair said on 21 December that Enercon was buying a stake of unspecified size. Mysterious.

The secrecy lasted one day. On 22 December, Lagerwey’s chief executive Huib Morelisse said the stake was 100% – a nice round number! – and that the tie-up would take effect on 1 January. The companies said Lagerwey would remain independent but they would work closely “in areas where synergies can be realised”.

Now, usually a mention of “synergies” would set off the alarm in my brain that shouts ‘business jargon’ over and over – but, in this case, it’s pretty clear what they mean. Both focus on direct-drive turbines, which makes them a good fit from a technology point of view, and they have been around for a similar time: Lagerwey was set up in 1979 and Enercon in 1984.

Enercon managing director Hans-Dieter Kettwig said the purchase would bolster its position by expanding its portfolio; and Morelisse said it would give Lagerwey a stronger position to sell its own machines. A sensible move.

And, to us, it seems to say a lot about the state of manufacturing in Germany. Kettwig warned at the WindEurope conference in November that German turbine makers were in for three tough years, as competitive tenders in onshore wind that started last
year were reducing the total size of turbine orders.

He added that turbine makers would lose up to 2.5GW of orders in Germany by 2020 because of the tenders.

This is forcing companies to restructure and grow overseas. And this is where the Lagerwey deal comes in. Enercon is seen as a leader in its home market, where it has installed over 20GW of turbines in its history, and has done even more than this overseas (23.5GW). This international story tends to get missed because of Enercon’s media-shyness.

Buying Lagerwey will shine more light on Enercon’s international plans. As well as giving it a bigger market share in continental Europe, the deal also gives it a much-needed foothold in Russia. This is a very young market – and in an oil-rich country could still be killed before it even gets going – but tough conditions in at home surely make it worthy of investigation for Enercon.

Last November, Lagerwey set up Red Wind, which is a tie-up with Russian firm Rosatom’s arm Nova Wind, to supply turbines in the region – and Red Wind is already in line for orders of 360MW. We have seen Vestas and Siemens Gamesa picking up deals in Russia, and now Enercon can count itself as a player too.

Lagerwey has other innovations that might have been attractive: hydrogen-producing turbines and climbing cranes are two of them.

Meanwhile, the Dutch firm said last year that it saw its future in licensing rather than as a pure manufacturer, and so the deal with Enercon makes sense in that perspective. Mutually-beneficial, in fact... the favourite line of most PRs when it comes to these deals.

With tough conditions in key markets likely to prevail, tie-ups like this could be a key feature of the European wind market in 2018.

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.

This week, we have published our first Finance Quarterly of 2018.

In this series of reports, we provide you with up-to-date deals data from the last three months, plus market analysis. This edition features a special focus on the UK market: alongside an in-depth analysis of the country’s wind sector, we have interviews with Boralex’s Patrick Lemaire, Nordex’s Rich Furniss and RES Group’s Ivor Catto.

We decided to focus on the UK for this edition as the country is facing a period of economic and political unpredictability. Its future after Brexit remains uncertain, and this inevitably affects the wind market – but the market has reasons for optimism.

The situation for offshore wind, in particular, looks promising. It has received strong government support due to its potential for job creation and to drive exports. Indeed, Prime Minister Theresa May praised the sector in a major speech this week.

Additionally, the recent Clean Growth Strategy promised £557m for renewables in the next round of Contracts for Difference auctions, which could potentially support 10GW of offshore wind capacity. We expect the next CfD tender in early 2019.

However, as strike prices decline, this squeezes the profits for investors. It will force investors to think harder about long-term predictions of open market prices when deciding how to invest, and find ways to mitigate risks. This is not straightforward as they are affected by many factors, such as changes in government and regulation.

The future of onshore looks more challenging, particularly in England, where the UK government has proved unwilling to support onshore developers. We see indications that politicians may be thawing on the idea of supporting new onshore wind schemes – not least because of the big price falls they have seen in offshore wind – but there is a major hurdle to supporting more wind farms: the planning system.

Since 2016, planning decisions about wind farms have been in the hands of local councils, not national government. This means that, even if developing onshore wind farms is in the wider national interest, they may struggle to get past naysayers at a local level. How the industry might overcome this remains to be seen, but Piers Guy of Vattenfall told us recently that it could depend on how convincingly the industry argues that it represents value for money.

If you’d like to read our market analysis in more depth, our Q1 Finance Quarterly is available to download here. Special reports are included in the price of membership: if you’re not yet a member, you can find out what we’re all about by signing up to a 30-day trial of our intelligence briefings.

Who are the most influential people in the global wind industry? This is a question we look to answer each November in our well-respected Top 100 Power People report.

This focused on the 100 most influential power-brokers, deal-makers and influencers, which includes investors, developers, manufacturers and advisers. Around one-third of last year’s Top 100 Power People came from the North American market, from firms as diverse as Bank of America Merrill Lynch, developer Invenergy and blade specialist TPI Composites.

But we always like to see where we can go into greater depth. We published our Legal Power List in 2016 to do just this, and followed up with our Women’s Power List for International Women’s Day in March 2017. Now we are doing it for North America too.

On 29th May, we are due to publish our first North American Power List. This will look at the 100 most influential individuals in wind in the US and Canada; and we will put together the list in collaboration with a panel of judges. You can nominate people for consideration by emailing: editorial@awordaboutwind.com

There are three reasons we think now is the right time for this.

First, we have been growing our readership in North America, and we are now producing more content for the region than ever. These weekly North American intelligence briefings are in addition to coverage of the region in our thrice-weekly global briefings.

Second, we are due to run our first Financing Wind New Yorkconference this year, as well as two Quarterly Drinks networking events, also in New York. We know that it isn’t always possible for you to see us in London, so we wanted to take AWAW to you.

And third, our Top 100 Power People was a reminder of just how important the US is for firms with ambitions to be global players in wind. Growth in Europe is patchy and Asia can be tough for players to break into, while the US continues to grow strongly.

In the third quarter of 2017, there were almost 30GW of projects being built or in advanced development in the US, according to the American Wind Energy Association. We see the US as one of the most dynamic wind markets in the world right now, and conditions look set to stay favourable in 2018 after Republican tax reform plans left key wind subsidies untouched.

In short, it is the right time to give you more insights into the vital North American market. The North American Power List will play a key role in showing where true power lies.

But we cannot do it alone. We need your nominations. You have until 14th February to get in touch and let us know which big-hitters we should be considering for inclusion in the list.

We want to hear about the men and women you think we should be looking to feature. We are looking for the individuals who do the biggest deals, lead the largest firms, and drive the sector forward – and we don’t typically include politicians so, if Donald Trump tells you he’s on track to be number one, don’t believe him!

If you know someone that fits the bill, please contact our team at editorial@awordaboutwind.com and provide a brief overview of why we should include them. Just give us the hard facts in under 300 words and our team will consider them for the shortlist to be put in front of our panel of judges later this year.

We look forward to hearing from you.

Wind Watch

Wind Watch is published every Monday and Friday.

In the meantime, we need your help. On 29th May we are due to publish our first North American Power List. This report follows our popular Top 100 Power People; and is set to focus on wind's most influential power-brokers and influencers in North America.

Nominations are now open and you can get in touch with us by 14th February to tell us who you think we should be consider.

We are looking for the individuals that carry the most influence in North American wind by doing the biggest deals, leading the biggest firms, and driving the sector forward.

You can send your nominations to editorial@awordaboutwind.com, providing a brief overview of who you think we should include and why. Just give us the hard facts in no more than 300 words and our team will consider them for the shortlist to be put in front of our panel of judges later this year.

We look forward to hearing your suggestions.

We're pleased to announce the launch of our first Finance Quarterly of 2018, published today. Members can download the report here.

UK ECONOMIC GROWTH WILL SLOW TO 1.5% IN ADVANCE OF BREXIT, BUT – WITH POLITICAL SUPPORT – THE WIND INDUSTRY IS SET TO KEEP UP THE PACE

Q1 Finance Quarterly report examines the forecast for UK wind industry after Brexit, and provides market analysis on latest wind sector M&A activity & deal flow

London, Tuesday 9th January 2018 – While rising inflation rates and the depreciated Pound are causing a slowing of economic growth, the UK wind energy sector offers a bright spot in the Brexit-induced gloom. However, although projects are now on the cusp of viability even without government subsidies, political support remains vital to ensuring the continued prosperity of this booming industry.

This is according to the latest findings outlined by industry intelligence service A Word About Wind in its Finance Quarterly Q1 report. The report forms the latest analysis published exclusively for its rapidly expanding international membership of energy developers, financiers and investors.

This financially focused, quarterly investor report series provides an exclusive insight into key M&A transactions, data on the most notable deals of the past three months, economic country forecasts and unrivalled investment analysis, four times a year.

A key focus of this edition is the UK market, and its future direction in a post-Brexit world. The EU referendum, and then the vote for Brexit, caused enormous uncertainty in the wind sector, and the changes to the economic climate affected internal investors and global players looking to expand in the UK.

The immediate consequence of the referendum vote was the depreciation of the pound, which has lost 22% of its value against a basket of currencies since the vote. This – aside from hiking the cost for Britons of holidaying abroad – has led to a raft of other consequences. While exports, including those in the wind sector, have been boosted, consumer-price inflation has risen to its highest level since 2012, causing interest rates to rise accordingly. This is attested by the Bank of England’s move, in November, to raise its benchmark interest rate from 0.25% to 0.5%, the first rise in ten years.

The International Monetary Fund predicts that the UK economy will grow by only 1.5% in 2018, as compared to an average annual GDP growth of 2.1% over the last 5 years.

However, the wind industry is defying the odds – and the economics – to flourish. For example, despite the Brexit vote in June 2016, the UK ended that year with over 14GW of wind power, putting it in third place Europe-wide for total wind capacity installed.

A major contributor to this success is the political support shown for renewables by the UK government. While the Conservative government was widely criticised for cutting onshore wind subsidies in 2015, and although UK Chancellor Philip Hammond has ruled out new subsidies for renewables until after 2025 in the most recent Autumn Budget, support for offshore wind from the government remains intact.

The Clean Growth Energy Strategy confirmed plans to give £557m support for renewables in upcoming Contract for Difference (CfD) auctions, which could support around 10GW of new offshore wind capacity. The future for onshore wind also looks hopeful, with ministers Greg Clark and Claire Perry implying that projects in Scotland and Wales could feature in a subsidy-free CfD auction this spring.

“The support for renewables projects by the UK government over the years has been integral to the industry’s success,” said Richard Heap, Editor, A Word About Wind.

“We are increasingly seeing that projects can thrive without subsidies, but backing from politicians is still key. Their support will be important if the UK government is serious about making wind, particularly offshore wind, a Brexit success story.”

” he added.

However, there is more the Government could do. A significant obstacle to the progression of wind energy projects is currently posed by the UK planning system, which currently gives local councils the power to veto wind farms larger than 50MW.

Adam Barber, Managing Director, The Tamarindo Group, of which A Word About Wind forms a key part, commented, “While economic factors caused by the fallout from Brexit have the power to affect the health of UK wind projects, it is ultimately regulatory policy that will make or break the industry,”

“The suggestions of future support in the form of CfD auctions are promising, but the planning system introduces a real obstacle, which must be addressed if the sector is to continue to flourish,” he added.

The investor report contains interviews with RES chief executive Ivor Catto, and CEO at Boralex Patrick Lemaire, as well as in-depth analysis and a breakdown of the largest M&A deals completed this quarter. This edition also launches a new deals tracker for wind project finance deals.

For further information, and to obtain a copy of Finance Quarterly, please visit: http://www.awordaboutwind.com/reports/finance-quarterly-q4-2017/

- Ends -

About A Word About Wind

A Word About Wind is a rapidly expanding international membership that provides intelligence, insight and connections to senior industry decision makers.

Our community of over 2,500 individuals comprises and represents some of the very best finance houses, banks, venture capitalists, and private equity investors in the world. Through our programme of reports and impartial industry analysis, together with a growing programme of exclusive members-only networking initiatives and events we influence, educate and inform the people that drive and shape international wind energy.

Membership enables our community to make better informed investment decisions, deepen industry knowledge, benefit from concise, informed deal information and ultimately get the inside track on what’s happening in wind.

For further information, please visit: www.awordaboutwind.com

It is nine years since the European Parliament mandated that at least 20% of energy used in the European Union must come from renewables by 2020. At the time, this seemed an ambitious goal, particularly without binding targets for individual nations.

Binding national targets would be helpful, of course. But, even without them, a report from the European Commission in February 2017 said the EU is on track to hit 20%.

We aren’t as confident. The report shows that the proportion of renewables in the EU energy mix grew from 12.4% in 2009 to around 16% now. Good progress, but it suggests hitting 20% by 2020 is only a possibility, not a foregone conclusion. We’ll see.

Either way, 2020 is near and it’s time for the EU to be ambitious again. In November 2016, the European Commission published a revised Renewable Energy Directive to ensure a target of at least 27% by 2030, which the EU energy council supported last month.

But is it enough? We think the council could have been bolder, given that the falling cost of wind and solar makes both more attractive – and we aren’t alone. Ahead of the meeting, the EU came under pressure from over 50 corporates including Amazon and Ikea to back a 35% target. This followed the proposal of a 35% target by the European Parliament in November.

And industry association WindEurope’s chief executive Giles Dickson says the target set by the energy council is “deeply disappointing from an economic perspective”. He argues that the difference between a 27% and a 35% target is €92bn in investments not made and 132,000 jobs not created.

Finally, Europe’s climate commissioner Miguel Arias Canete told ministers during the negotiations the level of ambition was “clearly insufficient”. He said the falling prices for renewables meant the EU could reach a target of 30% of renewables with similar costs as had been previously estimated for the 27%.

The 27% also gives less incentive for the best-performing nations to keep pushing on renewables. The latest Renewable Energy Progress Report published by the European Commission in December, which covers the period from 2004 to 2015, shows that 11 states achieved their 2020’s renewables target five years early.

Ten out of 28 member states are already near or exceeding the 27% target, and five – Austria, Denmark, Finland, Latvia and Sweden – were over 30% in 2015. Plenty of these countries will continue pushing on renewables regardless of the EU targets – these aren't everything, after all! – but it does mean there would be less incentive for them to do more, and that is only likely to curtail the amount of investment in wind in the next few years.

And the worst performers will likely continue as slowly as ever.

This sounds like we are being pessimistic for the sake of it. We’re not, and we think there is good news in the council’s plans. The 28 member states have agreed to give three years’ visibility on volume and budget of public support schemes for renewables.

They have also agreed on the need to cut barriers to corporate power purchase agreements. This gives energy producers and buyers the clarity they need.

But, with more action on renewables in countries including the US, China and India, we think the EU could do more. A higher target could help the EU really stand out.

Continuing our series of member Q&As, we spoke to Jonathan Rose of Hyperion Search about his insights into the industry. If you'd like to contribute a member Q&A to our blog, we'd love to hear from you. Email us at editorial@awordaboutwind.com.

Name: Jonathan Rose

Job: Executive Search Consultant

Company: Hyperion Executive Search

How long have you worked in renewables?

3 years

In ten words or fewer, what does your firm do?

Finding clean energy companies the talent needed to achieve objectives.

In which markets do you see the biggest opportunities at present?

After spending the last 3 years in New York supporting IPPs, Developers and OEMs, I see North America remaining a key market.

Onshore wind continues to surge, with the industry installing significant amounts of new capacity. Entering 2018, wind has become cost competitive through long-term PPAs. Support in the C&I sector is swelling and Wind Turbine Technician is projected to be the fastest growing profession in North America over the next decade.

And, as global project costs continue to drop, the US is quickly building on the momentum of its first commercial offshore wind farm and has a robust pipeline of projects in various stages of development. It should be a fascinating couple of years.

What is the biggest challenge facing wind, and how would you solve it?

From a search perspective, the biggest challenge we see in a rapidly growing and very competitive industry is an increasing skills and talent gap. In 2005, the US had just over 7GW of installed wind capacity. In 2017 we are now above 80GW and the industry regularly faces new technical, commercial and operational challenges with a shortage of professionals who possess the requisite wind energy experience.

It’s a big challenge to solve single-handedly but here at Hyperion we partner with startup developers to global OEMs and deliver tailor-made solutions to each search we’re given. By understanding our client’s culture and ethos, we can employ a methodical approach to our search, and we have the foundation on which to deal with the great, the challenging and the unexpected.

In 2017, we were able to successfully complete several senior leadership searches for businesses who were struggling to find the right talent in wind energy for Project Management, Supply Chain, Data Analytics and Cyber Security roles. Through our knowledge of the renewable sector and in-depth questioning & screening of candidates, we identified highly qualified professionals outside of the wind industry who had the right transferable skills and motivations to be an immediate asset. By widening the pool of potential candidates and offering a consultative service, we offer our clients an advance over their competitors in the search for talent.

What do you enjoy most about working in wind?

The people! I really enjoy speaking with innovative, passionate and collaborative professionals every day and keeping up to date with an ever changing & developing industry.

Why did you join A Word About Wind?

Our vision is making a contribution to a cleaner world by getting the best possible people into the industry and helping to build the best companies in the industry. Joining AWAW, gives us the opportunity to continue participating in the wind energy sector as well as serving it.

Welcome back! It's an A Word About Wind tradition that in our first edition of the new year we give ten predictions about what we expect to happen in the wind industry in the next 12 months – and we will check back when the year ends. If you didn't see our look back at our 2017 predictions then here it is.

Here are our ten predictions for 2018…

1) Europe seeks to regain initiative: Europe has been slipping behind North America and Asia in recent years terms of annual wind installations, and in 2018 we expect the European Union to seek to regain the initiative. The EU is committed to gaining 27% of energy from renewables by 2030, but corporates and others have been pushing for 35%. We expect this lobbying to result in more supportive policies for wind and solar. And even if 35% looks a step too far, we see a chance they could settle at 30%.

2) US faces tougher year: President Trump’s first year was calm for wind, but his second will be less so. Republicans have not cut the vital production tax credit in their tax reforms, while changes to BEAT look more benign than they were. Even so, we expect more policies with negative consequences for wind, both intended and unintended; and more scrutiny of what happens after 2020.

3) Auctions weigh on manufacturers: Competitive tenders are helping to drive down the cost of wind globally, but they are taking their toll on manufacturers. For example, Vestas shares are trading 40% lower than in summer as a result of increased competition. In 2018, we expect job pain as manufacturers restructure and look hard at R&D budgets. Efficiency will also drive takeover activity.

4) Contracts for Difference get sexy: Competitive tenders will re-shape the way that owners and operators do business as well. With fewer government feed-in tariffs, we expect to see more wind firms clamouring for Contracts for Difference. These would help firms stabilise their revenues and give governments more certainty on energy prices. Hedging projects will rise up the agenda.

5) Germany and India face tender fallout: Germany and India may be very different countries, but both faced problems with competitive tenders in 2017 – and, in both, we see firms warning that tenders are killing wind. Germany is set to modify its auctions after political gridlock subsides, while India is set to plough on with new auctions. Firms in both will find there are no easy fixes.

6) Onshore support for Scotland and Wales: The falling cost of offshore wind in the UK’s CfD auction in September put onshore wind back on UK government's agenda too. We expect the UK to make more progress on plans to support construction of large wind farms in Scotland and Wales ahead of a CfD auction in 2019, but extending this to England will prove a step too far.

7) PPAs pick up in Europe: Businesses in the US have made the running when it comes to signing power purchase agreements with wind farm owners in the last few years, but in 2018 we expect to see more globally. In Europe, we see good potential for PPAs in places including Scandinavia, the UK and the Republic of Ireland; and Australia’s wind PPA market should stay strong.

8) Frothy pricing continues: One key talking point at Financing Wind 2017 last November was the high prices being paid for wind assets, and we expect this to continue in 2018. Interest rates will not yet reach levels that draw investors away from wind. The great unknown is whether we will see a global crash that forces banks to restrict liquidity: Italy’s banking crisis could be the spark, and the
level of debt in China is also a threat to global stability.

9) Developer consolidation: Consolidation is not just for turbine makers. We see plenty of utilities looking to grow market share, and we expect many to do so by buying smaller developers and their project pipelines. We also expect financial institutions to get in on the action, with investors from Canada and the US looking especially keen on developers in established markets.

10) Battery storage breakthroughs: Batteries have grabbed the industry’s imagination this year, and we expect more firms to make inroads in storage in the next 12 months. Elon Musk’s Tesla shook things up with a 100MW facility in South Australia last year; and we have also seen Vattenfall install a 22MW battery at its 228MW Pen y Cymoedd. These will become more common in 2018.

And that's it for the predictions. No doubt some of these will give us a few sleepless nights in the next 12 months!

That just leaves us to wish our members a prosperous year, and we will check back at the end of 2018 to see what we got correct.

A Word About Wind has always had a global focus in our reports and intelligence briefings. Yes, we are based in the UK, but most of our members look beyond the UK and Europe to North America, Asia and further afield. We are well aware that wind is a global industry.

Even so, we are always looking at how we can do more – and, in 2018, that means growing our coverage of the North American market. It has become clear to use in the last year that the US truly is one of the most important wind markets now, and key for our members.

Let’s look at the Top 100 Power People 2017. In this report, we saw that more than half of the most influential people in the industry operate in North America exclusively or as part of their role. The industry’s continued strong growth in 2017, in the face of President Trump’s hostility to wind, was one of the industry’s feel-good stories of last year. We are looking to play a key role in helping our members to understand the market and grow within it.

And this is why we will dedicate a more attention to the North American market this year. As such, there are several extras which you can expect from us in 2018.

As of this week, we have added a new weekly intelligence briefing that focuses specifically on the North American market. This is an addition to our three weekly global briefings, and follows the same format: five of the most important news stories from the last week, and a piece of analysis. This goes to all our members every Thursday at 8am New York time.

In May, we’ll also launch the North American counterpart to our flagship annual conference: Financing Wind New York. Now in its sixth year, Financing Wind draws together key players within the industry, helping them connect with one another and gain new insights into the market. We’re very excited to get out to the US to host our first international conference.

On 29th May, we’ll publish our first North American Power List. This is set to follow a similar format to our annual Top 100 Power People and other ‘power list’ reports. Nominations are open until 14th February, and we’d love to hear your thoughts on who should rank among the 100 most influential power-brokers and deal-brokers operating in the US, Canada and elsewhere in the region. Email us at editorial@awordaboutwind.com with your suggestions.

Finally, in September, we’re due to run the first of our new US Quarterly Drinks networking events in New York. These events are primarily aimed at those who can’t attend our London Quarterly Drinks, but all members are welcome.

These extras will stand alongside our existing programme of intelligence briefings, reports and London-based events, which will continue as usual. We are passionate about helping our members forge new connections in North America and get new insights into what is arguably the world’s most exciting wind market right now.

Wind Watch
Why are we launching a North American edition?
By Richard Heap

Three times a week. That was always the plan.

When Adam set up A Word About Wind back in 2012, the idea was to send a concise round-up focused on the financial side of
the global wind industry three times a week, made up of five news stories and a piece of commentary. The aim was to focus on the often-neglected financial side of this important industry.

And over the last six years – including four with me as editor – we have shown it is a model that works. The growth in our community over that time is testament to that. We will keep producing A Word About Wind intelligence briefings as long as people are read them.

However, last year, we became aware of a limitation with our three weekly editions. We have found ourselves talking more to wind professionals in the US and Canada following our work on global initiatives such as the Women’s Power List and Legal Power List. And our sales guys keep hitting the same question: “But do you even write about North America?”

The answer was always the same: ‘Yes, we do. North America is a hugely important market for us.’ More than half of the people in our sixth-annual Top 100 Power People report published in November operate in North America exclusively or as part of their role.

But this got us thinking we should be doing more for our North American members – and, as of today, we are. This is the first of our weekly intelligence briefings focused on activity in the wind industry in North America.

The format is the same as our existing global briefings: five news stories and a piece of market analysis in this Wind Watch column.

The idea is this new edition will round up the biggest stories in the North American market each week. If you don’t have time to read all the global editions, this weekly briefing every Thursday morning – published at 8am New York time – will tell you all you need.

Here are the most important points:

• AWAW’s North American edition
• Published each Thursday (8am New York time)
• Five key North American stories from the last week
• Market commentary focused on North America

But if you are in the US or Canada, you should still read our three weekly global editions. We will include North American stories in those as we have always done. These contain important insights into the strategies of the global firms operating in North America.

And this is not all. We will be doing more for our North American readers in 2018. Later this year, we are planning to launch ourannual Financing Wind conference in New York, and a series of networking drinks evenings under our popular Quarterly Drinks banner. These are designed to cater for some of you who cannot attend our regular events in London.

Finally, this May, we plan to publish our inaugural North American Power List. This is set to look at the 100 most influential power-brokers and deal-makers operating in wind in the US, Canada and Mexico. This will follow a similar format as our Top 100 Power People and other ‘power list’ reports. We will be looking for your nominations and reveal more details about this in the next week.

These three new products – an extra weekly intelligence briefing, US events, and new power list – will enable us to serve our North American readers better than ever. And that is on top of our three weekly global briefings, special reports, and events in Europe.

We look forward to getting to know you all better in 2018!