The Blog - Wind energy market analysis

Posted 03/09/2018

Frances Salter

   

3 Key Investment Trends We Discussed at Financing Wind Europe 2018

 Investment trends were one of the key themes of our 2018 conferences- alongside the PPA boom, the future of offshore and technological advances. You can download the full agenda here. 

For details of upcoming conferences, click here.

Investment

Should we be concerned about the impact of Brexit on wind deals?

As we wrote in a recent blog, the impact on wind power is one of many areas of uncertainty related to Britain’s exit from the European Union.

However, there’s some cause for optimism. The government’s commitment to building new renewable energy projects is unlikely to change, even one Britain leaves the Renewable Energy Directive, which requires that the UK generate 15% of its energy from renewables by 2020.

The country is already on track to meet this commitment – and in any case, the Climate Change Act 2008 is stricter than the RED, so plans to increase reliance on renewables are already enshrined in UK law.

In terms of investment in British wind projects coming from outside the UK, the future looks less rosy.

At present, the UK receives significant sums for energy infrastructure projects from the EU, including billions of euros a year from the European Investment Bank. The EIB has warned repeatedly of the risk of Brexit over the last 18 months, and it is no surprise that the Luxembourg-based bank’s new contracts with the UK totalled just £1.89bn last year, down from £5.54bn in 2016. Of that £1.89bn figure last year, £377m came in the nine months after Theresa May triggered the Article 50 process that set in motion the UK’s exit from the EU.

Exactly how individual projects will be affected depends on the terms of their investment agreements: projects that have already been granted funding may need to be repaid, if it becomes unlawful for the EU to fund them.

For projects that have been proposed but not yet funded, the impact will depend on the timing of changes to investment criteria, and how desirable the EU funding bodies deem them to be. There will be uncertainty, too, for energy research: funding from the European Research Council and Eight Framework Programme may also be withheld.

In terms of private investment in wind projects in the UK, credit agencies in member states won’t necessarily be put off backing investments – including in the UK’s offshore wind sector – but it does entail extra risk. 

How do strategies need to change in an era of subsidy-free projects? 

As we’ve seen in Poland, changes to government subsidy can pose a major risk to investors.

The Law & Justice Party made punitive changes for wind investors in 2016, significantly reducing Poland’s status as an emerging market. 

The $700m legal action by US developer Invenergy against the Polish government brought the situation to international attention. The company took its fight to the United Nations in April after claiming the government and state utilities had been “blatantly disregarding” decisions in the Polish courts. This also highlighted the risks for other overseas investors when looking to invest in the countries.

In recent months, we’ve seen the Polish government soften its approach to the wind industry by reversing punitive tax changes introduced in 2016 – which gives cause for hope that pushback from investors can influence government attitudes.

It’s not just Poland that’s seen disruptive changes to subsidies. Firms in Australia, Canada, Poland, South Africa and Spain will have cautionary tales, while even the established markets in Germany, the UK and US are in the grip of major political upheaval.

We’ve written about the major political risks to wind investors, including subsidy cuts, in our new ebook: 7 Growing Political Risks for Investors in Wind.

 

Will corporate M&A deals reshape the European wind market?

2018 has already seen significant M&A activity within European wind – as we explored in our Finance Quarterly Q2 report.

This includes M&A activity involving non-European firms. For example, a subsidiary of Japanese conglomerate Mitsubishi last month bought a 33.4% stake of the 950MW Moray East in UK waters. 

Big Japanese corporations have continued to show interest in the European offshore market as slow growth of the sector in their home market, falling costs and Japanese interest rates at a record low of -0.1% have pushed them to look at offshore wind investments in Europe for long-term returns. Mitsubishi is also reportedly looking to invest in the 370MW Norther off the Belgian coast and the 130MW Luchterduinen off the Dutch coast.

For a run-down of the 5 most significant European M&A deals this year, take a look at this blog post.

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