Offshore Wind Becoming a Big-Ticket Item

Investors who traditionally focus solely on big-ticket mergers and acquisitions are showing interest in offshore wind projects as returns on investments in more conventional infrastructure assets are pushed lower and lower, according to Macquarie.

Pension funds, sovereign wealth funds and insurers that invest in infrastructure have typically been attracted to assets such as regulated utilities and availability­-based Public Private Partnerships (PPPs) that have fixed payments over a long-term period – up to 30 years in the case of some PPPs, said the investment banking and financial services group.

However, as more institutional investors enter the infrastructure space – either on the equity or debt side – less conventional assets such as offshore wind become more attractive, said Mark Dooley, Macquarie Capital Head of Infrastructure, Utilities and Renewables in Europe.

“The traditional centre of what infrastructure investors like to look at, for example utilities and transmission in strong European markets, are seeing fewer assets and more money chasing them,” said Dooley.

Kit Hamilton, Managing Director at Macquarie Infrastructure Debt Investment Solutions, says offshore wind has the potential to offer stronger returns than more conventional infrastructure assets.

“There are certainly areas of infrastructure debt that have felt crowded out, such as conventional availability-based PPPs,” said Hamilton.

“In recent years PPP sponsors have been able to command financing packages with returns in the low 100s of basis points. Then when you add the competitive nature of the PPP bidding processes, you still risk not achieving any asset at the end of it. With returns approaching twice those, it’s fair to say offshore wind has a lot of attractive features for us.”

Not least among these attractive features is the large amount of capital that each offshore wind farm requires to be built. With project build costs typically well into the billions of pounds, offshore wind offers the kind of scale of investment opportunity that technologies such as onshore wind and solar simply cannot.

Another attraction of offshore wind is the sheer size of project pipelines in key markets like Germany and the UK.

According to UK Trade and Investment, there is currently 1.7GW of offshore wind capacity under construction, 5.1GW that is yet to be built but has secured financial support, and a further 7.4GW of capacity that has gained planning consent but has not yet secured subsidy support. Add projects currently in the planning process, and the UK has an offshore wind project pipeline totaling 19GW of capacity, Macquarie said.

However, investment in any form of energy generation, including offshore wind, is currently very difficult due to extremely low wholesale power prices, Macquarie said.

According to Macquarie Research, baseload power prices in the UK fell by 26 per cent in 2015 and by 5 per cent since the start of October 2015. Macquarie has also reduced its power price forecast from GBP 45.6 MWh to GBP 38.6 MWh.

This price level is insufficient to attract the large initial capital outlay required for most energy infrastructure projects.

Therefore, some price support is necessary for European countries such as the UK to build the infrastructure needed to replace power plants that are shutting down – either due to age or, in the case of coal, environmental legislation.

”At the moment, investments cannot occur without government intervention,” said Dooley.

“Market price risk is so difficult for investors at the moment, that you need some sort of price underpinning, like the Contract For Difference (CFD) in the UK, and the Feed-in Tariff (FIT) in Germany,” said Dooley.