Industry maturity and competition for green assets brought €51.2Bn of investment to the wind energy sector in 2017, with new capacity being brought online at lower cost than ever.
The development of new windfarms accounted for €22.3Bn of the €51.2Bn total, according to WindEurope’s ‘Financing and Investment Trends’ report. The rest of the investment went on the refinancing of existing windfarms, acquisition of projects and of companies involved in wind and on public market fundraising. The total investment figure was 9% up on 2016.
The €22Bn invested in new windfarms was down on the €28Bn invested in 2016 but it covered more capacity – 11.5 GW compared to 10.3 GW – reflecting the falling costs of wind energy.
The low interest rate environment has given rise to a dynamic refinancing market. Offshore wind has experienced an uptake in corporate finance transactions over the past two years. However, offshore wind project finance declined for new final investment decisions (FIDs). In the UK, the Hornsea 2 offshore windfarm reached FID. With a capacity of 1.4 GW, this is the largest offshore windfarm to date to be constructed.
Investment volumes are expected to increase in 2018. This is due to the roll-out of auctions across Europe and the fact that many projects already awarded support will reach FID.
More than 14 GW of capacity was awarded support through 2017 and the first quarter of 2018. During the first quarter of 2018 Europe invested €3Bn in new wind energy projects. 30 new onshore wind projects, for a combined capacity of 1.9 GW, reached FID. Wind energy projects currently awaiting FID are estimated at over €23Bn. Strong equity and debt liquidity is expected to continue for both onshore and offshore wind projects.
In the near term, the downward trend in interest rates is expected to slow down, with the quantitative easing coming to an end and existing commercial banks establishing their competitive position in the market. In the longer term, the merchant risk exposure in wind power projects will likely change both the landscape and investor profiles of wind energy financing.
2016 and 2017 were transitional years for the wind sector. While there was a dip in investments in 2017, the large volume of investments in 2016 reflected the regulatory uncertainty that would come because of the transition to auctions and feed-in premiums. However, investment volumes are expected to stabilise in 2018 with the roll-out of auctions across Europe and projects awarded support expecting to reach FID.
Over 14 GW of capacity was awarded support in 2017 and the first quarter of 2018: 5.3 GW in Germany, 4.1 GW in Spain, 3.2 GW in the UK, 1.4 GW in the Netherlands, 500 MW in France. New announced offshore wind transactions are estimated at a combined capacity of 3.9 GW, as tendered projects awarded support are expected to go through FID. This includes several projects in the UK, Denmark and the Netherlands, as well as floating offshore wind projects in Portugal and France.
Financing needs could top €9Bn based on disclosed transaction costs. Between 2018 and 2020, more than 17 GW of additional onshore and offshore capacity is set in the auctioning plans of four countries: Germany, France, the Netherlands and Turkey. Most of this capacity is expected to be auctioned in 2018.
WindEurope chief policy officer Pierre Tardieu said “With €51.2Bn, wind energy accounted for half of all power sector investments in 2017. It is delivering more capacity for less money. This is largely due to increased competition in auctions and technology advances that are driving cost reductions in the supply chain.”
The maturity of the wind energy sector and the competitive pressure of auctions is changing the way wind projects are financed. Power producers still carry projects on balance sheet through FID but refinancing and the sale of minority stakes in projects are coming in much earlier in the process.
More investors are entering projects as equity partners, particularly from the financial services industry. These partnerships allow power producers to ‘recycle’ capital to finance new wind farms. A healthy pipeline of projects is diversifying the pool of investors: 82 lenders were active in 2017, including multilateral financial institutions, export credit agencies and commercial banks from both Europe and Asia.
Green bonds are emerging as an alternative source of debt. This is also helping risk-averse institutional investors to access the wind sector. Green bonds raised €17.5Bn in 2017, the highest rate of issuance in the last five years. €8.5Bn were in corporate renewables portfolios, €7Bn in wind energy and €1.9Bbn in transmission lines. This shows investors have more and more trust in the industry and are confident they will see a healthy return.
Investors are also going further afield: 20 European countries made investments in wind in 2017 compared to 16 in 2016 – though Germany and the UK accounted for half of all new FIDs. Investments in Southern and Eastern Europe remain low, representing just 16% of the total new assets financed in Europe (€3.5Bn). A lack of regulatory stability is largely responsible for this.
“The outlook for 2018 is strong with investment volumes expected to increase,” Mr Tardieu added. “The auction system for wind energy is settling down, and projects that have won auctions are now reaching FID. The investment outlook up to 2020 is strong.”