Investment in building new European wind projects is stagnant, but total investment in the sector is at an all-time high thanks to a mergers and acquisitions frenzy for existing and development-stage assets.
Indeed, the number of investors queuing up for a piece of wind energy action in Europe has become “unmanageable" in some cases, a leading financial adviser said.
For some deals, financial advisors are under pressure to manage as many as 60 nondisclosure agreements with investors. In these cases, even after taking half of the interested investors out of the equation, they are still left with 30 separate parties to manage.
"You can't run an M&A [mergers and acquisitions] process like that. But that's what we've been seeing," said Mortimer Menzel, partner at Augusta & Co., which has advised on renewable energy transactions totaling more than $11 billion.
Brisk trade in operational plants could see European wind investment continuing to rise even as demand for new projects slows, he said.
Sales of existing onshore and offshore wind farms have increased for the last two years, and “we don’t at the moment see that slowing down,” said Menzel.
Figures published by the European wind energy association WindEurope last month confirmed that the secondary market outstripped new project investments in 2018.
New asset financing accounted for just 41 percent of the 65 billion euros ($73 billion) spent across Europe's wind industry last year, or €26.7 billion ($30 billion), an all-time low. The remainder of last year's investment went toward project acquisitions, project refinancings, company acquisitions and capital markets activity.
More than 11 gigawatts of capacity changed hands across Europe in 2018, WindEurope’s annual Financing and Investment Trends report said. That includes both onshore and offshore wind projects.
The U.K., France and Sweden accounted for 62 percent of all the capacity traded at the development, construction and operational phase, it said.
The trend toward the secondary market could slow down. WindEurope predicts investment in new European wind power projects will rise to €29.9 billion ($33.6 billion) this year and hit €37.4 billion ($42 billion) a year by 2021.
Large wind portfolio owners are still planning to increase their presence across the continent, with the Italian power giant Enel, for instance, looking to have 2.6 gigawatts of wind in Spain by 2021, up from 1.8 gigawatts today, and a gigawatt in Italy, up from 800 megawatts currently.
An Enel Group spokesperson told GTM the company would finance most of these projects, along with around 700 megawatts of wind capacity across the rest of Europe, on its balance sheet, with non-recourse financing “for a few special situations.”
But the company was also seeing investment interest from infrastructure funds, the spokesperson said.
And the money going into new projects will likely be dwarfed by M&A activity as the onshore wind market becomes saturated and cash-rich funds continue to invest in renewables.
Currently, said Menzel, “there’s a huge amount of capital stored up which can’t find deals.”
The big money piles in
Competition between investors was driving up the price of acquisitions and reducing the internal rate of return on projects, Menzel said.
In Germany, where the profitability of many projects is assured through solid government support, foreign investors have practically been priced out of the market, he noted.
In the U.K. there is also “a surprising level of interest” from investors in onshore wind projects, Menzel said. Wind farms in the country could attract average returns of up to around 9 percent a year before asset management fees, he said.
Trading was also buoyant in Benelux, France and Spain, he said, but is expected to diminish in the Nordics following a rush to build projects linked to corporate power-purchase agreements.
The main actors in the M&A sphere tend to be strategic and financial investors or utilities, along with a small number of pension funds.
Much of the private-equity money going into the market is channeled through investment managers who charge significant fees for their services, said Menzel.
Despite sitting on a pot estimated at more than $1.1 trillion globally, private equity players had remained shy of the market because the average return, net of investment management fees, was lower than initially expected, he said.
Private equity’s place was occupied by infrastructure funds that had lower costs and could take advantage of the returns offered by wind, Menzel noted. Another class of investor that has not made the anticipated mark on the industry is the YieldCo.
After appearing on the renewable investment scene with great fanfare in 2015, and crashing ignominiously within a year, YieldCos have maintained a relatively low profile in European wind — albeit with a few notable exceptions, such as Greencoat in the U.K.
Traditional wind investors, however, are increasingly willing to pay more for assets thanks to technology and data developments that offered an improved visibility of the likely returns.
Better output forecasts mean investors “could afford to go to the edge of what they can do,” said Menzel.
It all adds up to a rosy outlook for European wind investment, which hit its second-highest level last year, according to WindEurope.
And even though the proportion of money going into new projects is diminishing, the falling cost per megawatt of wind technology means capacity additions are at record levels. The 2018 spend bought 16.7 gigawatts of new capacity.
WindEurope spokesperson Andrew Canning said the growth wasn’t just fortunate, but essential. “We need to see this kind of investment level sustained if Europe is to meet its 32 percent renewables target for 2030,” he said.