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For several years, offshore wind has held a poor reputation in financial circles for being a risky and expensive venture which should only be taken on by major energy companies. But technology is now so mature and prices have declined so much that the atmosphere has changed, says one of Europe’s largest green funds.
While energy companies such as Dong and Vattenfall have invested massively in offshore wind for many years, the enthusiasm among European equity funds and investment banks has been more modest. The offshore appetite among pension funds has existed for several years, but particularly in recent years this trend has been lead by Danish pension funds. And now, investment banks and other equity funds are joining in.
A study by WindEurope from the summer of 2016 shows that institutional investors were behind the financing of 25.1 percent of the offshore wind capacity erected in the first half of 2016 in the EU. In comparison, this number was just 13.5 percent for the first half of 2015.
The numbers for the full-year 2016 are not yet accessible, but according to one of Europe’s most experienced green equity funds, this number will not shrink going forward.
Equity fund Glennmont Partners, which administers two funds of a total EUR 1 billion in renewable energy, which for the first time acknowledges offshore wind as a technology at the maturity level where the fund is willing to invest in future projects. Thus far, Glennmont Partners has consistently opted to invest only in solar power, onshore turbines, and biomass based on compost. Small hydro facilities are also on the fund’s list of approved technologies, but not something the company has actually invested in.
“Offshore wind is now on the list of technologies that we invest in. So when we enter the market with our next fund in a foreseeable future, there is also a chance that we will invest there. We have previously been skeptical towards offshore wind, and we considered the technology too immature with overly high technological risks and too many bottle necks for our profile. The newest generations of offshore wind farms have shown, however, that the technology has come a long way, and we believe the contracts that form the foundation for the farms are so thoroughly tested now, that we want to join in,” says Peter Dickson, founding partner and technical director of Glennmont Partners.
More professional offshore wind
Glennmont Partners is behind two funds of EUR 437 million and EUR 500 million, respectively. Both funds exclusively invest in projects in renewable energy, and they do so on behalf of institutional investors. The funds have overwhelmingly invested in the UK and southern Europe. The largest investment areas have been solar power and onshore wind, combined with some biomass in the UK.
“A technology like offshore has not thus far level been at a level where we considered it an attractive investment for a fund like ours. The previous offshore projects have naturally been led by large energy companies, which have other opportunities to take on the risks that these projects entail. And take on the projects alone. But now, the market is different and we are seeing everywhere that new offshore farms need to attract financial partners. This places new requirements on the deals behind the farms, and as an investor, we have very strict requirements for risk distribution and guarantees. This helps increase the professionalism behind the projects and it benefits all parties, as I see it,” says Dickson.
Different capital requirements
The investments in offshore wind turbines require a very different level of capital, however, than that required by onshore turbines and solar panel farms. For this reason, the trend has mainly been for energy companies such as Dong to take on the preparation work and begin construction of the offshore wind farms, and then divest stakes to parties such as pension funds.
Glennmont Partners is also potentially interested in this type of model, but in order to get in the game it needs to evaluate the size of the future fund.
“We will have to examine how to financially structure a new fund. Offshore projects are more expensive than onshore, for example, so it would take a different kind of strength. Therefore, it would be a type of consortium, where apart from economic funds we can offer technical knowledge and a risk management team with vast experience. Furthermore, we have extensive in-house engineering expertise in how to manage large and complex construction projects. So I see us taking a leadership role in this kind of consortium,” says Dickson.
You can read the full article here: Energy Watch EU