The expanding network of giant windmills in the North Sea — the largest such collection in the world — is turning into a windfall for some bankers helping institutional investors acquire a piece of Europe’s renewable-energy market.
A record $9.36 billion of stakes in offshore wind farms were sold last year, up 77 percent from 2016, and refinancing of project debt doubled to $6.27 billion, data compiled by Bloomberg New Energy Finance show. The 23 acquisition deals, almost all in Europe, were the most ever for the industry, and the average transaction price rose 69 percent to $407 million, an all-time high.
Investors are stepping up investment in offshore wind farms that are producing eight times more power than in 2008. After years of public subsidies, turbines as tall as the Eiffel Tower with blades longer than soccer fields are grabbing a bigger share of Europe’s electricity supply, replacing some coal-fired plants on land. With demand rising for renewable energy, developers are selling stakes in older projects to raise cash for new ones.
“Offshore wind makes up a significant and growing percent of the work we’re doing in infrastructure,” said Lisa McDermott, an executive director of project finance at ABN AMRO Bank NV in Amsterdam. “It’s getting very competitive for banks to get involved.”
Among the financial institutions active in offshore wind deals are Green Giraffe BV, KPMG LLC, Societe Generale SA, Mitsubishi UFJ Financial Group Inc. and Natixis SA.
“There’s lots of people announcing sales,” said Carol Gould, head of power and renewables on the structured finance desk for MUFG in London. “It’s very hectic,” Gould said, adding that there are “quite a few” deals slated for the first half of this year.
Governments in Europe have been investing in clean energy to make good on commitments made in the 2015 Paris climate accord to reduce carbon emissions. BNEF estimates countries in the EU provided 61 billion euros ($75 billion) of subsidies in 2016 for renewable energy, mostly for solar and wind farms.
The startup costs for renewables used to be higher than conventional fuels, but improvements in technology make some new wind and solar developments cheaper than building a coal plant. The U.K. and Germany are by far the biggest investors in projects that try to harness the ocean breezes in the North Sea, accounting for more than three quarters of the region’s offshore generating capacity.
While offshore wind farms account for just 2 percent of Europe’s electricity, more are being built. According to BNEF estimates, each new project announced last year in Europe will cost more than $500 million. One will top $4.8 billion.
Many of the investors buying into offshore wind are attracted to stable cash flows from long-term contracts to sell power at above-market rates, a legacy of early government aid for the industry. The U.K. paid out almost 138 million pounds last year to projects with contracts for difference, just one of several subsidy programs.
“You can see the enthusiasm worldwide and the imperative for decarbonization and renewables,” said Richard Crawford, a director at InfraRed Capital Partners Ltd., which manages a fund that acquired a 15 percent stake in the Sheringham Shoal offshore wind farm for 80 million pounds ($91 million) in December. “There is the opportunity, of course, for more significant amounts of money to be invested in offshore, and that’s exciting some investors.”
In January, Partners Group agreed to buy 45 percent of the Borssele III & IV projects in the Netherlands from Royal Dutch Shell Plc, Eneco NV and a unit of Mitsubishi Corp. The deal may have been valued at about $2 billion. Orsted A/S recently sold 50 percent of its Walney Extension wind farm in the U.K. to two Danish pension funds for 2 billion pounds.
Sumitomo Corp. is said to be close to buying a stake in wind projects under development in waters off western France from a consortium led by Engie SA. A few miles down the coast, Renewable Energy Systems Ltd. is looking for a buyer for its piece of a wind farm the company is working on with Spain’s Iberdrola SA in the Saint Brieuc Bay.
In the U.K., the biggest source in Europe for offshore wind power, Germany’s Innogy SE is planning to sell a minority stake in its Triton Knoll project, which is under development. Enbridge Inc. is selling half of its interest in the Hohe See wind farm off the coast of northern Germany, with Canadian funds and Macquarie Group Ltd. said to be preparing bids.
“We still have interest in adding more offshore investments to our portfolio,” said Henrik Nohr Poulsen, executive director at Copenhagen-based PFA Pension A/S, one of the Orsted buyers.
Last month, Japanese trading house Marubeni Corp. sold its share of the Westernmost Rough project in the U.K. to Macquarie’s Green Investment Group. Marubeni also is said to be in the early stages of divesting its interest in the Gunfleet Sands wind farm.
To be sure, as costs drop, the financing model for the industry is shifting. Last year, developers proposed building the first subsidy-free offshore wind projects in Germany and the Netherlands. As more projects are built without government help or price guarantees, the value of older projects with fixed contracts will increase.
Offshore Wind Farms Offer Subsidy-Free Power for First Time
“Developers may be tempted to sell assets under older regimes because a windfall could be made there,” said Jerome Guillet, managing director at Paris-based Green Giraffe, which advises renewable energy developers and investors. “Assets coming out of tenders have much lower prices, so investors can get the same returns by paying a higher price for an asset with a much higher tariff.”