|The construction of new wind farms will inevitably slow down amid the coronavirus outbreak.
As hundreds of millions of workers enter lockdowns across Europe to help slow the spread of the coronavirus, leaving offices and construction sites deserted, it has become clear that most sectors will feel the sting of the crisis.
While there is uncertainty over the duration and severity of the downturn, developers of renewable energy projects are already facing delays in the construction of new capacity. Project financing decisions may also be pushed back as the market backdrop changes from day to day.
But the booming sector also has inbuilt strengths shielding it from catastrophic contraction, developers said, and it may also be a central part of any stimulus packages laid out by governments to try and boost economies after the pandemic.
In a March 26 outlook on the impact of the virus on the European renewables sector, lawyers at Watson Farley & Williams projected a buoyant future power demand, which, coupled with European governments' ongoing environmental commitments and the industry's falling reliance on government subsidies, suggests that renewables are "underpinned by fundamentally positive long-term prospects, even should coronavirus present immediate challenges to certain projects."
Those developing and building new capacity can point to such cases. Norwegian utility Statkraft AS has suspended construction of its Windy Rig wind farm in Scotland and two hydropower projects in India and Chile because of the coronavirus.
London-listed investor The Renewables Infrastructure Group Ltd., or TRIG, said on an update call with investors March 23 that some of its projects in France face delays due to the strict lockdown there. Later that day, all nonessential construction sites in its home market, the U.K., were also ordered to shut.
The world's largest wind farm developer, Denmark's Ørsted A/S, also expects a hit. "Travel restrictions and quarantines may impact our suppliers' delivery of critical components to projects currently under construction," the company said March 25.
German energy and agricultural giant BayWa AG, which owns developer BayWa r.e. renewable energy GmbH, said in a March 26 earnings release that the impact of COVID-19 on its business is so far "incalculable." CEO Klaus Josef Lutz said, "Thanks to our diversified business model, however, we believe that we are well positioned despite the difficult situation."
Meanwhile, French developer Neoen SA said the outbreak will slow down the pace of construction of its new projects and, as a result, its planned ramp-up of EBITDA. Delays are driven by the supply chain, administration and construction capacities, CEO Xavier Barbaro said on the company's 2019 earnings call March 25. "In the end, a project is only as strong as its weakest link," Barbaro said, highlighting that parts are coming from all over the world.
Suppliers delivering panels and turbines to projects, such as Siemens Gamesa Renewable Energy SA and Nordex SE, are facing troubles of their own, such as closed factories and delays in component deliveries.
It also remains to be seen how fast and strong the rebound from the European Green Deal and other laws will be, given that some climate resolutions are being put on the back burner as lawmakers deal with the coronavirus crisis.
Prices locked in
The power generated by operational renewables assets is flowing into a market with subdued demand, as consumption from industry, hospitality and offices drops. Watson Farley & Williams is factoring in a 6% drop in power demand across Europe in 2020, triggering a 9% drop in power prices for the period.
Most renewables plants are shielded from power price volatility, either through fixed-price government subsidies or private power purchase agreements, or PPAs. Meanwhile, widespread hedging policies will protect those developers with merchant exposure.
Richard Crawford, a partner at InfraRed Capital Partners, the investment adviser to TRIG, said 77% of TRIG's power sales for 2020 are locked in at fixed rates, and Ørsted added that its hedging program means it is "largely shielded in the short to medium term from the current extreme market volatility."
Similarly, U.K. solar investor Bluefield Solar Income Fund Ltd. said in a COVID-19 update that nearly two-thirds of its revenues are regulated and not exposed to wholesale power prices. The rest is sold via PPAs, a setup that provides visibility and security, the company said.
While the economic downturn will put pressure on PPA off-takers and thereby create some default risk, Bluefield and Ørsted said the robust credit rating of their counterparties makes them comfortable in their ability to weather the crisis.
Developers seeking debt financing for new renewables projects may face delays in achieving financial close, Watson Farley & Williams said in its report.
"Financiers are revisiting and focusing closely on base case assumptions and projections, and more generally reassessing their risk appetites," energy lawyers at the firm said. A volatile debt pricing environment is making long-term debt financing unattractive, they added.
Other roadblocks to securing cash can be due diligence processes requiring site visits that have been canceled, and remote working can also cause delays to business processes. Challenges can even include difficulties with witnessing and notarization, which requires specific document handling, and delays to administrative decisions and permitting.
The law firm did note that, despite this, it sees several projects nearing imminent financial close.
Fewer points of failure
Solar and wind projects are technologically well-equipped for a remote working world, executives pointed out, with monitoring and even some repairs being able to be done remotely.
Wind and solar assets have a "natural resilience," Chris Sweetman of Renewable Energy Systems Ltd., TRIG's operations manager, said on the company's investor call. TRIG has remote monitoring and reset capabilities for all of its 800 wind turbines and even substations, Sweetman said.
In times of restricted workforce availability and mobility, renewables operators can point to the advantages of having a decentralized asset portfolio and fewer crucial Achilles' heels in their infrastructure, said Toni Volpe, CEO of Italian developer Falck Renewables SpA.
"If you consider a wind farm, let's even imagine that one turbine fails and for some reason, we do not have the part, it still had all the other turbines, available for the wind farms," Volpe said on a March 12 earnings call. "In essence, the infrastructure of our normal power generation has less single points of failure."