E.ON's 302-MW Amrumbank West offshore wind farm in the German North Sea.
Ten years ago, U.K.-based asset manager Glennmont Partners completed fundraising on its first fund — a vehicle aimed at investing in proven renewable energy technologies that could deliver predictable and stable returns, and had limited technical risk.
"At that stage, it was certainly the case that you could not describe offshore wind in those terms," said Peter Dickson, partner at Glennmont, which owns nearly 1 GW of onshore wind, solar photovoltaic and biomass capacity in Europe.
The company went on to raise second and third funds in 2014 and 2019, and after nearly a decade observing the sector from the sidelines, did its first offshore wind deal in July, buying a 25% stake in Ørsted A/S's operational 330-MW Gode Wind 1 project in Germany.
For investors like Glennmont, offshore wind's journey to becoming an investable asset class points to an increased comfort with the risks in the sector. The industry has learned to deal with the technical and performance issues that hindered many of the early projects.
"We still very much see the risks being present in this industry, but ... the risk mitigation strategies are much more developed and advanced than they were historically," Glennmont Manager Jay Sarma said. "That's what gets us comfortable with the sector, more than the risks abating or disappearing completely."
New players entering
Glennmont is the latest in a long and increasingly diverse list of new players in Europe's offshore wind market — a list that includes some of the world's biggest pension and investment funds; corporates such as Ingka Holding BV, IKEA's parent company; and a host of strategic investors from Asia. Oil major Royal Dutch Shell PLC has also returned after years away.
For these newcomers, the lure of the offshore wind industry is its core fundamentals: few other infrastructure asset classes can claim to regularly command nine-figure equity checks, boast steady pipelines of deals and are genuinely "green" investments. Combine these with the sector's much better understanding of risk, and it is no surprise why offshore wind farms have become such prized assets.
Faced with this heightened competition from an ever more crowded marketplace, many of the experienced offshore wind investors are now heading to new markets outside of Europe, including the U.S. and Taiwan. Others are seeking out earlier-stage opportunities on their home turf — a natural progression for a maturing industry.
"Developers are selling stakes in these wind farms earlier and earlier in the development cycle," said Ross Schloeffel, partner at the law firm Linklaters LLP. "Whereas previously … we weren't really seeing [offshore wind] M&A occurring until a project has hit [commercial operation], now we're seeing M&A activity going on both during the construction phase ... or even during the pre-construction or development phase."
This is all because returns on operational and construction assets are converging. "There is very little value creation during the construction phase anymore in Europe," said Michael van der Heijden, managing director at financial advisory boutique Amsterdam Capital Partners BV.
"Offshore wind construction in Europe is much, much better understood now than it was five years ago, and because of that the risks have come down tremendously."
At the same time, a more fundamental sea change is underway. Across all major renewables technologies in Europe, government support is being phased out. In offshore wind, projects in the Netherlands and Germany have been awarded on a zero-subsidy basis, and France and the U.K. are inching closer to grid parity.
Here appears a fork in the road. Investors wanting exposure to offshore wind could try to make the numbers work on low- or zero-subsidy deals, but in the case of the latter, many will not be prepared to take merchant power risk.
Alternatively, they could join the growing cohort of players competing for the more lucrative legacy assets, which because of their relatively high long-term tariffs, have been commanding extremely good prices in the market.
"The deals that have been done last year and the year before have certainly changed sellers' expectations in terms of pricing," said Dominic Szanto, a director in the energy and infrastructure advisory team at JLL.
As one example, Macquarie Group Ltd.'s recent purchase of a 40% stake in Iberdrola SA's 714-MW East Anglia One project in the U.K. may have looked expensive at £1.63 billion, but the project's 15-year tariff of £119.89/MWh — in 2012 money, or £136.08/MWh in today's terms — is more than double the prices expected in the U.K.'s third offshore wind auction later this month.
In all stages of development, M&A deal values have been climbing in recent times. An investor source, speaking on the condition of anonymity, said this again reflected the fact that the risks in the sector were not as high as people once thought.
The investor added that certain elements of pricing that were previously considered upsides were now becoming part of an investor's base case. For instance, most players now assume a longer lifetime for offshore wind assets, beyond their certified life, which pushes valuations further upwards.
Competition from Asia
Another factor is the presence of more strategic investors, such as groups from Asia, who are viewed as particularly aggressive. Japanese trading houses Marubeni Corp. and Sumitomo Corp. were already longstanding investors in European offshore wind, and have been joined by the likes of China Three Gorges Corp. and China Resources Co. Ltd. in recent years.
Two other new faces entered the market last year, with Japanese pair Electric Power Development Co. Ltd., or J-Power, and Kansai Electric Power Co. making their European offshore wind debuts when they bought into Innogy SE's shovel-ready 860-MW Triton Knoll project in the U.K.
"They wanted to get experience in the construction phase of a wind farm. They actually saw more benefit in a project like that than they would in … a pure operational project," said Szanto, who advised J-Power on the transaction.
These kinds of investors are deploying capital into offshore wind for reasons that are not just purely financial. "Not only are they interested in the returns that they can get from the asset itself, but unquestionably they will be interested in the experience or knowledge that they can gain in the European market, which they can then transfer to their home markets," said Schloeffel of Linklaters.
And if gaining experience is priority number one, the most valuable kind of deals are those led by blue chip utilities with long track records in offshore wind and large development pipelines. These transactions in particular, sources say, might just be worth paying that little bit extra for given the prospect of a longer-term relationship, even if it means taking a hit on returns in the near-term.