A wind project in South Plains, Texas, outfitted with Vestas wind turbines. Macroeconomic factors seem favorable for wind project financings and M&A activity.
Low cost of capital continues to be a major feature of the U.S. renewable landscape as offshore wind takes off and European companies previously considered oil and gas majors ramp up investment on this side of the pond.
"Wind energy has emerged as a massive asset class," PJ Deschenes, partner at Greentech Capital Advisors, told attendees during a recent panel at the American Wind Energy Association's Windpower 2019 conference in Houston.
At least one new major energy company is likely to splash into the U.S. renewable market within the next year, said Deschenes, a period during which he expects the cost of capital to remain stable. "We've seen a massive growth in wind and solar in North America and this is going to continue," he added.
Macroeconomic factors seem favorable for project financings and M&A activity, according to Deschenes, who noted the Federal Reserve's recent dovish behavior ensures that developers are "still able to access relatively inexpensive project financing from commercial banks and project finance lenders."
"The Fed has eased up on raising rates, there's plenty of demand for good projects out there," he added.
Busy M&A market
The experience of Greentech, an advisory and asset management firm focused on sustainable technology, highlights the rollicking reality of the M&A market for wind assets, with the past six sell-side asset auctions for renewable portfolios run by the firm attracting between 20 and 31 bids.
"There is significant competition in the U.S. for high-priority assets," said Deschenes, who defined a "high-priority" project as including an off-taker.
Unlevered sponsor returns after tax equity remain attractive, especially for projects with utility power purchase agreements.
"For wind projects that have offtake contracts at the busbar, so traditional power purchase agreements with utilities, we're seeing cost of equity somewhere in the 7% to 8% expected return range," said Deschenes.
Proxy revenue swaps, a financial hedge designed to produce stable revenues from a plant by helping to mitigate volatility from weather or market prices, will also continue to be an important market factor.
Recent acquisitions of operating assets have been primarily made by institutional investors, said Deschenes, including "pension funds and other investors who have a very long return horizon and a very low, generally stable cost of capital." Development platforms, meanwhile, have attracted the attention of an emerging class of European investors.
Europeans in the New World
"We're seeing big new entrants into our market," said Deschenes, citing the influx of European oil and gas majors that have rebranded as part of a shift to renewables. "Others are going to do the same."
Deschenes noted the most prominent European investors in clean energy have rechristened themselves in recent years, moderating their historic association with fossil fuels. Specifically, he noted that the companies once known as DONG Energy, EDF Suez, Gas Natural Fenosa and Statoil now operate as Ørsted A/S, Engie SA, Naturgy Energy Group SA and Equinor ASA.
The day before Deschenes spoke at AWEA, EDP - Energias de Portugal SA and Engie announced they would combine their offshore wind businesses in an effort to catch up with the sector's largest players.
Meanwhile, tax equity investment is expected to remain an important component in wind financings. "I don't think we've seen anything to suggest that we'll be short on tax equity in the coming three or four years," said Deschenes. "We're seeing that tax equity is still likely to be an important part of the financing structure in a 60% [production tax credit] environment."
On an earlier panel on May 21, Joel Spenadel, an executive director at JP Morgan, noted that secondary tax equity deals had increased in prominence in 2018, a year that saw investors pour approximately $12 billion into renewable tax equity deals.
"You'll probably see some more competition among tax equity providers in what they're willing to offer and what they're willing to do," said Deschenes.