European Wind Investment European Wind Investment 2017 Project Finance and M&A

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1 European Wind Investment 2017 Project Finance and M&A

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3 European onshore wind M&A Investors spent a record $7.1 billion on acquiring European onshore wind projects in 2016, considerably more than the $3.5 billion poured into the asset class only a year prior. European onshore wind purchase activity looks to be as strong as ever in 2017 with $4 billion of M&A investment already made in the first nine months of this year. Legacy support schemes in the UK s onshore wind market has meant investor confidence remains high for securing stable yields from the clean energy asset class. Clean Energy Pipeline recorded over $1.4 billion of investment being made into wind assets in the UK. For much the same reason, Germany was able to attract a sizeable $1.1 billion of M&A financing to its onshore wind sector in 2016, putting it within touching distance of the UK s secondary market. Ireland was the third largest secondary onshore wind market in 2016 at $1 billion, though its performance last year was substantially boosted by the high-profile acquisition by China General Nuclear Power Group (CGN) of 14 onshore wind farms with an enterprise value of over 500 million ($523 million). Robust M&A activity in France ($770 million) and Portugal ($652 million) place the two countries fourth and fifth, respectively, in Europe s onshore wind market by total deal value in Investors in the UK s onshore wind sector carried their strong secondary spending activity well into In the first consolidated nine-months of the year, UK secondary onshore wind investment has already breached the $1 billion mark, without taking into consideration the deal flow taking place in Q4. Onshore wind asset spend considerably picked up in Italy over the course of While M&A investment came in at $402 million in 2016, Italian investors took their spending to $697 million between Q1 and Q3 2017, making it the second highest-value wind market in Europe so far this year. Germany remained in the top three most valuable European secondary markets for onshore wind as investors made a sizeable $553 million of onshore wind acquisitions in the first three quarters of In the Nordic region, Swedish M&A wind investment almost doubled to $428 million from last year ($238 million) to make it the fourth largest onshore wind secondary market. Portugal remained in fifth place for this year despite wind acquisitions falling to $403 million in Q1-Q European onshore wind project M&A ( M) Source: Clean Energy Pipeline, unless otherwise stated 3

4 M&A deal value and effective capacity acquired 2016/2017.9M European onshore wind project M&A deal value and effective capacity aquired by project status (2017.9M) Effective capacity aquired Operational assets Under contsruction and pre-construction assets Deal value European onshore wind project M&A deal value and effective capacity aquired by project status (2016) Effective capacity aquired Operational assets Under contsruction and pre-construction assets Deal value 4

5 European onshore wind project M&A deal value by country (2017.9M) UK Italy Germany Sweden Portugal Ireland Finland France Other European onshore wind project M&A deal value by country (2016) UK Germany Ireland France Portugal Spain Italy Sweden Other 5

6 Europe s offshore wind market totalled $25 billion in 2016 The infrastructure debt market rightly sees offshore wind as being the most attractive renewables sector due to the sheer scale of the projects involved. Offshore wind investment totalled a record $25.2 billion across 20 project finance transactions in Given that the UK boasts the highest installed offshore wind capacity in the world, it should come as no surprise that the UK has attracted the most project financing in the sector compared with any of its European counterparts. UK offshore wind project investment reached its high water mark at $15 billion in 2016, placing the country significantly higher than its closest rivals in Germany ($4.8 billion) and Denmark ($1.1 billion). transaction value of the market fell off considerably in Investment into the offshore wind sector in Q1-Q totalled close to $7 billion, marking a 66% decrease in deal value from the same period in This was the result of a relatively subdued deal flow across core European markets such as the Netherlands ($149 million), Portugal ($138 million), and Denmark ($47 million). In fact, Germany was the only offshore wind market to not only match 2016 s project finance volume but far surpass it at $6.3 billion. However, the lack of offshore wind project finance deals in the UK this year, at just $246 million, meant the European offshore wind project finance ( M) 6

7 European offshore wind debt project finance (2006 to 2017) M Princess Amalia MW Thornton Bank (C-Power) Phase 1-30 MW Bligh Bank Phase I (Belwind) -165 MW Lynn and Inner Dowsing wind farms MW Borkum West II MW Thornton Bank (C-Power) Phases 2 & MW Global Tech MW Meerwind MW Baltic MW Gunfleet Sands MW Northwind - 216MW Lincs - 270MW Walney - 367MW Butendiek - 288MW London Array MW Gemini MW Westermeerwind - 144MW Westermost Rough MW Baltic 2-288MW Innogy Nordsee 1-332MW Nordergründe - 111MW Nobelwind - 165MW Galloper - 336MW Meerwind MW Belwind MW (refinancing) Dudgeon MW Luchterduinen MW Beatrice MW Norther - 370MW Otary Rentel - 309MW Merkur Offshore - 400MW Race Bank - 580MW Dounreay Tri - 12MW Trianel Windpark Borkum II (Borkum West II Phase II) - 203MW Butendiek - 288MW (refinancing) Deutsche Bucht - 252MW 7

8 Key European offshore wind project finance markets (2016 vs M) UK 2016 $15.1bn 2017 $247m Belgium Denmark 2016 $1.2bn 2017 $47m 2016 $2.6bn Netherlands 2016 $1.1bn 2017 $150m Germany 2016 $4.9bn 2017 $6.4bn Portugal $138m European onshore wind project finance ( M) 8

9 Onshore wind project finance Over the past three years, European onshore wind project investment has remained relatively stable, averaging approximately $20 billion, with the deal value falling by 7% in 2016 from the previous year. The transitory shift to a competitive auction across several European markets from a traditional feed-in tariff scheme has translated to a decrease in the overall number of projects reaching financial close. Clean Energy Pipeline recorded 341 greenfield transactions taking place in 2014, compared with 316 deals in 2015, falling even further to 224 wind investments in Germany took the largest share of Europe s $11 billion onshore wind market by deal value so far in 2017 at 18%, followed by Sweden at 17%, the UK at 14%, Italy at 12%, and Spain at 10%. Over the course of 2016, the majority of new greenfield onshore wind deals took place either in Western Europe or the Nordics. The total value of Europe s 10 largest onshore wind markets in 2016 came to $17.7 billion, while the combined value of the remaining jurisdictions totalled just $1.8 billion. European onshore wind project finance by country (2017.9M) Germany Sweden UK Italy Spain Greece France Other European onshore wind project finance by country (2016) UK Norway Germany France Sweden Ireland Finland Netherlands Italy Other A spate of deals will have to close in Q in order to prevent a two-year slide in market value as onshore wind project financing declined by 15% in the first nine months of this year to $11 billion from the same period in

10 Interview with Carsten Bartholl Carsten Bartholl is Head of the Energy Industry Group at Taylor Wessing. He advises on transactions and financing, primarily in the field of renewable energy, as well as on investment in technology for the avoidance and reduction of CO2 emissions. His practice also includes ongoing advice on investment projects. Which geographies have regulatory frameworks that are most attractive to developers and investors for both onshore and offshore wind? In Europe, Germany and France remain largely established markets with numerous projects under development against a background of rather stable regulatory conditions for the longer term phase post-commissioning. The Netherlands has become very attractive recently, in particular where the offshore wind segment is developing strongly. The same applies for Belgium as well as for Denmark, and of course the UK. The French offshore segment will also be interesting to observe: French utilities dominated the first tenders in 2011 and 2013, for which commissioning are expected between 2020 and 2021, while the next few months will reveal if this is also the case for the current tender rounds. Market conditions are ever-changing and it is still vital for developers and investors to stay alert. In Finland for instance, the pipeline of projects rapidly slowed down as the total installed capacity target (2,500 MVA) was already nearly reached by the end of 2015, but interest for the Finnish market rises again in light of current discussions regarding a new subsidy scheme as of How much interest has Taylor Wessing seen for subsidy-free projects? This is a very interesting trend that we are currently observing for renewable energy. Firstly, auction systems all aim at bringing renewables to market (i.e. the market for electricity sales). This in turn has caused market players to consider projects based solely on the strength of the power purchase agreement (PPA). Secondly, there remains intense competition amongst banks and investors for renewable energy projects in the most mature European markets to finance or invest in projects with low or no dependence to a subsidy scheme. This competition has also led these actors to consider opportunities in other geographical zones, and many traditional lenders are gathering project financing experience in markets such as Asia or Australia. Only very recently, we have advised in connection with a ca. 90% PPA based project in the South East Pacific region. The risk taken by the bank or the investor was higher in this case (marked by a debt/equity ratio quite significantly different from that for a German onshore wind farm), but the potential for higher internal rate of return margins is of course a driving factor, too. We see a market developing for this and we think that this evolution can also be expected in the longer run in Europe. More specifically for offshore wind, will cost reductions in the technology make such subsidy-free wind a truly viable proposition? The cost reductions in the technology itself certainly plays a major role. The results of the April 2017 tendering round in Germany have already demonstrated that established industrial players are considering the development of subsidy-free offshore wind parks as viable projects. It will be interesting to observe if this trend is confirmed in the Netherlands, where 700 MW of offshore capacity will be put off to tender without any subsidies. More generally, the recent results from auctions in the UK, Belgium, the Netherlands or in Denmark all point towards a drastic reduction of the feed-in premiums. So in your opinion, the switch to competitive auctions in Europe has not reduced interest for greenfield project wind financing? The very logic of the auctions is that a project that has successfully bid should be financially viable in principle, given the secured long-term electricity price underpinning the proposal. However, it should be noted that it is harder (if not presently excluded) to obtain project financing before securing a bid in the auction. This may be different for general business financing of larger developers or energy producers. In this context for example, there has been activity on the German market concerning project pipelines, with a significant portion of the projects not yet holding a building permit. Here, the investors were speculating on a certain realisation quota of this package of projects. Some of these transactions have closed successfully, others were brought to a stop when the very low prices for the first auction rounds in onshore wind were published in Germany. How is the secondary market in Europe characterised at present? This secondary market mostly illustrates itself with the sale of portfolio divestments, frequently spread across different countries. In this case, as long as the subsidy scheme is still operational, the individual projects are valued at the 10

11 Carston Bartholl Partner Hamburg Head of Energy Industry Group Tel: level of their respective rate of subsidy and can reach very attractive prices. The local power market conditions of the different countries involved do not play a significant role in this valuation. Activity on the secondary market is stimulated when financial investors must (or want to) close their funds. We have hardly seen any strategic investors bringing their projects to the secondary market (other than some few exceptions where a certain type of energy production was no longer a focus area, e.g. biomass). Why have pension funds and insurers stepped up their interest in operational onshore/offshore wind assets? Pension funds and insurers are amongst the traditional players in this market because they typically favour long-term infrastructure projects with a reliable and secure cash flow. In that sense, many such actors would consider subsidised renewable energy projects almost similarly as real estate investment. Offshore is particularly attractive as the investments are significantly larger and hence a greater portion of capital can be placed in one single transaction. What is the likelihood that energy storage will be paired with existing or future onshore and offshore wind projects? This is an excellent example of a market evolution being very closely examined by investors and comes against the backdrop of adding new technologies to the existing portfolio of production capacity. There is growing interest on the investor-side for energy storage projects and we have seen several firms investing in or teaming up for future applications of large-scale battery storage or other forms of storage, particularly as engineers seem increasingly optimistic that the technical hurdles to storage can be overcome in a foreseeable future. Some of these investors have seemingly transformed into strategists over the years, simply by assembling more and more installed capacity, and some of them have developed deep in-house knowledge on energy markets and renewable energy technologies. These types of investors are very attentive to any new trends in the energy market and we believe that they will play an important role in the further design of electricity markets, digitalisation and the energy turnaround. 11

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