'Squeezed both sides': Why selling wind farms has become a nightmare

Building and selling wind farms may never have been so difficult as investors and suppliers both turn the screw on developers, say experts, while adding that there are still ways to buck the trend.

Not too long ago, a developer could confidently take an offshore wind asset to market and run an auction that would attract “four or five really compelling, really attractive bids,” said Martin Lucas, a projects partner at law firm Watson Farley Williams.

This was at a time during the depths of the Covid-19 pandemic when the cost of capital was at rock bottom and the renewables market was booming. Indeed, for a brief period that now seems like a fever-dream, Danish wind giant Orsted was more valuable than oil major BP, and NextEra’s market cap exceeded that of Exxon in the US.

Back then, investors were willing to compete in “aggressive auction processes” for wind assets and “spend a few hundred grand” knowing they might walk away with nothing, said Lucas.

But those heady days for developers have largely passed, said Lucas, who has specialised in offshore wind for much of his 20 years of practice. Now the appetite is more for “bilateral deals” where buyers are much more selective and will only complete deals “at their pace, more on their terms.”

“Developers are being squeezed at both ends,” he said. “Projects are costing more – suppliers of wind turbines, cables and HVDC substations are increasingly setting the terms in negotiations with developers.”

“And the ability to sell down is becoming much harder”

“It's very hard being stuck in the middle as a developer,” Lucas reflected. “And being squeezed at both ends is one reason why the projects are either falling over or not progressing.”

Rock-stars and cherry picking

For developers to attract significant interest in a wind or solar asset it now needs “rock-star” energy.

“Investors have realised there's a very high development risk when you're talking about wind projects compared to other types of technology.” They are now “pickier” and stricter than they were at the start of the decade.

Back then, during the depths of the Covid-19 pandemic, global oil prices hit rock bottom and there was an unprecedented surge in renewables M&A activity.

“Just after the pandemic, there was a lot of dry powder, there was a lot of capital being ready to be deployed in renewable energy projects,” said Acosta.

There were not enough developers with big project pipelines, he said. Developers with such project portfolios would therefore find investors with, “I wouldn't say little due diligence, but maybe not as thorough as it would be now,” said Acosta.

But the familiar foes of rising inflation and interest rates, spurred in the West by the war in Ukraine, changed all that.

There is “more cherry picking,” with investors only wanting the best few assets in a pipeline, said Acosta. “You would say, ‘Okay, I would like this one, this one, this one.’”

Suppliers now have upper hand over developers

If the investors are applying pressure on developers from up top, then suppliers are doing the same from below.

Increases in the cost of raw materials in the West due to higher energy costs and inflation more broadly mean suppliers are now far less willing to fix prices with developers for components, said Lucas.

“Up until fairly recently, on all of the deals we were involved in, we were seeing the supply chain, generally speaking, being willing to offer fixed lump sum pricing,” he said.

But now key tier one suppliers of turbines, cables, foundations and substations are “much less willing now to give that sort of price certainty because they in turn are being impacted by what's happening on a macroeconomic level.”

“What we're seeing now,” said Lucas, is the tier one suppliers saying, ‘Well, we can't fix the pricing because we don't have control ourselves over what the various elements are going to cost.’”

And not having price certainty makes it hard for an investor to buy into a project, he added.

Supply chain players have negotiating power as there is “very little competitive tension,” said Lucas, meaning they dictate “this is what it's going to cost you” to developers, while also reserving the right to increase prices further as necessary.

“For a long time, the supply chain probably felt it was being squeezed,” said Lucas. Now there may be an element of that supply chain wanting to “restore their margins.”

‘It cripples your economics’

The trend of buyers being less willing to pay top dollar has had a serious impact on developers, said Jérôme Guillet, founder of renewables financial advisory Snow.

Offshore wind developers have perhaps been hit particularly hard because there is a long lead time on projects, he said.

If a developer made optimistic assumptions a few years back about what they would be able to sell a project today for then it “cripples your current economics.”

The question, said Guillet, is whether developers should be “protected from these market moves," adding those who made "unhedhged bullish commercial decisions... should have to face the consequences."

The offshore wind sector has also been influenced by the fact that oil and gas players that moved fast and with much fanfare into the sector are now “retreating” just as quickly, said Guillet, and “quite noisily” as well.

Oil and gas companies may have “bought expensively and then sold cheaply” in the renewables market, said Guillet, but they “don’t really care because” if they lose $100m on one asset but get a $2bn bump on their stock market price because investors now reward their exiting the sector.

Guillet said that not only are projects under development now less attractive due to the risk profile, but now-cowed investors have also stopped investing in projects in “more exotic countries,” preferring safer havens in well established and core for their capital.

“So if you're looking to develop in new markets that's gotten a lot tougher.”

How to buck the trend: pedigree and robust O&M

Despite the twin pressures that wind power developers currently find themselves caught between, it is still possible to buck the trend, said Watson Farley Williams senior associate James Ballantyne, who works with Lucas.

One somewhat intangible but critical quality some developers can bring to bear in negotiations is their pedigree in the field.

“Having an existing developer who is known to have real knowledge of the asset class, the ability to build and operate it,” is something Ballantyne said can make an asset “much more attractive.”

Having a high-quality operator is “really critical,” agreed Lucas, drawing a contrast to some of the early stage ScotWind projects, “where you've got a less established developer looking to build new projects with new floating technology.”

“It becomes a challenging proposition for an investor.”

Developers must also work to package their assets in the “most attractive way,” said Lucas.

“One obvious way,” he said, is for the bigger developers to “lean upon their enormous O&M strength, expertise, synergies with other projects as well,” such as through sharing facilities and vessels between projects.

Offering “more robust O&M packages that de-risk the operation phase” is another way to “entice investors to come on board.”

“It is a challenging market at the moment,” said Lucas. “But the developers we work for and the developers we speak to are still quite buoyant about things. They realise that things are challenging. They realise they need to go about things a little bit differently. They realise that they might not be able to divest quite as early as they would like.”

“In the right markets with the right assets, the right technologies, the right stage of development, the right size of project, the right operator, developer, I think there's still a good appetite for those projects.”