Black Friday season for UK onshore wind

Published November 2015

In recent years, we’ve become accustomed to a period of price reduction before Christmas stimulated by the now infamous Black Friday sales. This year, however, the UK onshore wind market seems unwittingly to have been dragged into the price reduction frenzy – but for this industry, the discounts are likely to persist beyond the festive period. Everoze Partner, Colin Morgan braves the frenzied crowds to browse for interesting investment opportunities (albeit with significant risks).

Let the bargain hunting begin

With the closure of the Renewables Obligation (RO) to onshore wind, we are expecting to see a number of projects on the market at a bargain price. Those projects locked in the development and construction pipeline fall into one of three broad categories:

  1. Contracts and suppliers all in place with commissioning scheduled before the RO closes
  2. Most necessities in place for construction but at significant risk of missing the deadline for commissioning
  3. No chance of being commissioned in time.

Activity around projects in the first category has predictably increased since June when closure of the RO was announced, while projects in the third category have, understandably been put in the deep freeze.

The second category, however, is for those who fancy some entrepreneurial excitement! Will they be the bargains we anticipate them to be? We will be keeping a close eye on how they pan out financially, as they will indicate just how cost-competitive UK onshore wind can really be.

Risk and reward

The stark reality is these projects run a very real risk that they will miss the RO deadline and will have to survive without subsidy – so why invest in a scheme that could end up with roughly half its potential income stream?

Because with experience and expertise you can mitigate the risk and bag yourself a bargain. But, beware this game is only for investors who are up for the construction risk and can operate without the use of borrowed money as the banks have already declared that they not interested in these projects.

So how can the risks be managed?

  1. Spread the risk across several projects.
  2. Thoroughly understand the delay risks to the project and keep on top of these at a project level.
  3. Make sure the project valuation completely captures the risk. Bear in mind, that these valuations rapidly heading towards zero – and there’s your bargain opportunity!

The bigger picture

These projects could prove to be very important in the bigger industry picture. The reduced developer premium outline above is not the only relevant driver in play. The current strength of Sterling against the Euro is also making equipment prices dramatically lower than we’ve seen in recent years, so these projects could herald a step change in the cost of onshore wind energy in the UK.

There are going to be a number of happy shoppers in this market who take on this risk and deliver quality projects before the RO deadline, but we can also expect to see some onshore wind projects commissioning after the deadline. Those bargain hunters will be left with projects operating without subsidy and, in isolation, these will be loss-makers. But they will also represent the first of a new generation of subsidy-free onshore wind farms which is, after all, what we have all been aiming for…