New money - Where's the equity to come from

Raising equity for offshore wind farm construction and ownership presents a similar challenge to raising debt (main story). Offshore wind is just one of the energy sectors that are competing for utility investments.

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HgCapital’s Tom Murley points out that up until now, utilities have funded renewables through their operating cash flow. But in addition to the much bigger sums required to realise utility offshore ambitions, they now have less money available.

"For the past 15 years European utilities have been cash rich and opportunity poor. They have bought each other, bought back shares in buy backs.

"They are now moving to a period where they are over-geared and ... cash poor." This is because of some bad acquisition investments, having to de-lever, falling electricity demand and falling prices, he says.

To bring equity into the sector, utilities are increasingly looking for new partners and joint ventures. Sovereign wealth funds have deep pockets and are seen as a potential source of equity.

Abu Dhabi’s Masdar fund was the first to enter the wind sector taking a 10% stake in the 630 MW first phase of the UK’s 1 GW London Array wind project. And the recent entry of PensionDanmark into the sector shows that pension funds have an appetite for equity in the offshore wind market.

Whelan notes that traditionally the energy sector has accessed institutional capital and sovereign wealth funds through rights issues and corporate bonds offered by the utilities.

But investors are no longer coming through this route, he says.

Raising equity through rights issues would discount the value of utilities’ shares, Murley says.

"None of the pension funds and other shareholders who are getting a nice dividend want to see ... their shares marked down in a rights issue at a big discount to current market share."

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