Last year saw the market slowly moving away from a world with secure feed-in tariffs and steady and secure income streams from projects, towards a competitive market. And this trend looks set to continue.
Currently the market appears to be divided between peripheral countries, such as those in southern Europe, and more established markets. The latter are being flooded as investors move away from the less attractive markets, driving up asset prices, according to Peter Dickson, technical director at clean-energy fund managers Glennmont Partners. "Projects that have a secure tariff are attracting heightened interest that is pushing prices up and returns down," says Dickson.
This is not only being caused by cautious established investors moving into countries with secure regulatory frameworks, but also by new entrants to the market.
"We're seeing a lot of new funds and yieldcos emerge. These are new investors with a lot of money to spend — they structurally need to keep on spending," says David Jones, head of renewable energies at Allianz Capital Partners. "And I think there's a danger that some of the newer ones are inflating asset prices based on less experience of what they are buying."
With supply and demand pushing prices up, if investors want to keep their returns they are going to have to accept greater risk, Dickson warns, whether that is risk in development, in the surety of the project, or the geographies where they look for projects.
However, this could be good news for developers as there is still a considerable amount of finance around for projects with a tariff secured. Wind developments remain a very attractive investment opportunity with steady, stable long-term yields — exactly what institutional investors are looking for.
But at the same time, utilities are reining in their exposure due to capital constraints. Although they are still developing projects, they are doing so to sell majority or minority stakes rather than to keep 100% ownership. Financial investors are taking up some of the slack.
"As a financial investor, [Allianz Capital Partners] was fairly unique in financing on an all-equity basis when we started nine years ago," says Jones.
"Typically utilities would finance this way, whereas now some financial investors, including yieldcos are making unleveraged investments. And some utilities are now looking at project finance and other financing solutions, which historically they have not done, but this is driven by their current financial constraints, necessitating a change of business model," he says.
In the offshore sector, there is likely to be a continued shift towards more debt financing as lenders become more comfortable with the sector and utilities increasingly seek third-party finance.
"Banks are beginning to do underwriting again and they are definitely more bullish about offshore wind projects than they have been in recent years," says Jerome Guillet, managing director of Green Giraffe Energy Bankers. "If you do get the underwriting market going, there will be more of the small banks coming into the field via syndications, but that's going to be on an incremental process."
But while Guillet is confident there is likely to be an increase in offshore equity investment, Jones is less optimistic.
"There seems to be a belief that there is a huge wall of institutional money just waiting to fund offshore wind, but I just don't think that this is the case," Jones says. "Allianz is one of the largest institutional investors in the wind sector, and we are very cautious on it. Other investors I speak to are also very cautious. Some institutional investors have committed serious money — PensionDanmark being an obvious one — but how many more of these are they going to do in the near future?"
This year looks set to be a good for investment in emerging markets. The debt parameters for the financing of projects are currently very competitive due to pricing and margins being low when compared to other years. While a dramatic shift in dollar interest rates could have a negative effect, a large change is unlikely, and a minor alteration should not make too big a dent.
"We don't know exactly what is going to happen with the dollar – I think that interest rates will go up, but only slightly," says Nicolas Navas, investment principal at emerging markets investment specialist Actis. "As a result it is likely that there will be fewer dollar loans, with developers looking to get financing on a local currency basis. As well as this, euro loans will become more attractive." There will also be more possibilities of financing through project bonds or infrastructure bonds. They are not going to get a massive share of the market, but it is something that needs to be looked at as an alternative, Navas says.
Navas highlights Chile, Brazil, Mexico, Central America, South Africa and India as the most appealing markets at the moment. "In all of these countries, wind is competitive in market terms, so it is sustainable in the current conditions of the market — this is very important," he says.
With the price of high-quality wind assets in established markets rising, developers are likely to be in a strong position for project financing. But from an investment point of view, financial backers are going to have to be smarter and look further afield if they are to maintain their returns.