It is my very strong view that investing in operational wind assets in peripheral European energy markets today will bring high-yield returns for moderately low risk.
At present, the trend for investors is to buy stakes in fully operational wind farms in stable countries with well-defined regulations, which can be similar to sinking money into long-term-bond-style financial instruments, with predictable yields that are paid out for 25-30 years.
Many infrastructure investors and pension funds have moved into this space in the past few years. Allianz and Munich Re have each invested about €1bn ($1.3bn) in European onshore wind projects, while PensionDanmark has put more than €500m into operational offshore wind.
Investors have focused most of their attention on regulatory and country risk when selecting which assets to invest in. Minority stakes in wind facilities operated by major utilities in North America and northwest Europe have proved popular. These are generally sound investments in terms of risk profile.
However, the ever-growing number of investors trying to enter these mature markets does not match the number of assets available for acquisition.
This oversubscription is leading to increased competition, with investors willing to accept lower yields that could be labelled as underperforming when risk-adjusted.
Traditional investors such as private equities, which seek relatively high returns, are slowly being crowded out of the market by pension and insurance investors seeking stable long-term yields.
The situation is very much the opposite in peripheral markets such as Eastern Europe.
With ever-shrinking renewables support schemes across Europe causing investors to write off billions of euros, the risk in the peripheral energy markets is being overlooked and overpriced.
In my view, the recent regulatory adjustments in many peripheral countries demonstrate why investors should take a long hard look into these “belittled” markets and bet on coming in at the bottom of the regulatory cycle, thus avoiding excessive and unjustifiable premiums in future.
In fact — and this is, admittedly, slightly counterintuitive — the market risk that made investors wary of committing capital to the peripheral markets is the same market risk that has been considerably mitigated given the recent regulatory changes. This is because new regulations in countries such as Portugal and Spain will bring long-term stability to the sector.
In many regions, wind energy is becoming competitive in terms of long-term generation costs, and should merit continued support from governments.
For instance, in parts of Eastern Europe, the rationale for supporting renewables is as much related to the dependency on natural gas from Russia as it is to environmental purposes. Renewables will also be a major cornerstone of plans to substitute outdated and expensive conventional power stations that will be retiring from the system in the next few years.
The possibility of investing in these markets now — at what could be called discount or even distressed asset pricing — is a great opportunity to capture high long-term yields with a relatively low risk profile.
The non-commitment to developing markets by investors may, at least in part, be due to a lack of experience in understanding the main risks associated with renewable energy.
Those that understand the ins and outs of the business are best placed to capitalise on these opportunities.
In conclusion, the intrinsic risk of investment into operational wind farms in peripheral European markets should be considered as a good deal, with a high return-to-risk ratio.
It should also allow investors to capture long-term yields that are higher than any equivalent investments in the traditional European markets.
But how long will this value-to-risk mismatch last? How many sizeable and sound investment opportunities exist in the peripheral markets?
In my view, the opportunities are few and they will not last for long.
It will be interesting to see which companies will be the winners in these markets, and which will be the losers.
Who will benefit from first-mover advantage and who will play the game too late... and eventually suffer from the well-known “winner’s curse”?
Luis Adão da Fonseca is a former board member and chief business development officer at EDP Renewables. He is now working as a board adviser to several renewables firms and is setting up an investment fund focusing on wind and solar assets in peripheral markets
This piece was published as part of the Thought Leaders series. Recharge’s Thought Leaders’ Club brings together leading thinkers and participants from the renewable-energy sector to examine the key challenges facing our industry