Brexit special: Silver linings in shock UK vote


June 27, 2016

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This is a Wind Watch we hoped we would never have to write.

Thankfully, we can re-use the opening line of a column we wrote five months ago. It said: “The UK’s prime minister David Cameron has a track record of mismanaging big votes.”

And we finished by saying it would be “one hell of a close vote” that would tell us whether Cameron had previously been “a highly-skilled political operator, or just lucky”.

Now we know — and his luck has run out in earth-shaking fashion.

On Friday, the UK opted to leave the European Union, which triggered a huge drop in the value of sterling; put the country on the precipice of recession; raised the prospect that the UK will split; and caused Cameron to announce that he would be resigning as prime minister. As recently as last week we thought that those voting to remain in the EU would sneak home, but it was not to be.

This has not just been a major shock for UK businesses. Europe’s biggest banks saw their share prices fall steeply as the continent woke to the prospect of the EU falling apart. Companies around the world have also been affected, and continue to be.

Politicians in Denmark, France, Italy and the Netherlands have called for their own votes on EU membership. This is a shame as, even without the UK, we think the EU could play an important role in helping promote renewables including wind on a Europe-wide basis. If Donald Trump becomes US president then the EU could play a key role in leading talks on behalf of Europe about the future of the Paris climate deal, which Trump wants to axe.

But we have focused on the policy before. Now we want to ask:
what is the likely impact of this Brexit vote on wind investors? And what are the potential opportunities amid all the immediate woe?

First, undoubtedly, the market turmoil that follows this vote will put significant pressure on developers. There will be fewer European banks and other major institutional investors in the market to buy or back schemes; and those who are in the market will subject deals to far more scrutiny to make sure they do not overpay. This will squeeze developers’ margins and put these companies under greater pressure to cut unnecessary cost from projects.

There is a positive here, though. This should give greater impetus to developers in Europe to reduce the levelised cost of energy from their onshore and offshore projects. It may take longer to make schemes happen, but added scrutiny should help to improve them.

Second, we see good acquisition opportunities for cash-rich investors and utilities that can fund deals off their balance sheets. Buyers that do not need to take on debt should be able to pick up assets at lower prices, and thus higher yields, than they have been able to in the last few years. For them, it is a good time to build a portfolio while debt-focused competitors are reeling.

This may seem counterintuitive but, in reality, the rationale for investing in a wind farm is no different than it was at the start of last week. Interest rates are at historic lows and now set to stay there, which means investors are getting poor returns from investing in bonds. It still makes sense to buy operational wind farms that can offer steady, sensible returns.

And third, while there will be a great deal of uncertainty for UK wind businesses, there are opportunities too. If the pound remains weak then it is set to make exports more attractive, and should encourage companies to invest in ground-breaking technological advances. It is the disgruntled voters in former manufacturing powerhouses in the Midlands and north of England that drove this shock Brexit vote. These communities now need to step up.

We are not saying it will be easy for the UK to leave the EU. It will not. We are not saying it is desirable either. We would prefer the UK to stay in. It is galling that the UK is on the cusp of leaving after a divisive, fear-mongering and often ill-informed debate.

But the fact is that we are here and we have to get on with it — and, in the next year, some players will win big.

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