Consolidation crucial to continued cost-cutting


May 28, 2018

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This is a week of firsts for A Word About Wind. On Wednesday, we are due to host our inaugural US conference, Financing Wind New York, in partnership with GCube Insurance Services – and, while we’re there, we’ll be talking about our new special report too.

Tomorrow, we are due to publish our inaugural North American Power List, in partnership with report sponsor Lincoln Clean Energy. This has been a long time in the making and, in our humble opinion, gives a great snapshot of the state of the US wind market.

In addition to the top 100 list, we have also included interviews with high-profile individuals including Bank of America Merill Lynch’s Ray Wood; MUFG’s Beth Waters; Enel Green Power’s Rafael Gonzalez; and Declan Flanagan from Lincoln Clean Energy.

And if you’re not in the US? Well, we think you should read it anyway!

Some of the trends we’re seeing in the US are equally applicable to the global market, and one of the most noticeable this time has been the impact of consolidation. Utilities and large institutions have been buying developers and yieldcos like there’s no tomorrow.

Last week, Canada’s La Caisse de Dépôt et Placement du Québec grew its stake in US developer Invenergy from 24.7% to 52.4%, and in normal times we’d have been picking apart this deal to tease out its significance. But the most remarkable facet of this deal has, frankly, been how unremarkable it has seemed. We’ve stuck it with all the other similar deals.

This year, Engie has bought Infinity Renewables to get its 8GW project pipeline; and Innogy has acquired EverPower’s 2GW US onshore development portfolio.

The two utilities are seeking to line themselves up alongside the major European utilities that have already made an impact in US wind, including EDF, EDP and Iberdrola.

As for the major institutional buyers, we’ve seen Global Infrastructure Partners buy three parts of NRG Energy for $1.4bn; Ontario Municipal Employees’ Retirement System has bought Leeward Renewable Energy; and Brookfield has been bedding in SunEdison’s two former TerraForm yieldcos are the deal that completed last year.

And this US activity is just a snapshot of what is happening globally.

GIP has this year concluded its $5bn buyout of Equis Energy; India’s ReNew Power has paid $1.7bn for Actis arm Ostro; and RWE and E.On have agreed their €60bn asset swap deal. The M&A merry-go-round is moving quickly and there is no shortage of well-capitalised buyers trying to take their seat. In the US, we’re looking closely at Apex Clean Energy too.

There are a few things these deals tell us about the wind market worldwide.

First, that companies looking to expand in renewables aren’t content to simply buy assets. Some will remain keen on low-risk assets, but the big attraction is on buying a platform that enables them to take development risk, with the higher returns that entails. As Waters says, there is “tremendous demand by large players in the market for development pipelines”.

It takes two to make these deals work, though. These willing buyers must also have a willing seller – and that brings us to our second point.

These deals are attractive for developers too because it gives the owner an opportunity for to exit their business with a healthy payday; and gives them a well-capitalised partner with which they can realise schemes. Development is capital-intensive and the falling levelised cost of wind is squeezing developers’ margins, so the chance to exit makes sense.

Wood points out that there’s “clearly a trend towards development companies being rolled up into bigger entities” – and, as wind has gone mainstream, the money’s there.

And third, for the larger partner, it is often simply easier to buy projects where the developer has already done the early development work. It means less faffing to acquire the site, appease locals, win consents, secure transmission lines, and so on. No point spending ages developing your own 8GW pipeline if you can buy someone else’s.

Flanagan argues that this shows that new esteem with which developers are being held. He says that, previously, development was sometimes seen as the part of the wind development cycle where cash was burned. However, investors are increasingly seeing this as an area where they can realise higher returns: “We’ve seen a shift in recent years that what you really want to be best as is the development part of the value chain,” he told us.

This isn’t just a US trend, but the US has provided some of the most visible deals so far. What impact will this have on North American Power Lists in future years? We’ll let you know later! I’m going to enjoy a couple of days in New York after the conference recovering from this one.

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