When Joe Biden announced at a virtual climate summit of world leaders in April, on Earth Day, that the US would halve carbon emissions by 2030, he placed the spotlight firmly on the urgency of a global energy transition.
After four years of a Trump administration unwilling to even engage with the climate conversation, the new US president told a global audience that he was ready to take on a transformation of unprecedented scale.
“This is the decisive decade,” Biden said. He spoke of a moral and economic imperative to save the world from climate catastrophe. “A moment of peril, but also a moment of extraordinary possibilities,” he said.
In the run-up to the COP26 meeting in November, the leaders of other countries are rallying around with their own ambitious statements of intent. Decarbonisation requires rapid electrification. And carbon-free electricity relies very heavily on the rollout of renewable-energy capacity, and the connections that deliver that energy where it is needed. None of it is going to be cheap.
It is hardly possible to overestimate the scale of the challenge. The International Energy Agency (IEA) has estimated that total annual global investment in clean power sources and enabling system infrastructure must rise to $1.6 trillion in 2030, from $380 billion in 2020, in order to meet global emission-reduction targets.
Wind’s contribution to the price tag is set to be sizeable, as the IEA indicates in a new net-zero roadmap that annual global wind capacity additions must scale up to 390GW by 2030, more than four times last year’s record capacity.
While the scale of required investments may appear daunting, the challenge is also an opportunity. With a big expansion in the wind industry, the Global Wind Energy Council (GWEC) calculates that 3.3 million new wind-power jobs can be created worldwide over the next five years, on top of the already existing 1.2 million. The International Renewable Energy Agency (Irena) points out that every dollar spent in the energy transition will deliver a payoff of $3-$7.
Seizing opportunities
Indeed, the established players in the industry appear to be aware of the opportunities, unveiling ambitious targets for the next decade and beyond. Among these, renewable energy “supermajors” Enel and Iberdrola have both announced plans to triple their renewable-energy capacity by 2030.
Italy-based Enel intends to invest about €70 billion through 2030 to increase its renewable capacity to 120GW, from 45GW last year — with new additions split roughly evenly between wind and solar — and the same amount for infrastructure and networks. Like other big renewable players, it is also looking to invest in storage and green hydrogen.
Spain’s Iberdrola is targeting 95GW in cumulative renewable capacity by 2030, nearly three times the 35GW it had installed by the end of last year. It already has a pipeline of more than 38GW in offshore and onshore wind projects, alongside 32GW in solar PV. It plans to spend a total of €150 billion in the next ten years on renewables, grids and storage.
In the US, NextEra Energy wants to invest in up to 30GW in new renewables capacity through 2024, after installing 5.8GW of new wind, solar and storage capacity last year. The company was thrown into the spotlight last October when its market capitalisation briefly surpassed that of oil major ExxonMobil.
Pivoting towards wind
ExxonMobil has indicated it will remain focused on its traditional business. It sees returns offered by renewable energy as unattractive compared with those it is accustomed to in its core oil and gas operations. It also notes that fossil fuels are expected to remain a key part of the energy mix for years to come.
“The dilemma for today’s fuel companies that are looking at becoming energy companies starts from the fact that oil and gas has been — and remains, for most — a successful business. It has rewarded shareholders with robust dividends, and the transition to ‘energy’ could risk, at least in the near term, these financial returns,” the IEA acknowledged in a 2020 report on the energy transitions of oil and gas companies.
But with net zero on the horizon for a growing number of countries and companies, and amid growing pressure from shareholders, several oil and gas majors have begun slowly pivoting towards wind and solar — even if planned investments remain marginal as a share of total expenditure.
The IEA found that investment outside oil and gas majors’ core business averaged at less than 1% of total capital expenditure. Individual companies that are leading the energy transition spent about 5% on average on projects outside fossil fuel supply, with the biggest investments in wind and solar PV, according to the IEA.
Leading the way with announcements of wind-energy investments and projects have been European companies, including Equinor, Total, Shell, Repsol and Eni. In the US, Chevron in April became the country’s first oil major to invest in offshore wind, securing a deal with Norway’s Moreld to help develop the floating offshore-wind technology of tech firm Ocergy. And in India, the Oil and Natural Gas Corporation (ONGC) and the National Thermal Power Corporation (NTPC) set up a joint venture last year to develop renewable energy.
The path for oil and gas majors seeking to green their energy sources has been blazed by Ørsted, which changed its name from Dong (Danish Oil and Natural Gas) Energy in late 2017 after disposing of its last oil and gas assets to focus exclusively on renewable energy. The global leader in offshore wind, Ørsted re-entered onshore wind in 2018, with an initial focus on the US. In April this year, it acquired 100% of Brookfield Renewable’s UK and Irish onshore wind portfolio, marking its return to onshore wind in Europe.
Competition and innovation
Renewable-energy powerhouses and oil majors now looking to invest in wind on land and at sea are only the tip of the iceberg. Wind-energy investors include scores of diverse, medium and small investors. “It’s a sector that’s a lot less concentrated than others, which has been good for competition and innovation,” says Jérôme Guillet, managing director of renewable-energy advisory consultancy Green Giraffe.
Competition and innovation have helped bring costs down. The levelised cost of energy (LCoE) for wind has fallen sharply, making it a competitive source of power around the world. The end is not yet in sight, however: Irena expects the average LCoE of onshore wind to continue declining by 25% from 2018 levels out to 2030, while the offshore wind’s LCoE is seen falling 55% compared with 2018.
In this context, financing is not seen as an impediment to building new wind projects. Indeed, many bankers would like to increase their lending to the sector. “There is more than enough financing available for wind and for all renewable energy,” says Guillet, “and on very competitive terms, which is very important to keep costs down, since it’s a capital-intensive industry.”
Project sponsors for new offshore wind farms in western Europe, for example, can secure “extremely competitive financing,” with interest rate margins of 130-170 basis points over Euribor for 20 years, while onshore wind farms in the region may enjoy margins of 120-130 basis points, says Youssef Fahd, head of infrastructure and power project finance at Italian bank UniCredit.
“From our perspective, there’s enough money to go around,” he says, “it’s more about getting deals in place. We see the problems more in project permitting and grid connections.”
Fahd notes that the increasing use of power purchase agreements (PPAs) and competitive auctions means that regulatory risk has been going down in Europe, creating a “safe platform” for financing wind and other renewable-energy investments. “In the past, there might have been the risk that if you had juicy feed-in tariffs and were overpaying for renewables, the government might change its mind.”
Competition is keen among banks to participate in offshore-wind financing deals. “Typically, these offshore deals involve some €1.5-2.0 billion in debt, and it is easier for banks to deploy large amounts of capital,” says Fahd.
It is a different story for floating offshore-wind technology, which is still in its early days. Many commercial banks are waiting for the technology to prove itself in the field before considering project-finance loans.
In the meantime, demand for project financing from larger, more sophisticated investors is increasing. Gone are the days when project finance was used mainly by smaller project developers, while bigger companies tended to finance most investments through their balance sheets.
“Because renewables are Capex-heavy, we now see a trend of utilities and other project sponsors teaming up with equity investors such as infrastructure funds in joint ventures, which typically use project finance,” explains Fahd. And as companies accelerate plans for investment in renewables, the need to free up capital for new projects is also driving demand, he says.
Revenue stability
Alessandro Boschi, head of the renewable energy division at the European Investment Bank (EIB), expects that ensuring some form of revenue stability for projects through tools such as contracts-for-difference (CfDs) and PPAs will become increasingly important, partially because the rising penetration of renewable-energy sources with marginal costs near zero will bring down electricity prices and increase their volatility.
Auctions should be designed to allow a long-term market price to emerge, which in turn brings down the cost of capital for financing wind projects, notes Guillet. “Banks and financiers yearn for fixed rates, and stable long-term prices attract stable, long-term capital,” he says.
Alongside CfDs secured in auctions, PPAs are expected to be increasingly important in allowing project sponsors to secure financing at low interest rates. Within the European Union, the EIB has estimated about 10-20% of renewable energy capacity could be underpinned by PPAs by 2030.
According to BloombergNEF, a total of 6.5GW in corporate PPAs was signed globally for wind energy last year. While that was 29% below the previous year, GWEC points out that corporate commitments to green energy remained “impressive” considering the disruption caused by the pandemic.
Institutional investors
As corporate buyers look to PPAs, institutional investors such as pension funds, insurers and sovereign wealth funds have also stepped up their investments in green-energy assets as they seek stable and secure returns to match long-term liabilities.
One way institutional investors may invest in the sector is through renewable-energy funds, such as the €7 billion Copenhagen Infrastructure IV fund that closed this April. Managed by Copenhagen Infrastructure Partners (CIP), the fund achieved commitments from 100 institutional investors — mainly pension funds, life insurance companies and family offices — seeking to invest in onshore and offshore wind, solar PV, transmission and storage.
Institutional investors with consolidated experience in renewable-energy investments may also take a more direct route, a trend that has been seen in the European wind sector. Earlier this year, Ørsted agreed to sell 50% of its 752MW Borssele I & II wind farm to Norges Bank Investment Management, the manager of the Norwegian government’s oil fund, for around €1.375 billion.
Bankers say that institutional investors tend to come into the process once assets are operational and investment risks are lower, but that is not always the case. For example, the Canadian Pension Plan Investment Board in December 2020 set up a UK-based platform to invest in onshore wind, solar and battery-storage projects across Europe that are in development and ready-to-build, as well as operating ones. It is also part of a joint venture in the running to build a 1GW offshore-wind farm off the French coast.
Yet despite some highly visible deals, Irena found in a recent study that only about a fifth of around 5,800 institutional investors it surveyed had made indirect renewable-energy investments in funds as of 2018, while just 1% had invested in direct transactions. “Greater provision of desirable investment vehicles such as project bonds, project funds, green bonds and green bond funds can help attract a greater share of institutional capital to renewable assets,” Irena suggested.
Green bonds
“We need to speed up everything when it comes to climate financing,” says Sean Kidney, CEO of the Climate Bonds Initiative, an NGO working to mobilise global capital for climate action.
He expects issuance of green bonds — debt instruments used to finance projects that have a positive environmental and climate impact — to reach $500 billion this year, up from a record $295 billion in 2020.
Given the urgency for investments to cut emissions, the near-term goal is to move to a market with annual issuance of $1 trillion, nearly matching the $1.2 trillion total to date. That compares with a global bond market worth about $100 trillion.
When it comes to issuing green bonds to finance wind farms, the procedure is relatively straightforward, explains Kidney. “While you need an independent review and you have a tracking process, if it’s a wind farm, it’s not difficult to show that assets qualify.”
Turbine manufacturer Vestas in 2015 got things started for wind-energy companies with a €500 million green bond, the first from a company dedicated exclusively to wind energy, and Nordex followed suit the year after with a €550 million issue.
Since 2017, Ørsted has used green bonds to finance about a dozen offshore wind projects in Europe and Taiwan. Greek energy group Terna and Italy’s Alerion Clean Power are among the growing list of issuers in Europe — which last year accounted for nearly half of total green debt — using green bonds to finance wind.
The green-bond phenomenon is by no means confined to Europe, however. Chinese issuers have also been active, with the Industrial and Commercial Bank of China, Cecep Wind Power and China Three Gorges Corporation all using green bonds to finance wind.
But despite the rapidly growing offering, the number of green bonds available comes nowhere near to exhausting investor demand. “There’s no problem getting investors interested,” says Kidney, “It’s a matter of supply. If we had $10 trillion dollars in green bonds available, we could sell them all.”
Developing markets
Tapping into this institutional capital will also be essential for financing renewable energy in developing markets, Irena believes. “Institutional assets in emerging and developing markets are growing more rapidly than those in the developing world, holding out the promise of bridging the funding gap for local green infrastructure and supporting long-term sustainable development,” it says.
Development banks are also expected to continue to play a role in fostering renewable-energy investments. The World Bank in 2019 announced a new programme to help countries including Brazil, Indonesia, India, the Philippines, South Africa, Sri Lanka and Vietnam to develop a pipeline of both fixed and floating offshore wind projects that could be supported by financing from the World Bank and its sister organisation, the International Financial Cooperation (IFC).
Given the investment challenge in some countries, International Monetary Fund (IMF) managing director Kristalina Georgieva has said that it “makes sense to pursue so-called green debt swaps” in some countries where debt would be forgiven in exchange for “green investments”. Low-income countries are “highly, highly vulnerable,” she said.
Essential grid investments
In all markets, investments in wind and other renewable energy must go hand in hand with those in the grid. According to BNEF, at least $14 trillion must be invested in grids globally by 2050 to support an evolved power system accommodating electric mobility and other forms of electrification alongside renewables. BNEF sees annual power grid investments growing from roughly $235 billion in 2020 to $636 billion by 2050.
Roughly speaking, for every dollar or euro invested in renewables, you need to add another for grid reinforcement, notes Antonio Cammisecra, the CEO of Italian utility Enel’s global infrastructure and network unit. “We have to create the enabling conditions for renewables,” he says.
“Grid investments can be made interesting to infrastructure investors with the right structure,” says Green Giraffe’s Guillet.
He points to the system in the UK, in which offshore wind transmission links are designed and installed by the project developer but then tendered off by regulator Ofgem to an offshore transmission owner (OFTO). “Investors get stable returns and low risks, and there is essentially no revenue risk because it’s a regulated business,” Guillet says.
Kidney expects green bonds for grid infrastructure will be of growing importance, given that the EU sustainable finance taxonomy includes the broad inclusion of criteria for grids. Dutch-German transmission system operator Tennet has used green bonds to finance transmission of power from offshore wind farms to the mainland.
Although some funds may be available for distribution grids through the European Union’s €672.5 billion Recovery and Resilience Facility, Cammisecra expects Enel and other distribution network operators to do most grid investments on the balance sheet.
“For grid operators it’s also a fantastic opportunity to reinforce, modernise and expand their business,” he says. “The hard thing isn’t the financial viability or the financial sustainability” of these investments, but “moving this large volume of projects through the pipeline”.
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