Falling cost of capital for offshore wind

A survey of 25 European funds investing in infrastructure shows the cost of capital for offshore wind projects is closing the gap with that of their onshore counterparts.

Advisory group Lincoln International, in partnership with Clean Energy Pipeline, found in a report released this week that the average unlevered cost of capital for UK onshore and offshore wind farms currently stands at 6.3 and 8.1 percent respectively.

The cost to construct and operate offshore wind projects has traditionally been higher than for onshore wind, due to the greater risks and more complex requirements associated with projects located at sea.

The report compiled data from some of the largest specialty and general European infrastructure funds. It focuses on the UK and Germany's offshore market but covers other renewables technologies in the French, Nordic and Irish markets.

The report is aimed at informing investors about the levered and unlevered costs of capital in the renewables secondary market. 

The biggest surprise for the report's author, Lincoln's managing director for valuations Tomas Freyman, was how much the price of offshore wind projects in the UK had fallen.

“You stand back from that and think it doesn't make sense because offshore wind has more operating and technology risk than onshore wind,” he said. “So I was quite surprised to see those returns lower than biomass and closer to onshore wind.”

Germany was the only other offshore market investors reported data for, and the difference was greater. The unlevered cost of capital for onshore projects was 4.1 percent, compared to offshore's 8 percent.

The driver for this trend, Freyman told Infrastructure Investor, was that investors are continually searching for yield. “There is a significant amount of annuity capital out there wanting to find a home,” he said.

This is also true for the other renewables technologies Lincoln asked about in its survey. France's unlevered cost of capital for onshore wind projects was 5.4 percent, 7.1 percent for Nordic countries and 6 percent in Ireland. Only the UK, Germany and France reported data for the solar industry, with costs at 7.8 percent, 3.4 percent and 5.1 percent respectively. Unlevered cost of capital for biomass projects in the UK was 9.4 percent, 1.3 percent higher than offshore wind. In Germany, biomass was at 6.7 percent, 1.3 percent less than offshore wind.

“With interest rates being so low, it's a constant hunt for yield for these players, and here you have projects utilising proven technologies that are government-backed with guaranteed inflation-indexed cashflows,” Freyman said.

Lincoln's survey covering the cost of capital in the renewables secondary market is the first of a biannual report it has started to publish for investors. The advisory firm will release the next report in February, and the markets that are covered may change depending on what investors are focusing on at the time.