Have offshore investors thrown caution to the wind?

Offshore wind will be an important part of the future energy landscape, but investors may be mispricing the risk in these projects.

One thing is certain in these turbulent times: more offshore wind capacity will be built – and fast.

In a world hungry for non-fossil-fuelled energy, offshore wind looks like a very sure thing, which is why offshore projects generally find funding.

But, as with other trends that rise to prominence in a comparably short time, it may be worth asking whether investors fully appreciate the risk in offshore wind projects.

Asking around, it isn’t hard to find GPs that have stayed clear of offshore for the past few years as cheap debt has poured into the sector.

“We haven’t invested in offshore since 2018, though we have looked at several deals, but found that in the end, we weren’t needed because there was so much other and cheaper finance available,” says Darryl Murphy, Aviva Investors’ head of infrastructure.

“The problem is that banks are falling over themselves to get into offshore wind, and they do not align the pricing with the risk profile,” he adds.

Nicolas Merigo, CEO of Marguerite, alluded to the issue recently, saying that “The issue with offshore wind right now is that the returns are not attractive.” This followed Marguerite’s sale of its share in the German offshore wind park Butendiek.

One potential fallacy is to take more than a century’s steady experience with onshore wind and apply it to the risk profile for offshore, where technology is changing at breakneck speed.

At the moment, 15MW offshore turbines are ordered years ahead of entering serial production for projects in locations as contrasting as Denmark and Taiwan. The current offshore standard is 8MW turbines such as those used in the UK’s 1.3GW Hornsea 2 wind farm that entered into operation this summer.

It also means that floating wind farms of up to 2GW are planned with backing from a pension fund at a time when the largest commissioned floating wind farm, the Norwegian Hywind Tampen, has only 11 turbines and 88MW of capacity.

Another pension fund, APG, has taken to investing directly in offshore wind.

While the risk profile obviously varies with the project, location, turbine and anchoring technology – and every aspect of the project will have been examined as thoroughly as is humanly possible before the first foundation is placed – the risk in the less-tried and tested offshore projects must be higher than for onshore wind.

Despite this, risks in offshore projects are generally priced quite close to that of more established onshore schemes.

“On average, the cost of debt for offshore wind is about 12 percent higher than for wind onshore. The difference is smaller in the UK and China, the top two offshore wind markets globally,” Chelsea Jean-Michel, wind analyst for BloombergNEF, tells Infrastructure Investor.

Sailing this close to the wind has probably meant that some offshore projects have taken off sooner than they otherwise would have. At the same time, turbine producers are struggling to keep afloat and may have sold their wares too cheaply to the benefit of offshore business plans.

This would imply that some recent offshore projects may well have been less economically sustainable than expected and hence make poor templates for future developments.

Looking ahead, any change to the benign offshore risk profile could spell trouble for projects looking to refinance in a more cautious debt market. Or maybe banks will still be falling over themselves to finance the next phase of the offshore build-out.

Offshore projects will remain supported by sentiment, necessity, and dreams of a new hydrogen-based economy for years to come. But those are not good enough reasons for investors to throw caution to the wind.