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Prime Capital: Listening to the winds of change

The pairing of wind with hydrogen and hydrogen derivatives will prove critical to the decarbonisation of transportation and heavy industry, says Prime Capital’s head of infrastructure Mathias Bimberg.

This article is sponsored by Prime Capital

You have recently closed the Prime Green Energy Infrastructure Fund. What was your experience of fundraising through the pandemic and why do you think you were successful, particularly given that this was a first-time fund?

Undoubtedly the biggest contributing factor was our 10-year track record built up through managed accounts. The first €380 million came from investors who were already clients, and this gave us the momentum that we needed to reach our final close at €586 million, significantly exceeding our €500 million target. We were able to achieve that success after only 18 months, despite the fact that we launched the fund in the midst of the pandemic in June 2020.

Mathias Bimberg

The fact that the fund is designated as an Article 9 impact fund under SFDR was also a major appeal for investors and was important for bringing in institutions with whom we had not previously worked. There has been a marked increase in investor focus on sustainability since the onset of the pandemic. This is also the first infrastructure fund to receive a second-party opinion from Sustainalytics as well.

In addition to the product’s green credentials, investors were also attracted by our commercialisation strategy. We generate alpha of 2 to 3 percentage points. The fact that Infrastructure Investor named us Renewables Investor of the Year and awarded us both European and Global Renewables Deal of the Year in 2021 for our first transaction in the fund helped too, of course. Finally, we had already invested 51 percent of the fund by the time we reached final close, so this wasn’t a blind pool anymore. Investors knew what they were buying into.

What is the focus of the fund?

The fund is primarily focused on greenfield onshore wind power in Scandinavia. We enter the projects early, which means the value generated during the commercialisation phase is made available to investors. That is where the alpha comes in when compared to conventional investment strategies.

This approach has already been tested several times and includes, amongst other things, the extension of approval periods and the optimisation of both the wind farm layout and the turbine technology, as well as a broad tendering of construction, operational and financing contracts.

We aim to generate returns of 8 to 10 percent, whilst many renewables strategies are generating returns in the low single digits.

In addition to wind, the fund will also implement related themes, in particular the production of green hydrogen and other carbon-neutral energy sources.

What is the appeal of the Scandinavian wind market?

Appetite for renewables has soared as investors have sought to meet their ESG objectives. That, of course, means that valuations are increasing and returns are coming under pressure.

In that context, we believe that investing in the production capacity associated with the lowest-possible cost of electricity is the best way to maintain performance. Investing at the very lowest-possible price point provides a natural hedge against the potential for low power prices in a fluctuating power price environment.

In Europe, that lowest possible price exists either in locations where it is very sunny, like the Iberian Peninsula, or in Scandinavia, where there is a lot of wind. Scandinavia also has the advantage of low population density in rural areas, which means it is possible to build the 100MW to 250MW projects that we target in order to achieve economies of scale. That helps bring the levelised cost of electricity down, as well.

A big leveller

‘Focusing on levelised cost of energy can generate 2 to 3 percentage points of alpha compared to subsidised, pan-European renewables strategies,’ says Bimberg.

“However, while levelised cost of energy of a renewable energy project will remain very important for its development, we strongly believe that solely focusing on this is not sufficient anymore. From our point of view, it is key to also do something intelligent with the green power produced by creating decarbonsation solutions also for the hard-to-abate sectors, like producing green hydrogen and other derivative products, which can then be used in the transportation sector or for heavy industry, such as steel production. There is a large amount of blue and grey hydrogen out there that needs to be replaced with green hydrogen and a large potential for the replacement of other polluting fuels.

“Due to the fact that we generate at the lowest levelised cost of energy, we are ideally positioned to be also very competitive when it comes to the levelised costs of hydrogen allowing us to structure creative offtake solutions which shall become commercially viable not only in the medium- to long-term future, but already today.”

What makes an attractive site?

Obviously, the wind conditions need to be good. We also look for low infrastructure complexity, for example multiple access points to the site, pre-existing roads or proximity to a port. Those logistical factors are important because component parts are getting bigger all the time. Construction risk and capex are things that you can control as an investor, unlike future power prices, so it is important to manage that risk carefully. What is also very important is for the wind farm to be wanted by the locals and bring benefits to local stakeholders. We seek to support community projects, for instance through municipality organised programmes, and to minimise disruption to the local community.

What are your views on the offshore wind market?

We definitely see a trend towards moving offshore in Scandinavia, as land availability declines, particularly in the southern areas, and as offshore wind technology matures. It is an interesting market and one that we are following very closely. We are currently looking at several different Scandinavian offshore wind projects, where developers are looking to team up with an experienced energy investor like us that can bring “value add” to the development stage.

In addition to equity financing, what demand are you seeing for junior debt in the renewables market and what is driving that?

Over the past 24 months, we have completed the biggest renewables mezzanine investment in Europe, as well as the second and third biggest.

For instance, we arranged a €106 million junior debt financing for a European solar PV portfolio owned by MKM Invest Group. That portfolio consists of solar PV projects in Germany, France and Spain, with a total capacity of 579MW. The instrument is cross-collateralised by 94 solar projects in total, including both operational assets and projects under construction.

The transaction enables our investor to get access to cashflows from a large and diversified pool of renewable energy assets, with long-term visibility and it is by no means a one off. There are a significant number of developers that want to orchestrate a cash event, but don’t necessarily want to divest their projects. They want to retain their pipelines and to build up their portfolios. That means there is increasing appetite for junior debt.

At the same time, we are also seeing increased supply of junior debt, particularly when it comes to solar. We are certainly seeing competition from other players. Nonetheless, we have deployed €300 million in the last two years alone. In fact, we have plans to launch a dark green Article 9 mezzanine fund in 2022.

What new technologies do you deem to be particularly exciting moving forward?

Whilst we are focused on wind investments, we are certainly also very interested in how wind will be paired with value-enhancing technologies in the future, including energy carriers such as hydrogen and ammonia.

We are also paying close attention to developments in storage, which will be paramount, of course, if we are to continue increasing the penetration of renewables in the system and as we decarbonise transportation and heavy industry.

We have recently announced an investment in Finland’s first industrial scale green hydrogen production plant in Harjavalta. That is a partnership with P2X Solutions Oy, a Finnish pioneer in green hydrogen and derivatives (power-to-x) technology.

P2X Solutions produces green hydrogen completely emission-free by electrolysis of water using renewable energy sources. The company then processes some of the green hydrogen into renewable synthetic fuels, such as synthetic methane while capturing CO2.

Meanwhile, the heat and oxygen generated as by-products of the process can be utilised in industrial processes. Construction work on the 20MW plant will begin later this year and should be completed in 2024. The project received a significant grant to support construction costs. Additional green power-to-x projects, even larger in scale, are planned to be developed together.

We are also looking at a number of other initiatives with different offtake solutions in other markets, including Norway where we are exploring the use of ammonia in the maritime industry, alongside local partners TromsKraft and Magnora. That project involves the large-scale production of green hydrogen and then additional processing into green ammonia and liquid organic hydrogen carriers.

The project is based in Tromsø which, with more than 3,000 fishing boat calls per year, is one of the largest fishing ports in Norway, as well as an increasingly popular cruise destination. It is also an area that has a surplus of green electricity from hydropower and onshore wind, which makes it attractive for green fuel production. There is no doubt that there is a large need for such innovative solutions, if we are to continue to increase the penetration of renewables on the grid, whilst also decarbonising other harder-to-abate sectors, such as transport and heavy industry, and we want to be at the forefront of those trends.