Financing Wind 2017: Bidding frenzy provokes crash talk

It is said there is a grain of truth in every joke. And so, when chat in the first session at A Word About Wind’s sixth-annual Financing Wind conference in London last Thursday included a quip that a crash is needed to bring down the price of wind assets, we have to take notice. But will it actually happen and why?

It started innocently enough with a conversation about the prices that investors have been paying for wind farms. Low interest rates over the last ten years have prompted institutional investors to look more closely at infrastructure assets, which offer steady returns that are more generous than government bonds.

Likewise, in the last five years we have seen more funds set up to specifically target investments in renewables. Annual investment in renewables globally averaged $264.4bn from 2012 to 2016, up 27% from the $208.8bn on average globally from 2007 to 2011, according to figures from Bloomberg New Energy Finance.

Both factors have helped to drive up prices. David Jones, head of renewable energy at Allianz Capital Partners, told attendees at the conference that growing familiarity among institutional investors with wind as an investment class had driven “the escalation of asset prices to what I think is pretty close to bubble pricing levels we see today”. He added that operational projects in Europe were now attracting “crazy” prices based on “ever more aggressive” assumptions on future power prices and project lifespans.

The other three speakers on the session all said similar.

Mortimer Menzel, partner at Augusta & Co., said that the amount of capital chasing wind farms in core European markets, such as France and Scandinavian nations, had “reached almost a level that is hard to handle”. He added that he regularly turns down 10-30 interested investors early in a bidding process, and would still have 10-20 in the bidding process. This is extending bidding processes.

Lorna Shearin, managing director at RBC Capital Markets, said she was seeing a lot of interest from Canadian utilities and Asian buyers, as well as pension funds, which are all “underinvested in infrastructure”. And finally Ray Wood, global head of power and renewables at Bank of America Merrill Lynch, said buyers are paying the highest prices for wind farms he had ever seen, and were getting more bullish on risk.

Interest in wind is huge and prices are high as a result. But, despite Menzel's quip about a crash being needed, they added that it does not follow that this is a bubble in imminent danger of bursting.

Shearin, for example, argued the investors that she works with are being sensible in terms of the downside risks of their deals, and would be happy to accept returns of 4%-5% in certain scenarios: “Compared to their other alternatives to put money into use, they’re still seeing that as a fair bet,” she said.

Menzel argued that, while he saw a problem with some bidders too high, most deals closed at a fair price: “This irrational exuberance shows itself in bidding, but doesn’t show itself in the closed deals.”

Jones was more circumspect, and warned that many valuations now were based on aggressive assumptions on long-term power prices and operating lives of the assets: “I think there could be an adjustment, and I think it’s needed, because the sector is just going to blow up” when projects do not deliver the returns that buyers expect. Investors will only know for sure if they overpaid when they see how their assumptions now play out in two decades' time.

So could there be an imminent crash?

Wood said not: “There’s not necessarily a bubble. There’s certainly a lot of liquidity so, if there was something to happen in the market where liquidity went away, then of course… prices will go down. But what will drive that liquidity out of the market? It’s systemic and it’s global,” he said. “That’s the exogenous risk that would be hurtful to what is such a capital-intensive sector.”

There is not just one factor behind the attraction of wind farms to investors: wind's growing maturity; high levels of institutional cash chasing limited assets; and sexy returns in infrastructure versus government bonds, driven by low interest rates. All have played their part and none of these is set to change imminently.

If prices are to crash then it looks like it would take a global shock to start it. And ten years on from the last one, surely we're due.