Turbine makers are always looking for growth opportunities, and squeezed margins are making this drive all the more urgent. Now they have developers in their sights.
This week, Vestas entered into a partnership with Swedish utility Vattenfall and Danish pension fund PKA to develop a 353MW onshore wind farm in Sweden.
This deal is notable for a number of reasons. First, the size. Yes, 353MW isn’t a record-breaker – the 650MW Markbygden 1 is the largest in terms of the European onshore wind sector – but it’s still a sizeable project. This reinforces Scandinavia’s status as a leader in European onshore giants.
Second, the involvement of PKA. The pension fund manager has previously invested in offshore wind farms and, for example, bought a 25% stake in the 659MW Walney extension scheme in October. But its acquisition of a 30% stake in this 353MW wind complex, known as Blakliden and Fäbodberget, is important because it shows there are onshore projects being built of a size that can interest major pension funds.
And third, Vestas has taken a 40% equity stake in the development. This is a major departure for the Danish manufacturer from its core business making turbines, and it has the potential to shake up the onshore wind market. But why make the shift?
Anders Runevad, president and CEO of Vestas, said the falling cost of turbines was “making the market more competitive and creating new opportunities”.
In other words, for manufacturers such as Vestas, it makes sense to use their balance sheet to get involved in the early stages of onshore schemes, and take advantage of the higher returns that come with accepting that early-stage development risk.
Not that there appears to be much risk. The development partners have announced that Norwegian aluminium giant Norsk Hydro is set to buy 60% of the electricity from the complex when it completes in 2022. This follows Norsk Hydro’s power purchase agreement late last year to buy electricity from the Pitea scheme, which is part of Markbygden 1.
This PPA will help de-risk the project for Vestas, PKA and Vattenfall. As a result, the process for securing the €350m of construction financing needed should be a fairly straightforward process. The deal is due to conclude in the coming months.
We have watched for a few years as Vestas has got more involved in the operational side of wind farms, including through its acquisition of US analytics business Utopus Insights in February. It has also been getting more involved in hybrid projects, where it can match its wind turbines with solar, hydro and storage technologies. Therefore, it’s no surprise to see it getting more involved nearer the start of the development cycle.
It isn’t the first to do so. The merger between Siemens and Gamesa last April landed us with a player that could sell turbines and develop its own schemes.
Likewise, GE Renewable Energy said at this month’s AWEA Windpower event in Chicago that it had created a standalone development team to look at onshore wind projects in the Asia-Pacific region and in Europe. GE has indicated it will co-develop early-stage projects and could offer PPAs of its own.
These go even further than the wind financing work that General Electric does via its GE Energy Financial Services arm, and again give it the potential for higher returns.
As well as the returns, getting involved in early-stage projects helps Vestas and GE to de-risk their sales cycles. For one thing, projects they develop themselves will lead to a guaranteed order; and it also makes them less reliant on business plans of external developers. There seems little logic in always waiting for other developers to come along with appropriate projects if they can develop schemes themselves.
And finally, it could help them to open up new markets. Manufacturers are always on the lookout for new countries and regions that they can move into, but their ambition and investment plan has to then be matched to the plan of an external developer. In situations where two parties have the same goal, pooling resources makes sense.
This could worry independent developers. It might mean turbine makers edge them out of the development process. Equally, though, it could mean the developers get a chance to form long-term partnerships with well-capitalised turbine makers. We’ll doubtless see a bit of both.
