Development risk and reward
Let's say you are an offshore wind farm developer. There is a lot going on, so I will not keep you long. I know you are focused on looking at locations, getting ready to apply for feasibility licences, and thinking about marine and wind resource studies.
But you must also keep an eye on the future. Decisions you make now will impact the value of your wind farm in a decade or so, when you are most likely looking to sell or refinance your project.
I say this because that has been the trend for most renewable projects (portfolios) to date. It takes specific investors and developers to take on board the risk of building projects in markets going through such a significant transition like we are seeing in the decarbonising energy market. Not all proposed projects will succeed. If they do, then developers (and investors) stand to be rewarded for taking on that risk.
So, once you can prove the viability of your offshore wind farm and achievement of stable output - between 2-5 years of operation – then you can divest and move on to the next project.
It begs the question – who is your potential future buyer or investor? And how do you plan for a sale before your asset has even been built?
The long term de-risked view
Once your wind farm has been operational for a few years, you will have a ‘known’ asset to sell. You will be able to prove its operational characteristics, share earnings trends, match projected operational costs with actuals, and so forth. And in a world where net zero targets must be met – you are also offering an opportunity for investors to become part of the solution.
A new investor will likely be someone looking to boost their ESG (environmental, social and governance) credentials or ‘green’ assets. They will be targeting a certain risk profile – one which may give away a little on the upside, but which comes with more certainty on the downside.
There is a good chance you will be negotiating with a superannuation fund. A fund looking for a long-term investment.
So, what are some tangible ways to maximise the value of your offshore wind farm and make it an attractive investment for a super fund in, say, 2035?
You will need to apply a financial model that straddles two things – long-term financial stability and a shorter-term balance between profit and risk.
Take offtake arrangements as an example. Locking in a power purchase agreement (PPA) will give you a reliable income stream for the electricity your farm generates. You could sign a 10- to 15-year agreement guaranteeing the amount of money you’ll receive over those years.
But it is likely less than you would receive from the spot market – where power supply and demand are matched instantaneously.
There is an appeal in signing a 10- or 15-year PPA with somebody at a set price to give comfort that you will make a minimum return on the capacity contracted via the PPA. But the current spot market is trading at quite a bit higher than that. Double! There is thus also strong appeal in being able to capitalise on these less certain opportunities observed in the current market.
You need to negotiate arrangements that aim to both maximise payments and profit for your renewable energy, while also showing long-term security.
Asset management approach
To ensure your asset is in top form come valuation day, you must have the proper software and technology to accurately monitor your wind farm (monitoring and control or SCADA system). Your buyer will want to know exactly what they are purchasing and have the operational performance data available as confirmation.
The expected operation targets that you will initially rely on will not be 100 per cent accurate. They are formed from relatively short-term wind measurements on site (pre-construction) only giving an indication of what you may experience over the next three decades. And manufacturing specifications and prototype testing of your turbines were set in a different location to your patch of water off the Australian coast (for example).
Therefore, it is essential that you accurately collect data from day one of operation. Only then can you do the necessary modelling and analysis to understand the true capacity and projected lifespan of your farm. To truly know what you are selling in terms of expected performance and remaining design life.
And with that same monitoring technology, you are able to extract maximum value from your infrastructure by keeping on top of maintenance – and decide when proactive measures will result in better economic outcomes than run-to-failure.
Stakeholders and social licence
Finally, you must meaningfully engage with stakeholders and the community to make sure you have as smooth as possible approvals, construction and early operating process.
My colleague, Fiona Thompson, has written about the risks of underestimating the impact of community and stakeholder engagement on the success or failure of a renewables project.
Failure to manage stakeholders properly can lead to fines, compensation pay-outs and reputational damage. All will have a direct financial impact on your project. Plus, an asset associated with low community support will not be an attractive option for a potential future buyer.
It goes without saying that your engagement with stakeholders and the community is ongoing. Engagement is critical during the approvals process, but also critical during the build and operation phases as part of maintaining your social licence to operate and good governance. The value of community engagement (and existing relationships) will likely be a critical factor when a new owner starts to consider their decommissioning or life-extension options on the project.
Developing offshore wind farms is the new frontier in renewable energy production in Australia and the Asia Pacific region. If you are looking to build one, or invest in one, make sure you do your due diligence upfront.