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February 11, 2020

The end of government subsidies for onshore wind and solar in the UK may have given investors pause for thought, but with ambitious net-zero goals, a new era of renewable energy infrastructure projects has emerged.

The UK’s first subsidy-free solar plant – and the largest solar plant to be built so far – became fully operational in December, backed by Next Energy Capital’s Solar Fund. In Scotland, the circa 45MW Douglas West windfarm in South Lanarkshire bought by Greencoat as part of a £45 million deal remains on target to achieve full energy output this year.

Such projects mark a transition for the country’s renewable energy infrastructure sector, which has been going through a period of adjustment since the UK government pulled the plug on subsidies back in 2015.

In the past few years, the number of construction of onshore wind farms in the UK has dropped dramatically, prompting concerns the country could fall short of its targets to reduce carbon emissions to net zero by 2050.

However, more investors and lenders are now seeking out subsidy-free opportunities, says Dane Wilkins, head of renewable energy infrastructure at JLL.

“The era of zero subsidies we are now in provides new challenges for investors as they seek comfort around the quality, visibility and certainty of future cashflows and they’ve had to adapt. But momentum amongst both long term investors and lenders is now building again amid growing interest in the role of renewable energy in hitting net-zero carbon targets.”

Lenders get more comfortable
Evidence of increasing validity comes as banks start to back the sector’s developers.

UK Merchant Bank Close Brothers recently provided finance to developer Muirhall for its construction of the 46MW CrossDykes windfarm.

“Lenders are becoming increasingly comfortable financing non-subsidised schemes where revenues depend on a merchant view of power prices and the ability to contract on shorter-term agreements than in the past, when long term, utility-based contracts underpinned by subsidies were the market norm,” says Wilkins.

Not all comfort has been removed, however. In the UK, the government’s contract for difference (CfD) top-up mechanisms, underpin any loss of revenue from energy for 15 years. The latest round of CfD auctions saw the cost of wind hit a new low.

Technology increases appeal
As the post-subsidy era provides more answers to current questions around the financing of projects and rates of return, more investors are likely to explore opportunities in the sector, particularly as advancements in technology improve infrastructure says Dominic Szanto, Energy and Infrastructure director at JLL.

Over the next four years, institutional investment in renewable energy is expected to rise by 10 percent, according to a survey last year by Octopus Investments.

“We’ve seen great advancements in scale, particularly in the past decade where each offshore turbine now generates up to five times the energy than in 2010, amid the wider industrialisation of the sector.”

In the UK, around 35 percent of the country’s electricity comes from wind power.

While utilities companies are the main energy buyer, demand for renewable energy is also coming from corporates looking to power their own operations; beer giant InBev, recently signed a 10-year contract for electricity supply from German renewable energy developer BayWa.

The next decade may see more environmentally-conscious corporates get involved in the sector, says Wilkins. “But for investors, opportunities are limited as bidders far outnumber the amount of corporate PPA (power purchase agreement) openings.”

Indeed, for today’s investors, being part of the transition to a low-carbon economy may not be clear-cut but there’s no mistaking how the wider appetite for renewable energy is growing; the third quarter of 2019 marked the first time that renewable energy trumped fossil fuels in providing electricity to UK homes.

“The next, non-subsidy decade is really going to be shaped by the strategies of investors and corporates, as well as an increasingly empowered and climate-conscious end consumer,” says Szanto.

Click to read about how real estate is adapting to a growing focus on sustainability.

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Dane Wilkins

Head of Energy and Infrastructure at JLL.

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