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Solid wind returns for pension funds in new markets – but not for long

Pension funds are seeing offshore wind project investments generate smaller returns than was the case just two-three years ago. However, attractive returns can still be made if investors are willing to take the risk of being among the first to enter the offshore wind markets in the US and Taiwan. Danish pension fund PKA is already evaluating specific projects in the new markets.

Photo: Windpark Noordostpolder

Pension funds can make solid returns if they are willing to take on ventures in offshore wind.

While the market for offshore wind farms in the North Sea has become so competitive that the returns for investors have shrunk significantly, new markets such as the US and Taiwan are poised to bulk up returns.

Several pension funds have turned their backs on offshore wind projects as falling returns are no longer deemed attractive. The lower returns are a result of factors including developers of the offshore wind farms, such as Dong Energy, having been joined by new players on the market, and competition has thus intensified. As such, the developers must accept smaller payments to build and operate the offshore wind farms.

For this reason, many developers have started looking towards the US East Coast and the Chinese east coast near Taiwan, where conditions are similar to those which make the North Sea the epicenter of offshore wind farms with low water depths and a lot of wind.

Competition is not as tough in the new geographic regions yet, and politicians are more willing to pay higher amounts to construct the offshore wind farms, explains Morten Imsgard, senior analyst at Sydbank.

"A lot of Dong's success actually comes from being a first mover in the UK, for example, where not many parties were interested in erecting offshore wind farms. They are benefiting from this now. I have a feeling that they hope to repeat this success in other regions. If they are among the first to enter Taiwan, they can generate greater returns as payment for the risk which it entails starting up an industry in a new market," he tells FWAM.

Imsgard explains that the same thing applies to the US, but that the returns also must be viewed in light of the fact that there is higher risk involved in entering projects in new markets. This is also because the vast majority of component manufacturing for offshore wind turbines takes place in Europe.

PKA evaluating specific projects outside of Europe

Danish pension fund PKA, which already co-owns four offshore wind farms – two in the North Sea, one off the west coast of the UK, and one in Denmark – is looking with great interest at new markets for offshore wind turbines.

"We have some other investments in the pipeline that we're looking at and we still think that we can defend investing in this and the risk will pay off. But I think it should be noted that it will be increasingly difficult to find this in Europe, so maybe we'll start looking in the US and similar places, says Michael Nellemann Pedersen, Chief Investment Officer at PKA.

So you find the new markets for offshore wind turbines in the US and Asia interesting?

"Yes they are. We have 15 people handling our investments in alternatives. They have different projects in the pipeline that they're negotiating and they're assessing how to reach agreement on certain final projects. We are looking at some projects outside of Europe. The US and Asia are interesting," he says.

Focus and expertise in other areas

Danish pension fund Industriens Pension has invested a total of DKK 1.6 billion (USD 227 million) in two German offshore wind farms in the North Sea. However, the pension fund does not find the type of returns offered on new projects that attractive, and there are no plans at the moment to invest in US or Asian offshore wind turbines at the pension fund.

"We are following the development, but it's not currently something we are looking that much into," says Jan Østergaard, head of unlisted assets at Industriens Pension.

Pension fund Sampension has not been pleased with the projected returns in relation to the risk and thus not made any direct investments in offshore wind turbines. Chief Investment Officer Henrik Olejasz Larsen expects that the new markets may cause the returns to rise.

"But these are probably not projects we will directly enter. However, we are involved in a few infrastructure funds where we might get some indirect exposure of this type," he says.

Denmark's largest pension fund, ATP, likewise has no direct investments in offshore wind farms but is a shareholder in companies such as Dong Energy and Vestas Wind Systems. Chief Executive Christian Hyldahl is not ready to jump into US nor Asian wind turbine projects right now.

When asked about direct investments in offshore wind projects, Christian Hyldahl recently said:

"I won't rule anything out. We can do anything where we find it to be a good investment and where we have some experience as well. But we have maintained focus and kept our expertise on other areas."

"We like renewable energy in many ways and we have to see where we believe the most in the returns. There is no doubt that this is an area in rapid expansion. But there are various political risks when investing in this type of assets. Subsidies can disappear, and so on. You have to take that into account," Hyldahl added.

At Danish pension fund PFA, DKK 40 billion were allocated last year for investments in alternatives and this sum must be spent by the end of 2018. However, PFA declines to be interviewed about investments in offshore wind projects.

Big returns only temporary

Across the board, the Danish pension funds have a lukewarm approach to the prospect of investing in offshore wind projects in new markets. But the pension funds will have to be quick to the draw, if they want to generate big returns on investments in US or Asian offshore wind projects.

"As soon as the markets mature a little, and the politicians in the respective markets realize that there is too wide of a price range between local farms and what is happening in Europe, then pressure will mount for costs to be reduced. Furthermore it will attract an increasing number of companies trying to compete," Imsgard from Sydbank notes.

And there is already some competition over the projects, which is pushing down prices.

"It's not like Dong will travel to the US or to Taiwan all alone. There are already other companies looking into these areas. But it still might be easier for Dong to make a difference there with the expertise at the company, in relation to how hard things have gotten in Europe," Imsgard adds.

English Edit: Gretchen Deverell Pedersen

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