In the wake of the Tokyo Olympics last year, we wrote about how the energy transition – particularly the challenge of rejuvenating maturing renewable energy projects – is much like a relay race.
Smaller, pioneering investors in Germany and other markets ran a fine first leg, bringing the early wind farms to fruition. However, with those projects now reaching the end of their regulatory lives, and the market fragmented and in need of consolidation, now it’s time for us to pass the baton for Europe’s aging wind infrastructure.
Taking part in the next leg of this energy transition relay are larger institutional and infrastructure investors. These players will drive economies of scale and provide the impetus needed to give new life to older assets before they go offline and deplete the grid of vital renewable energy capacity.
NeXtWind’s mission is to empower these investors as they enter a complex and highly competitive new market environment.
Since our launch in January 2021, we’ve successfully deployed the majority of our US $100 million launch fund into repowering and lifetime extension projects. We’ve negotiated strategic partnerships and secured our first Power Purchase Agreements (PPAs). And, as we build Europe’s next major green independent power producer (IPP), we’ve pioneered proven mechanisms for managing the technical, development and market risk associated with rejuvenating older assets.
We’ve certainly been quick out of the blocks, but the pace is building rapidly. As we enter 2022, two major trends are putting a spotlight on Europe’s repowering and lifetime extension opportunity:
1. Volatility in the energy markets is increasing
In recent months, we have all witnessed the dramatic impact electricity, gas and oil price rises have had on the European energy markets. The energy crunch is set to linger with record high prices hit in late 2021 in Germany and France, and ongoing price increases forecast for the next 12 months and beyond.
Despite this recent price shock, the EU has ruled that market mechanisms should not be suspended, so we can expect significant price fluctuations to continue.
One outcome of this volatility is a spike in demand for long-term renewable energy supply contracts, as rising prices for fossil fuel production increase the cost competitiveness of renewables.
As energy buyers seek long-term price security – and to hit ‘net zero’ goals – the market for Corporate Power Purchase Agreements (CPPAs) is undergoing significant growth and evolution. BASF’s 25-year, 20TWh PPA with Engie is just one example that illustrates the level of industrial and corporate demand for renewable energy – which is already considerably outstripping supply.
Faced with this supply and demand imbalance, the prospect of unlocking the untapped potential that lies within Europe’s aging renewable assets is becoming increasingly appealing to renewable energy buyers and investors alike.
2. The political and regulatory landscape is changing
Urgency around renewable energy procurement has of course been added to by COP26, where coal and other fossil fuels have been declared obsolete and stricter targets have been set for both emissions reduction and renewable energy expansion.
On a regional level, rapidly increasing renewable energy capacity is a core commitment of Germany’s new government. The SPD, Green and FDP coalition has set out a 2030 target to phase out coal entirely, reduce Germany’s emissions by 65%, and hit an 80% share for renewables in total electricity consumption.
Critically, 2% of Germany’s land area is set to be designated for wind power, while permissions for wind farm development – acknowledged to be in the public interest – are to be simplified and accelerated. Repowering has been identified as an essential part of Germany’s plans to grow its wind power capacity, and we expect further positive moves by regulators to accommodate essential rejuvenation projects.
This, of course, creates strong tailwinds for NeXtWind as we seek further expansion within and outside our home market of Germany. But, of course, it also stimulates competition – and added pressure to demonstrate exactly why we are best placed to take advantage of opportunities for our investors in what remains a highly complex market for repowering and lifetime extension.
So, considering all of this, what will it take to emerge as a winner in the next leg of Europe’s energy transition relay?
The immediate prize at stake is a substantial share of what we estimate to be a 10GW available market of European wind farms commissioned between 2000 and 2005. Within this asset base, we see a rough 70:30 split between prime sites for lifetime extension, and those where repowering is a viable option.
Repowering sites – where the route to a permit is clear – come with a significantly higher cost of acquisition and bring far greater technical and commercial complexity, but of course represent an opportunity for a greater long-term return on investment.
Sites suitable for lifetime extension are more numerous and come at a lower cost. These projects are generally more straightforward, but still require a great deal of expertise managing the complex variables of PPA pricing, maintenance costs and financing to ensure that they are profitable in a post-subsidy environment.
In both cases, the ability to effectively manage technical and commercial risks in tandem – and to create proven mechanisms for doing so in this very different phase of the energy transition – is critical to bringing these projects through development into long-term operation and maintaining a competitive advantage. This has been a fundamental principle underpinning NeXtWind’s asset acquisition and development strategy over the past 12 months.
Achieving scale is an essential part of this too. While our efforts are focused on one very specific segment of the market, we cannot ignore that we are part of a much bigger ‘race to scale’ across an increasingly crowded renewables market.
At NeXtWind, we are embracing this competitive environment as a sign that the market is poised to make significant headway in bringing new life to aging renewable energy assets. We will reveal more about our five-year strategic plan to grow into Europe’s next major green IPP in due course.
In the meantime, we are confident that our market access and network, our fast and flexible approach towards sellers, and above all, the proven mechanisms we are pioneering for managing risks and bringing rejuvenation projects to fruition, will continue to set NeXtWind apart.
Working together with established investors that share our commitment to sustainability, our strategic supply chain partners, and local communities, we are already making significant progress in this next highly competitive leg of the energy transition relay. Ultimately, if we can take advantage of this momentum to upgrade and keep Europe’s best renewable energy sites running, we will all be winners.