To meet net zero, the UK and Ireland will need more renewable technologies such as onshore wind, which will need to be built at scale. However, according to our latest insight paper, the development of renewable projects based on merchant finance, without direct support from subsidies, is unlikely to lead to mass capacity additions to the generation fleet, at least in the near future.
The insight paper features a survey of 258 individuals across the industry who attended our 'Financing net zero forum'. The survey gathered opinions on what type of merchant onshore wind projects are most likely to succeed and the implications for the developers who take them forward.
· Fully merchant projects are rarely considered viable.
· Investment premiums for the risk are prohibitive.
· Hurdle rates are unlikely to be met.
· Price volatility and cannibalisation cast long shadows.
· Part merchant projects are investable, but the supply of viable routes to market is not a given.
The survey found fully merchant projects are rarely considered viable, with only 7% of those surveyed saying they would invest in a fully merchant onshore project. Discussing the research, Daniel Atzori, Research Partner, said, "Currently, it is hard to see investors taking the leap of faith on merchant renewables when debt leverage is low, and expectations of price volatility and capture price cannibalisation are high. On top of this, the sheer volume of decisions in policy and regulation, and the scale of technological development that could unfold over the medium to long term, makes it difficult for investors to be confident in these types of projects."
49% of respondents felt price volatility is their biggest concern, shortly followed by price cannibalisation at 35% of respondents. This may come as little surprise to some, and is an issue that will continue as the amount of renewables increases. According to Daniel, these concerns may explain why so few fully merchant onshore wind financings have taken place in Great Britain and Ireland.
Our survey respondents considered utility PPAs the most available route to market option for onshore wind projects in the UK, with only 20% selecting CPPAs. However, the route to market selection is typically driven by views on "bankability" and needs to be with credit-worthy counterparties.
Based on Cornwall Insight's survey findings, the merchant financing route is anything but a sure thing. Any government hoping to see lots of merchant projects developed through private capital are likely to be disappointed. "It will be vital that auctions are calibrated to buy as much of the target capacity as possible", explained Daniel.