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Renewable merchant finance unlikely to lead to mass capacity additions

Merchant finance for renewables projects is unlikely to lead to mass capacity additions to the generation fleet, according to the latest insight paper from Cornwall Insight – Merchant renewables still face challenges.

To gauge the market’s temperature, Cornwall Insight surveyed 258 individuals across the industry on what type of merchant onshore wind projects are most likely to succeed and what the implications might be for the developers who take them forward.

Survey findings

  • Fully merchant projects are rarely considered viable. For example, fully merchant onshore wind projects are generally not considered financially viable, with only 7% saying they would invest.
  • Investment premiums for the risk are prohibitive.
  • Hurdle rates are unlikely to be met.
  • Price volatility and cannibalisation cast long shadows. Price volatility (49% of respondents) and cannibalisation (35% of respondents) concern investors the most.

Daniel Atzori Research Partner at Cornwall Insight, 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 is 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.

“These factors create more uncertainty today about long-term power prices than ever before. This may explain why so few fully merchant onshore wind financings have actually taken place in Great Britain and Ireland, and in reality, may struggle to ever really take off at all.

“Based on Cornwall Insight’s survey findings, the “merchant” financing route is anything but a slam dunk. In fact, merchant projects or even part merchant are unlikely at this stage to lead to mass capacity additions to the generation fleet.

“Governments hoping to see lots of “merchant” projects be developed through private capital are likely to be disappointed.  If, as the consensus analysis shows in both GB and Ireland that technologies like onshore wind will be required at scale to meet decarbonisation targets, then it will be vital that auctions are calibrated to buy as much of the target capacity as possible.”

About the Cornwall Insight Group

Cornwall Insight is the pre-eminent provider of research, analysis, consulting and training to businesses and stakeholders engaged in the Australian, Great British and Irish energy markets. To support our customers, we leverage a powerful combination of analytical capability, a detailed appreciation of regulation codes and policy frameworks, and a practical understanding of how markets function.

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