Friday Letter Prevailing winds

The number of private equity investments in wind farms recently has been head-spinning. This blow-out deal activity has been generated by a perfect storm of global energy demand, government incentives and improving technology. 

Do you own land that is far too windy for human habitation? You’re in luck – sky-high energy prices and new technologies can make you a wind farmer, and an increasing line-up of private equity firms want to buy your farm.

Each passing week seems to bring news of a private equity firm investing in a wind farm property.

This week Platina Finance, a private equity specialist in renewable energy investments, announced a €24.6 million refinancing of its investment in the UK’s Burton Wold, a 20 megawatt, ten turbine wind farm. It has also closed a €9.4 million financing of Winscales Moor, a seven turbine wind farm currently under construction. The previous week, The Blackstone Group announced it is partnering with German energy company Windland Energieerzeugungs for a €1 billion project to construct an 80 turbine wind farm off the northern coast of Germany. A week earlier, Bahrain-based investment firm Arcapita formed a joint venture with India’s Tanti Group to invest $2 billion in Chinese wind farms. And a few months earlier, HgCapital acquired a 75 percent stake in Swedish onshore wind farm Havsnas in a deal valued at €185 million.

The uptick in deal announcements follows recent news of exits. For instance, last month DLJ spin-out Diamond Capital announced it has sold its 100 percent holding in Catamount Energy, a 300-megawatt wind farm in Texas, after purchasing the company for $76 million in 2005.

So why all the wind farm activity? Part of the answer should be fairly obvious. Oil prices are sky-high and not expected to fall significantly anytime soon, generating an intense need for alternative energy solutions. Realizing this need, governments are offering incentives for investment in such solutions, sweetening the pot for investors who think there is money to be made in the area.

In the US, wind power receives a tax credit for each kilowatt-hour produced, and many American states also provide incentives such as exemption from property tax, mandated purchases and additional markets for green credits. Countries like Canada and Germany also provide tax credits and minimum price purchases for wind turbine construction, as well as assured grid access.

But the other factor that is perhaps not as obvious is the big leap forward made recently in wind farm technology that has made these wind-swept properties for the first time capable of generating significant revenue, allowing turbines to generate more power by giving them greater capacity. According to the Global Wind Energy Council, 2007 saw an increase of installed capacity of 20 GW, taking the total installed wind energy capacity to 94 GW, up from 74 GW in 2006. At the same time, the annual market for wind continued to increase at an estimated rate of 31 percent, following 32 percent growth in 2006. In 2007 the total value of new generating equipment installed reached $36 billion (€25 billion). All of this has made projects for the sector ambitious. According to a report by New Energy Finance, funds that invest in wind farms can expect to earn anywhere from between 9 percent and 15 percent on their money.

With biofuels now coming under fire for their contribution to the global food shortage, it seems likely even more attention will be paid to wind and solar power. For investors accustomed to investing in land used for industrial purposes, the wind seems to be blowing in the right direction for these types of assets.