“It’s not what you buy, it’s what you pay that determines a good investment”
- niallthorburn
- 23 hours ago
- 7 min read
“It’s not what you buy, it’s what you pay that determines a good investment”
So says Howard Marks, author and founder of Oaktree Capital Management[1]
What does this mean for buyers and sellers of offshore wind (and infrastructure more generally)? Besides, how much is a wind farm worth and what determines a good price?
In, this first of two insight articles, Inside Edge explores the drivers behind buying and selling offshore wind. The first looks at historic prices and benchmarking. The second at the relationship between price and the transaction and negotiation process.
Compare the market
To judge what you should pay for an offshore wind farm, one can look first at what everyone else has paid. Loss aversion bias might be satisfied by not paying substantially more, nor selling for substantially less than someone else has previously. There is safety in numbers.
Chart 1: GBPm/MW paid for UK Offshore Wind Farm investments 2021-2026*
*Publicly announced prices only, headline figures so not adjusted for inflation and converted where appropriate to GBP.
The devil is in the detail
The problem with such comparison is how and what do you compare? Firstly, there is not much publicly available detail for offshore wind sales and acquisitions other than the odd headline figure reported in the press (see table below).
Through clever excel work it may be possible to normalise the headline figures to account for different variables such as wind yield, power prices, scale, design factors (nearshore / far shore), OFTO sale and recovery (UK only), standalone versus synergistic O&M, debt terms, and leverage and design.
However, that is already a lot of variables to normalise. It gets even harder when factoring in deal structures. For instance, the underlying risk allocation (and corresponding risk premiums) and financial engineering buried within each transaction will have a material influence on the headline figures announced.
Unfortunately, announced transaction values make little sense without the underlying context to each transaction, particularly the risk allocation and the present value of that risk. Without an inside view into these terms of the transaction (which are restricted), it is hard to meaningfully compare what different investors have paid historically and why.
To illustrate the point, in March 2024, RWE bought Norfolk Vanguard East, Vanguard West and Norfolk Boreas (4200 MW pre-FID) outright from Vattenfall for an announced GBP 963m[1]. Just this month, KKR announced its purchase of 50% of Norfolk Vanguard East, Vanguard West (2800MW combined) for c. GBP 1340m[2]. These are still pre-FID but no doubt, these two wind farms will have significantly advanced in pre-FID development and, of course, have secured a crucial route to market with the recent win in AR7.
So, the figures of GBP 1340m versus GBP 963m are interesting but don’t really tell us that much without detailed appreciation for the risk picture within each wind farm and each transaction.
Secondary market sales
Over time, it will be helpful to track the evolution of prices paid for wind farms that are already operational in the secondary market. Comparison should be easier with fewer risk variables. Maybe even an indicative benchmark could emerge with levers for track performance, maturity/ amortisation and changes in lending rates. That said, to date, there are very few secondary transactions with publicly available values. For example:
1. In 2016, Orsted sold 50% of Burbo Extension (258MW) for GBP 660m to PKA and Kirkbi and in 2021 Greencoat bought 25% for GBP 400m in 2021.
2. In 2016, Orsted sold 50% of Race Bank (573MW) for GBP 1600m to Macquarie[3] before Norges Bank Investment Management acquired 37.5% for an equity value of GBP330m[4]
Once again, such figures require significant context. The primary purchases of Burbo Extension and Race Bank took place both construction and therefore recovery of the OFTO transmission construction costs. Furthermore, the Race Bank headline figure specifically excludes the debt element of the transaction which suggested an overall value for the deal of c. GBP 1000m rather than GBP 330m.
These are fundamental pieces of context. Perhaps in offshore wind, there is simply too much variability behind the headlines to permit the emergence of benchmark pricing.
Table 1: Publicly announced prices for Offshore Wind transactions in the UK
What this means for buyers
1. With no reference benchmark buyers can neither short-cut or bypass performing their own detailed due diligence and bottom-up valuation. Bearing in mind the difficulties some experienced operators have reported quantifying and valuing certain risk,[1] this is not an easy task. You need a decent valuation methodology backed by a process you can trust.
2. Understanding the risk picture (together with any hidden risk traps) is just one hurdle. Once they have identified the value traps, inconsistencies and ambiguities in the sales case, buyers need to determine the actual value at risk for each compared to the sales case. Note that some risks in the industry have no precedent method as to how to quantify them. Buyers may have to find (or invent) one themselves.
3. Buyers then have a tactical decision to make. Whether to deal with each quantified risk either via (a) valuation adjustment (which is simpler) or via (b) contractual adjustment via negotiation. This negotiation may have the advantage of preserving headline value for the seller but takes a lot of skill to persuade a naturally opposed seller over a sustained transaction period within a potentially competitive bid process.
To future proof their investment price, buyers must not only consider today’s valuation but also anticipate how asset value might change over time. For instance, prior to and during construction, attention will inevitably focus on the enormous up-front cost to build, and rightly so. Yet, wind farms operate for a long time. Pressure points, interests and risks between co-owners will inevitably evolve over that time. As exhausting as the acquisition process may be, it is worthwhile also focusing on anticipatory due diligence that considers a range of future operational and JV scenarios. Buyers can assess a range of scenarios to consider how value might be gained or lost during the operational phase and how this impacts price.
Note, that a wind farm developer / owner who has sold previously, will likely have greater comparable insight into pricing through their lived experience. Whatsmore, the party that prepares the transaction documentation has home advantage. For this reason, buyers might consider pricing not just what the contracts say but crucially, also, what they don’t say.
6. In this regard, buyers are vulnerable from redlining habits. Most people will start by comparing new transaction documents to what has been previously agreed. A useful exercise, this immediately flags what has changed on previously accepted positions for consideration. A redline doesn’t show all the new terms that should be there to reflect changes or new risks since last time in the (i) JV set up, (ii) power market, (iii) underlying legislation, (iv) environment, (v) technology, (vi) wind farm design, (vii) delivery model or (viii) commercial proposal. Nor to create an optimal, efficient way of working for the JV. This is where buyer can become exposed. They and their advisors have to find all these blind spots before signing the deal.
7. The pressure to avoid over-paying is not just about loss aversion. If the plan is ever to farm-down or exit in the future, better diligence today will avoid value erosion at the hands of future investors. Once again, this plays into the tactical approach as to whether each risk is best priced or addressed contractually.
8. It is important to not become too risk averse. Anyone can conclude there is too much risk. This ignores the industry’s superb track record in finding novel solutions to seemingly impossible problems. Having the right intelligence at the right time to identify the hidden value and then quantify it makes a difference.
What this means for sellers
1. A growing number of increasingly capable buyers have developed their capability in pricing offshore wind farms. The increasing number of wind farms available to invest in through the different stages of the life cycle (development, construction, operations) also means buyers have more choice in their investments.
2. There is greater pressure on sellers to prepare a compelling story as to why the wind farm justifies a high GBP/EUR/TWD/USD/PLN per mw price tag when compared to previous transactions that investors have either participated in or are familiar with.
3. To secure best possible price, the overall presentation needs to be coherent. The commercial value proposition presented needs to match the actual risk allocation evident in the proposed JV structure and transaction contracts. This is particularly true for decision making, governance and conflict resolution.
4. As tempting as it may be to trivialise certain risks, investors have become better at identifying and valuing risks. A well-informed due diligence team should be able to identify gaps or ambiguities in claimed risk protection, and the investors exploit these weaknesses to gain initiative in the negotiations. An investor can be expected to pay more for a clear scope matched by confidence in how resilient that joint venture will be in dealing with unexpected future events.
5. Sellers can claim bonus points for clear valuation levers that are targeted to the overall goals of their investors (for instance, mechanisms that protect lender exposure to volatility of cash flows or mechanisms that support equity investors extracting their investment depending on whether they intend to be a long-term or shorter-term investor).
In conclusion, pricing an offshore wind farm can be fiercely complex. This makes it hard to benchmark what is a good and bad price. This suggests there is a wide range of possible outcomes in any pricing process which presents good opportunity to enhance value for both seller and buyer through their conduct of the transaction process itself.
There is much more to say about negotiation, tactics and psychology and their bearing on price. More on this in the next article.
[1] https://www.linkedin.com/posts/barrons_its-not-what-you-buy-its-what-you-pay-activity-7260747362925522944-_dfp/
[2] https://www.linkedin.com/posts/barrons_its-not-what-you-buy-its-what-you-pay-activity-7260747362925522944-_dfp/ttps://www.linkedin.com/feed/update/urn:li:activity:7178753665439076354/
[4] Macquarie Capital and Macquarie European Infrastructure Fund 5 consortium
[6] See turbine manufacturers annual reports 2021-2023 and various impairments in the last few years from operator-owners. Numerous reference links available on request.
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