Fully merchant onshore wind is unviable to most investors and will not lead to mass capacity, according to a report by Cornwall Insight.
Merchant wind power is where electricity is generated from turbines that have been built on brownfield sites. The wind operators supply the green electricity produced to the landowners at reduced rates and are leased the land in return.
The caveat is that the installation and operation of the turbines is done solely by that company and therefore they take all the financial risk. Merchant power generation deals differ from power purchase agreements (PPA) as there is no prior commitment of output and they are normally structured as short-term generation deals.
The new report surveyed the thoughts of 258 industry leaders on what type of merchant onshore wind projects are most likely to succeed, with only 7% considering a fully merchant onshore wind project financially viable.
The report revealed this to be the consensus due to the fact debt leverage (borrowed funds to generate returns from the investment), is likely to be very low for fully merchant projects, with some banks not lending at all as prices continue to fluctuate. The report claims this means rates of return are unlikely to be met.
The surveyed respondents’ biggest concern was general price volatility, with 49% stating this would be a significant issue.
Daniel Atzori, Research Partner at Cornwall Insight, commented: “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 taken place in Great Britain and Ireland and in reality, may struggle to ever really take off at all.
“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 Great Britain 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.”