Corporate Interview: Greencoat Renewables
Paul O'Donnell
Paul O'Donnell

Greencoat Renewables Plc, owns and operates euro-denominated renewable infrastructure energy assets. The company is invested in twelve wind farms in Ireland, and is listed on the Euronext Growth Market of Euronext Dublin and the AIM market of the London Stock Exchange. Here we sit down with Paul O’Donnell, who together with Bertrand Gautier, manages Greencoat Renewables. He has over 15 years of investment experience, of which the last 10 have been focused solely on renewables. Paul has specialised in managing investments in the wind and solar generation sectors, working across development, operations, technology and financing.

Where did it all start for Greencoat Renewables?
Greencoat Capital is one of the largest investors in the resource efficiency and renewable energy market, with more than €4 billion under management. We invest across multiple strategies within this space including wind and solar infrastructure. Founded in 2009, we have built an experienced and stable team of what is now approaching 30 investment professionals.

In 2013, Greencoat Capital listed Greencoat UK Wind Plc (Greencoat UKW), a UK listed renewable infrastructure company, which was set up to take advantage of the need for utilities and developers to recycle capital and allow Greencoat UKW to provide a stable inflation linked dividend to shareholders. Today Greencoat UKW is a £2.2bn FTSE 250 UK company that has continually delivered both inflation protected dividends and net asset value growth to its shareholders.

In 2017, building on the success of Greencoat UKW, but also the desire for shareholders to have access to an equivalent Euro denominated vehicle, Greencoat Capital launched an Irish listed vehicle, Greencoat Renewables PLC (GRP). GRP’s mandate is to acquire operating renewable assets with a focus on investments in the Irish market, where the government provides a guaranteed inflation linked floor price for renewables.

I co-manage the GRP business with Bertrand Gautier, we have been with and grown Greencoat Capital’s business since its inception, almost 10 years ago. Prior to this we both had more than 10 years of experience in the renewables and wider infrastructure industry.

So what is the growth opportunity for renewables and wind energy?
Climate change is the defining challenge of this generation and Ireland needs to become a leader in responding to that challenge. Renewable energy will be crucial in meeting this ambition. The renewable energy sector has undergone transformation in Ireland over the past 5 years and now stands as a €8bn sector with almost 35% of Irish electricity coming from onshore wind.

At the same time Ireland is seeing substantial growth in electricity demand. Consumers are switching towards electric vehicles and heat pumps. The government has set a target of up to 1m electric vehicles by 2030.

In addition, Ireland is fast becoming a strategic location for data centres which have a substantial requirement for clean electricity. Some of the largest technology companies including Amazon, Facebook and Apple have all recently established datacentres in Ireland and overall electricity demand is scheduled to increase by up to 50% in the next 10 years.

The wind sector will be critical if we are to continue to decarbonise and achieve Ireland’s target of having 70% of our electricity come from renewable sources by 2030. Ireland has one of the best onshore and offshore wind resources in Europe. This provides an excellent opportunity for substantial renewable energy investments and growth in the Irish energy sector over the next 10 years.

Wind energy is also succeeding in pushing down the wholesale price of electricity as it removes older fossil fuels from the system. This should allow Ireland to remain very cost competitive in terms of electricity costs in future years.

Where do you see the future mix of electricity generation relative to what it looks like currently?
The transition to 70% renewable electricity will be made possible by a significant increase in onshore wind, offshore wind and solar PV. The government recently published their plan to see this being delivered and they estimate the need for at least 3.5GW of offshore wind, up to 8GW of onshore wind and a further 1.5GW of solar energy. This would require over €25bn of investment and so the scale of investment opportunity in Ireland is substantial.

Coinciding with this, removing fossil fuels from the grid will be essential in the coming years. There are plans to replace coal fired generation with low carbon and renewable technologies. Bord Na Mona are committed to transitioning away from peat by 2028 and an end to coal burning at ESB’s Moneypoint generation plant is scheduled to take place by 2025.

Do you believe market conditions and government support will remain positive in the short to medium term?
Absolutely. Since 2009 stable policy via the Irish REFIT (Renewable Energy Feed-in Tariff) support mechanism continues to be implemented. Under REFIT, wind energy projects have been paid a guaranteed amount of circa €80/MWH for up to 15 years once operational.

We now have a clear pathway for future government support via the new Renewable Energy Support Scheme (RESS) under which projects will be eligible to participate and apply in an auction format to secure a 15-year support contract.

Separately we expect the emergence of corporate power purchase agreements (PPAs) to continue to advance in Ireland with large corporates procuring clean electricity directly from wind farms. We have already seen corporates such as Amazon and Facebook enter into such arrangements and it is expected that the market opportunity will grow substantially in future years

What are the main risks to the business of wind farm ownership?
Wind energy assets in Ireland are designed to be low risk. The assets are guaranteed with an index linked price of €80/ MWh for up to 15 years of operation under REFIT. In terms of operating risk, typically the assets benefit from guaranteed availability for the first 15 years from the original engineering manufacturer (OEM), which minimises the risk around operation. Where the assets do not deliver planned output, the OEM is required to compensate the wind farm owner. Furthermore, the costs are typically index-linked long-term contracts and so there is a strong hedge between revenue and costs.

However, REFIT is underpinned by government legislation and so the windfarms are dependent on the Irish government to not change policy. Separately, once the REFIT period has ended, the wind farm typically will sell its power on the grid and a decline in the long power price forecast would have an adverse impact on future cashflows. There are also other asset specific risks including environmental, long term wind speed, inter year volatility of wind and asset life (how long the turbines will operate) that are important in terms of the short and long term cashflow projections. We set out a more detailed list of these factors every year in our annual report.

What are the implications of auctions in the future relative to the current situation?
We are expecting auctions to drive down the cost at which renewable energy projects will be remunerated under RESS with the implication being that the support price for future projects should be lower than the c. €80/MWh. This is driven by the fact that the construction costs for wind and solar have decreased significantly in recent years as well as turbine sizes increasing. Also, when developers are competing with each other to secure a RESS contract, they will be willing to accept a lower strike price. While this may decrease the margins for the turbine manufacturers and also decrease the development profits on the project, we do not expect the underlying returns that Greencoat Renewables would receive for investing into wind farms to change as we invest on an IRR basis. We do not expect the IRR on which underlying assets are sold to change (they have remained relatively consist in recent years). However, given that we would be receiving a reduced amount of cashflows from the windfarms due to the lower RESS pricing, we would therefore pay a lower price for future assets.

In terms of technology, we would expect onshore wind to remain the lowest cost renewable energy technology for the next number of years, followed by solar and then offshore wind. However, given the substantial cost decrease in offshore wind in recent years, it is expected offshore wind could be the lowest cost form of renewable energy within 3-5 years.

Finally then, who are your main investors and what has attracted them?
We have a mix of Irish, UK and European investors, made up of pension funds, private wealth managers and high net worth investors. As at end of June 2019, amongst our largest shareholders are Fidelity, M&G, Aberdeen Standard Life, Ballie Gifford and Irish Life. Separately, the Irish Strategic Infrastructure Fund (ISIF which is managed and controlled by the National Treasury Management Agency) is also a cornerstone investor since the IPO.

We believe investors are attracted to the stable dividend, the low risk nature of the investment coupled with the inflation element of the underlying assets, as well as the fact that returns are uncorrelated to the stock market.

Please note this article is for information purposes only. The views expressed are those of the author and not Cantor Fitzgerald Ireland Limited (“CFIL”). CFIL has not contributed to this article in any way. It is not intended to and does not constitute personal recommendations/investment advice.

To speak with a Portfolio Manager or Account Executive, please phone the Cantor Fitzgerald dealing desk on 01 633 3633.

Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up.