Traders Study Brutal Lesson From Sweden’s Wind Farm Woes

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(Bloomberg) — Situated on a blustery plateau simply south of the Arctic Circle in Sweden, Markbygden Ett grew to become the crown jewel of Europe’s largest onshore wind growth when it went on-line late final decade. Regardless of a long-term contract assumed to be protected, it grew to become an costly lesson within the risks of making offers primarily based on the predictability of vitality costs — or the climate itself. 

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Within the years since the 179 generators began spinning, operator Markbygden Ett AB has racked up a whole bunch of thousands and thousands of euros in losses and suffered a heavy reputational blow. That traces again to a essential misstep: signing a 19-year contract often known as an influence buy settlement that included unrealistic expectations about how a lot electrical energy the farm would produce across the clock. When there wasn’t sufficient wind, or the generators had been offline, Markbygden Ett needed to make up the distinction by shopping for electrical energy on the spot market, the place hourly costs are dynamically decided by availability.

Russia’s invasion of Ukraine compounded the issue. That induced energy costs to soar, triggering the undertaking’s spiral into monetary misery. 

The state of affairs that Markbygden Ett discovered itself in isn’t distinctive. The operators of no less than two different massive Swedish wind parks have ended up in comparable positions because of disastrous energy buy agreements, and photo voltaic parks in Chile have been pressured to cancel contracts amid vitality market upheaval. Different instances in Germany and the Nordic nations haven’t been made public but, analysts say. In consequence, the phrases of those multi-year offers are getting extra versatile. 

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Energy buy agreements are imagined to be a win-win. Main industrial shoppers like Norwegian aluminum producer Norsk Hydro ASA, which signed the deal with Markbygden Ett, are assured years’ price of regular energy, and wind farm house owners in flip can leverage these contracts to safe financial institution funding and, in concept, keep away from the turbulence of the electrical energy spot market. Within the case of Markbygden Ett, analysts and trade sources say that banks required an bold PPA to supply funding.

The issue with these preparations was that, even when the wind didn’t blow, the parks had been nonetheless contractually obliged to offer vitality. 

Markbygden at first regarded like a protected wager. Plans for the undertaking got here into view many years in the past when Hans Bergstrom, now a professor emeritus in meteorology at Uppsala College, was employed by a wind developer to search out appropriate places. When he found the world the place Markbygden would later be constructed, he discovered that wind speeds on the plateau had been as much as 40% greater than within the surrounding river valleys. 

“It was a surprisingly massive space,” he recalled. “If you happen to wished to construct in northern Sweden, with out going into the mountain vary itself, it was a fairly distinctive place.”

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The undertaking suffered from years of delay resulting from pink tape. In 2017, Macquarie Group Ltd.’s GIG arm and GE Power Monetary Providers closed on the Markbygden Ett undertaking for €800 million. It could be the flagship undertaking within the Markbygden complicated of wind farms. It was anticipated to ultimately generate the equal of 8% of Sweden’s annual energy consumption. In 2018, China’s CGN took management of the wind park as a part of an enlargement into Europe. 

The PPA that Markbygden Ett’s house owners signed with Norsk Hydro blew all different PPAs out of the water. Whereas the precise industrial phrases are intently guarded secrets and techniques, trade sources pegged it at a really low degree, round €25 per megawatt-hour, reflecting market perception on the time that vitality costs would stay low. At 19 years, the contract was additionally for much longer than most on the time. By comparability, a 2023 BloombergNEF survey put the typical 10-15 yr PPA worth for onshore wind in Sweden at simply over €60 per megawatt-hour.

“We had been all very enthusiastic about it when it was agreed. It was groundbreaking, pioneering stuff,” recalled Giles Dickson, CEO of trade group WindEurope. The deal doubled the amount of energy contracted below new company PPAs in Europe that yr, in accordance with a GIG assertion on the time.

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Markbygden Ett began delivering the contracted energy in 2021. However solely a yr later, Russia invaded Ukraine, sending electrical energy costs to file ranges. That will usually be good for a generator, however since Markbygden Ett wasn’t in a position to ship on a relentless foundation the 1.65 terawatt-hours it had optimistically promised to provide yearly, it became a catastrophe. To satisfy its obligation, it had to purchase electrical energy on the spot market, in accordance with the agency’s 2022 annual accounting. 

As electrical energy costs skyrocketed, the substitute energy that Markbygden Ett wanted to purchase grew to become extra of a monetary burden. Losses ballooned from €24 million in 2021 to €175 million in 2023, in accordance with annual accounts. A restructuring plan was permitted late final yr, and the PPA was voluntarily canceled.

Hydro is due €248 million, in accordance with a courtroom doc. And as of the tip of 2023, liabilities to credit score establishments totaled €381.5 million. Final possession of Markbygden Ett was transferred to a Dutch basis as a part of the restructuring. 

Different companies that signed comparable offers have additionally suffered. The Aldermyrberget wind park, about an hour’s drive south from Markbygden, fell into monetary misery after a PPA with mining firm Boliden AB pressured it to purchase further electrical energy on the open market. Even additional south, the Overturingen wind park has been below restructuring since August. It too racked up enormous losses after a PPA with Hydro pressured it to begin shopping for substitute energy. 

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Cloud Snurran AB, which owns Overturingen, wrote in a 2023 report that the park was producing as a lot as 15% much less electrical energy than had been  anticipated. And on the peak of the vitality disaster in late 2022, Aldermyrberget struggled with low wind and ice on turbine blades, its proprietor stated in an annual report. Citing “extraordinary climate situations,” EB EEE LHI Vindkraftpark Aldermyrberget AB described its deal as “extraordinarily unfavorable.”

Representatives for the house owners of Overturingen and Aldermyrberget declined to remark for this text.

The working firm behind Markbygden Ett is planning to ultimately promote the wind farm, stated David Hargrave, a UK-based restructuring specialist who joined final September as chairman and director. He’ll take a look at coming into  a brand new deal “perhaps of a PPA nature” or comparable, he stated in an interview.  “In a great world you’ve acquired extra certainty in your revenues than simply being reliant on the day-to-day service provider costs,” Hargrave stated.

PPAs will however stay necessary. In September, the European Fee’s Draghi report highlighted their position in boosting European competitiveness by providing worth certainty to massive industrial gamers.

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Having seen wind parks wrestle, stated Alexander Esser, head of Nordics at Aurora Power Analysis, operators are embracing “extra versatile offtake agreements with extra safety towards quantity and worth dangers.” 

Clients are additionally altering their method. Whereas Hydro secured three new long-term PPAs within the fourth quarter, in accordance with its final annual report, it additionally acknowledged in an e-mail remark that the period of lengthy and enormous PPAs is “most likely over.” The corporate now plans to “work actively out there and construct a broad portfolio of smaller contracts.”

Matilda Afzelius, chief govt officer for the Nordic area at Renewable Power Methods Holdings Ltd., stated the trade must get smarter  on the subject of financing large inexperienced tasks. “We’re coping with a pure useful resource right here that’s all the time altering,” she stated. “In fact issues can occur and go fallacious.”

Even after Markbygden Ett’s failure, nevertheless, the geographic space hasn’t misplaced its attract. Norway’s state-owned utility Statkraft AS snapped up a brand new wind undertaking there as a part of a portfolio in 2023. In December, it signed a memorandum of understanding with iron ore large LKAB to promote energy from the deliberate park. If it goes forward, it may very well be prepared by 2029. 

The situation is great, stated Jakob Norstrom, CEO of Statkraft in Sweden. However when signing a PPA, he struck a word of warning: “It’s necessary to search out the precise steadiness so that you don’t promise an excessive amount of.”

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