Wind Power Project Returns—What Should Equity Investors Expect?

Abstract

The wind power market has reached a new stage of maturity as dozens of new renewable energy and infrastructure funds enter large and liquid capital markets to compete for investors against established asset classes. These funds typically acquire equity stakes in wind farms that are project financed using non-recourse debt at the project or portfolio level. However, both investors (buyers) and developers (sellers) of wind projects are currently searching for a benchmark project equity return around which to place their return expectations given the emergence of institutional investors as the dominant new class of buyers. The author judges the benchmark return for wind project equity to be 12%, in line with privately held infrastructure and PFI assets. However, he expects it to fall to 9%, in line with listed shipping, real estate, and regulated water companies. After management fees, this equates to an internal rate of return of 7% that is actually delivered to the ultimate investors. This may appear low, but it implies a required dividend yield of 9.5% for 20 years, given that wind farms have little residual value.