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25 September 2013

Infrastructure Investor: Expert Commentary from Damian Darragh

Infrastructure Investor - October 2013
Why Onshore Investment Has Strong Tailwinds

The onshore wind and solar photovoltaic sectors present enormous opportunity according to Damian Darragh of Terra Firma, in conversation with Andy Thomson

“As a sector, onshore wind is largely mature, it’s well understood and it’s commercially proven,” says Damian Darragh, speaking at the offices of Terra Firma on London’s South Bank. All of which helps to explain why the firm is one of the biggest financial investors in onshore wind globally.

Darragh, a financial managing director who has been with Terra Firma for more than 18 years, points out that the firm has built or acquired 275 megawatts (MW) of onshore wind assets in the UK with a further 600MW under development. In the US, the equivalent figures are 512MW and 2 gigawatts.

In fact, over the past decade, Terra Firma has been at the forefront of renewable energy investment, completing 18 transactions with an aggregate enterprise value of nearly $3.2 billion. Today Terra Firma has a portfolio of about $5 billion of renewable energy assets including landfill gas, solar, hydropower and onshore wind.

Why such faith in the sector? For one thing, Darragh says that investors can take comfort from a “high confidence in the ability to predict cost and performance over a long-term period”.

According to Darragh, onshore wind has become increasingly cost competitive with fossil fuel alternatives.

“As the technology has matured, equipment costs have come down and the amount of subsidy has reduced, and this trend will continue,” says Darragh. “The great advantage of onshore wind is that it provides power at a predictable cost over the long run, whereas traditional alternatives depend on volatile commodity prices for coal and gas.”

On the production side, he says there was “some over-optimism in early forecasting methodologies five or six years ago, but now it’s much better understood”. Given what he describes as a “gold standard” service base from equipment suppliers, onshore wind is, he insists, a “very solid investment proposition”.

“With our scale, we have become more sophisticated about how to operate [in the space],” he adds. “The OEMs [original equipment manufacturers] are used to providing on-going services but a key operating aspect is how to manage that relationship with them – how do I get the best possible service?”

For example, he points out that in the UK, where there are higher power prices in the winter, when it’s windier, an investor will want any required maintenance to be done in the summer rather than the winter months. However, he adds, “this is not always reflected in the contracts”.

With the many advantages of onshore wind, an obvious question is why more investors are not piling into the market. The answer, according to Darragh, is that very few firms have the operational expertise, management capability or scale to invest in the larger opportunities.

Another area which looks good in Darragh’s eyes is the solar photovoltaic (PV) sector, which has “gained scale very quickly over the last three or four years”. He points out that, in Germany alone, there is some 30 GW of installed capacity and around 16 to 17GW in Italy.

“There is huge investment potential in solar,” says Darragh. “It can be more attractive than wind because it’s less intermittent and you can predict monthly output very accurately. Furthermore, it’s relatively easy to build and get planning consents.”

Other areas of interest for Darragh include the likes of hydropower and landfill gas, though there are fewer opportunities today to invest in each of these areas. In biomass, meanwhile, “the economics of the fuel supply are quite risky”; and, in geothermal, you are faced with “high development risk”.

Darragh will view each opportunity on its own merits – but, for the time being, onshore wind and solar PV are ahead of the rest of the renewable energy field and provide ample opportunities for investment.

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