The role of profit in the energy transition

Onshore wind projects need to become more profitable for Scotland to achieve its energy targets.

In the next 6 years, developers will need to invest around £13.5 billion to build the onshore wind projects required to meet Scotland’s onshore wind targets for 2030. This is equivalent to building 9 Queensferry Crossings.

The decision to invest in Scotland

Onshore wind developers, either private companies, state-backed enterprises or community based companies, need to make an active decision to invest in Scotland.

If you invested in a profitable project, this would allow you to reinvest the profits in even more projects that tackled climate change. You could also encourage others to invest with you, and therefore multiply the impact of your initial funds and maximise the impact you have on climate change. This is the basic objective of most purpose-driven renewable energy companies.

Profit enables purpose-driven companies to be sustainable, scalable and maximise their ability to fight climate change

Purpose-driven renewable energy companies will therefore look to develop projects that allow them to make a profit. Many of the onshore wind developers that are active in Scotland are also active in different countries in Europe. If the objective of these companies is to reduce global climate emissions by displacing fossil fuel generation, then it will not matter where the projects are developed. Therefore, when they are considering investing in the Scottish onshore wind sector they will be comparing Scottish projects to other development opportunities in places like Germany, Spain and Scandinavia.

The returns that a renewable energy developer can make on an onshore wind farm in the UK are currently lower than in other European countries. As a result, the level of investment in the onshore wind sector is lower in the UK, fewer projects get built and meeting domestic Net Zero targets becomes more challenging. Analysis by WindEurope found that in 2022, the UK ranked 10th for the level of investment it was able to attract in 2022.

To meet its targets for installed onshore wind capacity for 2030, Scotland will need to attract more investment than Germany did in 2022 for the next 6 years.

Clearing the Hurdle Rate

Onshore wind projects in Scotland need to become more attractive to meet our domestic climate goals.

For an onshore wind project to attract investment, it needs to generate a better return than alternative uses for the money. Why would a company build a Scottish onshore wind farm that generated a return of 5%, when it could achieve the same objective and generate a return of 7.75% from a European Green Bond?

The minimum level that a project needs to reach before the developer decides to progress with its construction is called the hurdle rate. This rate will vary between developers, depending on their attitude towards risk, the approach they take to financing projects and the types of investors that are likely to support the project.

Typically the hurdle rate for onshore wind developers in Scotland is between 6% and 8%

Approximately 40% of consented onshore wind projects in Scotland will not proceed because they will not meet the hurdle rate of the developer. Some of these projects will be redesigned in such a way that they become profitable, and resubmitted. While others will be abandoned. It is not possible to tell from the planning database which projects have been put on hold because they can not raise finance or where they are in the country. However, there are more turbines in Highland potentially in this position, in that they have planning permission but have not been constructed, than anywhere else in the UK.

If projects remain unable to raise finance this list of stranded turbines will grow. To clear this backlog, and start building at the rate needed to meet our targets, the financial viability of projects needs to improve.