EDP and Engie have joined forces to invest in offshore wind energy, a market that will experience strong growth. The joint venture will allow the necessary scale to attack new projects.
The joint venture for offshore wind energy announced months ago, is closed. EDP and Engie “married” the wind energy business, but with turbines “planted” in the sea, taking 50% each. It is a business in equal parts, commanded by the Portuguese. In an interview with ECO to be published in full next Monday, January 27th, António Mexia explains that only with this partnership will it be possible to gain scale in these offshore renewables, a segment in which he hopes to reach “at least the world top 5”.
EDP, through EDP Renováveis, of which it controls 82.5% of the capital, and Engie will combine offshore wind assets and projects under development in the new entity, starting with a total of 1.5 gigawatts (GW) under construction and 3.7 GW under development. It’s “a natural partnership because many of the projects we had were already together,” says the electric company’s CEO. And it’s a necessary partnership, given the size of the offshore projects.
“Neither solar nor onshore, I need” partnerships. “For offshore we need something we don’t need for the rest [which is the scale]. I don’t need for the rest. The rest I’m already the leader,” throws Mexia.
It’s a strong bet, believing in a high return, and the goal is to be, in time, among the top five in this business. “Offshore may even carry more weight [in EDP’s growth] than onshore, in terms of future growth,” he says.
What is this partnership with Engie?
It is a partnership exclusively for offshore, which is very important in this global vision that we have for the delivery of our commitments in the renewable area. We have already met 77% of our targets by 2022. In March we were around 40% and few, so I would say that these last nine months have been nine extraordinary months in what is EDP’s delivery capacity. With strong growth in the USA, but also in Colombia, Brazil and Greece. Multi-geographic, multi-continent and also multi-technology growth: onshore, but also solar. Solar will play a leading role in our growth in the USA.
The question of renewables is this: we have always been big onshore. We have confirmed that we have this capacity for development and growth in the solar. Capacity for development and growth, which is important. Develop and not…
Are we talking about Galp, which just bought a solar energy company in Spain for 450 million?
No… Just development and growth… And it was very important an area that we believe will be absolutely critical that is offshore. Why is that? Environmental issues, difficulty in finding onshore sites, but also for what has been its learning curve, brutal. We had the English case where four years ago we were faced with three-digit [price] numbers. Then they fell from one hundred and so to 70 and at the last auction, they were below 40 pounds. This shows – obviously there is the interest rate context – what competitiveness is, the learning curve offshore that I think was very significant.
Can offshore carry as much weight as onshore?
Yes. Offshore can even carry more weight than onshore in future growth. Some countries may have only that. For example, in Japan. There will be several countries that, for obvious reasons, will have enormous difficulties in doing [wind energy production] onshore. And often offshore, like the US, has an advantage over onshore which is that it is closer to the places of consumption. That’s what happened in the case of this big project we won in the US, 800 MW, in Massachusetts. Instead of bringing [the energy produced by] the wind from afar, I bring it up close with the offshore because what I save by the distance more than offsets the higher investment cost offshore.
On the suppliers’ side, there is a great concentration, which makes it necessary on the players’ side to be big. Big to be able to approach big projects. It has to be relevant. And we want to be at least top 5 in the world.
What is the difference between offshore and onshore in terms of investment?
Unlike onshore, but also solar, it is the scale of the projects. They are large-scale projects. We are never talking about 1 MW, nor 10 MW. They are large-scale projects. Always! If there’s the site, if there’s the connection capacity, we have the sea. Then, on the suppliers’ side, there is a great concentration, which makes it necessary on the players’ side to be big. Big to be able to approach big projects. It has to be relevant. And we want to be at least top 5 in the world.
With this new company…
Yes, in this new company [a joint-venture with Engie]. It’s a company that starts with 1.5 GW in construction and 3.7 GW in development. We’re talking about 5 GW, 5,000 MW. And together [with Engie], we’re going to approach new markets. It’s a partnership that gives us scale and it’s a natural partnership because many of the projects we had were already together.
But why Engie?
Because many of the projects we had were already together. We were already together in France. The teams were already working together. And there’s something else about this. We offshore, unlike the other projects, never want to, “at the end of the day”, consolidate [in the accounts]. With a partner, you can more easily have control without necessarily having to consolidate. The mode of operation, the scale, the power of negotiation and the mode of development are radically different from the rest of the renewable ones.
By size…
It’s much bigger. You can only [compete in this market] with a lot of financial capacity. Obviously, we like to develop and then sell a part [of the projects], but here [offshore], we have more firepower. The teams are going to be much bigger, we have more people, in more countries.
We are also going to address Japan, South Korea, that is, more difficult markets. So there is also risk diversification because we can go to more markets.
Engie gives scale in the USA. And the French gain access to this market where they were not present.
Of course. But we also gain access to markets where we were not like the offshores where they were already in Europe. And we go together to new markets. The idea is: for offshore we need something we don’t need for the rest [which is the scale]. I don’t need for the rest. The rest I am already the leader.
How will the new company lead?
We’ll have executive leadership. It’s only natural. We started this first. And the head office will be in Madrid, which means a lot [since EDP Renováveis is based in the Spanish capital]…
Today we have an EDP, an EDP Renewables and now an EDP Renewables offshore…
…as I have, in many dossiers, partners. In fact, this doesn’t change anything because I already had them. On a case-by-case basis, I was already looking for partners because of the size and the need to de-risking operations. In France, I was already with them [Engie], in England I had already looked for other partners, obviously because of the scale of the processes. Now, this joint venture gives me a little more speed…
But it’s not hard to manage partners like the Chinese, the French… How do investors look at these partnerships?
The market likes… just look at what’s been happening to EDP shares. In March, we told what we were coming to when the CTG takeover bid was still alive, and we committed ourselves to objectives. We have much more growth than was promised in renewables, we have more farm downs and better spreads than expected, and we have managed to give visibility to the process of the sale of assets in the Iberian Peninsula. In nine months, we delivered the main pillars that investors wanted to see delivered, in other words, growth, rebalancing of assets and here, in this operation, come the development of projects that will be more important even for the post-2022. We are laying the foundations for growth, which we considered exponential, offshore beyond this plan.
In nine months, we delivered the main pillars that investors wanted to see delivered, in other words, growth, rebalancing of assets and here, in this operation, come the development of projects that will be more important even for the post-2022.
In today’s world, partnerships are essential, and in everything, in fact. In other words, the change of business models, how one captures value is very different from the past and this whole revolution of decentralization, of a consumer-centred system, in which the digital component is fundamental – and goes from the management of park maintenance to the management of people, and important changes in storage, in electric mobility, in networks, all this requires different partners. The “do it yourself and do it out” model is over.
For example, how is the mobility business structured? The digital? We must have partnerships and open partnerships. Obviously, this is not an open market, it’s not a food court, but I have to understand what competences we have to have because the markets are completely different today. The world has changed.
The great advantage of EDP, which it has demonstrated in the past, is that it has anticipated renewables and that alone has enabled a company based in Lisbon to become a world leader. It helps that others are distracted, that we are not and that others are. It helps… Now everyone has a word in their mouth: renewables. But having a word on your lips costs nothing, the question is how you create value and what that implies.
Investors anticipate, with this agreement, that EDP is making a marriage with another partner, Engie. CGT, when it entered EDP’s capital, also announced a strategic partnership…
CTG is also our partner offshore, but also has offshore projects in Germany…
In today’s world, partnerships are essential, and in everything, in fact. In other words, the change of business models, how one captures value is very different from the past and this whole revolution of decentralization, of a consumer-centred system, in which the digital component is fundamental – and goes from the management of park maintenance to the management of people, and important changes in storage, in electric mobility, in networks, all this requires totally different partners. The “do it yourself and do it out” model is over.
For example, how is the mobility business structured? The digital? We must have partnerships and open partnerships. Obviously, this is not an open market, it’s not a food court, but I have to understand what competences we have to have because the markets are completely different today. The world has changed.
The great advantage of EDP, which it has demonstrated in the past, is that it has anticipated renewables and that alone has enabled a company based in Lisbon to become a world leader. It helps that others are distracted, that we are not and that others are. It helps… Now everyone has a word in their mouth: renewables. But having a word on your lips costs nothing, the question is how you create value and what that implies.
Investors anticipate, with this agreement, that EDP is making a marriage with another partner, Engie. CGT, when it entered EDP’s capital, also announced a strategic partnership…
CTG is also our partner offshore, but also has offshore projects in Germany…
So this new company can’t go to Germany?
That’s not our goal, we can always coordinate… What is clear is that these two companies achieve something that I could hardly achieve with others. I can coordinate efforts. As this partnership is restricted to offshore and as CTG has offshore parks in which we are not partners, this is managed naturally, knowing that when partners make partnerships it is because something is good, in this case for EDP.
The oil companies are betting on renewables, they have money. Could they be more interesting partners than Engie, because they would depend more on EDP and its competences?
Engie allows to have the upside of the partnership without having any problem of its management in the medium and long term, and not to have at my side a company with a market capitalization ten or twenty times higher than ours. Every time we make proposals for a project, we have to know how we will manage it, what levels of risk and return we want. It is good that, in these very large projects, we are with a partner who has the same philosophy.
And facing giants like BP and/or Shell… Is there “firepower”?
We’re running, that’s why we’ve gained scale. EDP was as big as it was and we became world leaders in renewables. It’s not enough to have “firepower”, you have to know how to do it. I do not doubt that our renewables team is recognised in the world as one of the best developers and can deliver what it promises. Even the victory in the US [in the Massachusetts project] shows how in a market where there were already other great players, we can be competitive, and this is something you can’t just throw money at projects. The complexity of today’s world helps those who can structure projects in the middle of this complexity. When things are put in a more obvious way, in plain sight, and only depend on who gives more or charges less, they are always more difficult. In the renewable business, leading companies are also able to structure things differently.