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(Bloomberg) — Set against the windswept backdrop of a plateau situated just south of the Arctic Circle in Sweden, Markbygden Ett emerged as a premier example of onshore wind energy development in Europe when it became operational at the close of the last decade. However, what was initially perceived as a secure investment quickly turned into a cautionary tale about the inherent risks of relying on fixed energy pricing and the unpredictable nature of weather patterns.
Since the launch of its 179 turbines, Markbygden Ett AB has incurred significant financial setbacks, leading to losses totaling hundreds of millions of euros and damage to its reputation. This predicament stemmed from a pivotal error in judgment: the company entered into a 19-year power purchase agreement (PPA) that was based on overly optimistic forecasts about the energy output of the wind farm. When wind conditions fell short or turbines were offline, Markbygden Ett found itself needing to procure electricity from the spot market, where prices fluctuate based on current availability.
The financial landscape worsened further following Russia’s invasion of Ukraine, which accelerated a surge in power prices that thrust the project into deeper monetary turmoil.
Markbygden Ett’s challenges are not isolated. Operators of at least two other prominent wind farms in Sweden have encountered serious issues due to similarly flawed PPAs, while solar energy projects in Chile have had to annul contracts due to volatility in energy markets. Analysts speculate that there may be additional undisclosed cases in Germany and the Nordic regions. Consequently, operators are seeking to renegotiate these long-term agreements to incorporate more flexible terms.
Power purchase agreements are intended to be mutually beneficial. For prominent industrial customers, such as Norwegian aluminum producer Norsk Hydro ASA — which secured a contract with Markbygden Ett — they provide stable access to electricity over extended periods. Wind farm operators also benefit, leveraging these contracts for financing while mitigating the unpredictable nature of the spot market. However, as noted by industry insiders, banks demanded an ambitious PPA as a prerequisite for funding Markbygden Ett.
The issue with these arrangements was that the wind farms were legally obligated to provide energy, regardless of actual wind conditions.
Initially, Markbygden appeared to be a promising venture. The project’s roots extend back decades when meteorology expert Hans Bergstrom, now a professor emeritus at Uppsala University, was tasked with identifying ideal sites for wind development. His discovery of the plateau revealed wind speeds significantly higher—up to 40% more—than in the adjacent river valleys, making it an exceptional choice for wind energy generation.
Bergstrom recounted, “It was a surprisingly large area. If one sought to establish a wind farm in northern Sweden without venturing into mountain territory, it was rather unique.”
However, bureaucratic hurdles delayed the project for years. In 2017, an €800 million agreement between Macquarie Group Ltd.’s GIG arm and GE Energy Financial Services marked the formal start of the Markbygden Ett project, anticipated to eventually supply around 8% of Sweden’s electricity needs. The following year, China’s CGN took over the wind park as part of its efforts to expand into Europe.
The PPA established between Markbygden Ett’s owners and Norsk Hydro was unparalleled at the time. Although specific financial details remain confidential, industry speculation estimated the price at an exceptionally low rate of approximately €25 per megawatt-hour, reflecting an era when energy market forecasts predicted low prices. The 19-year duration of the agreement was substantially longer than typical contracts, with a 2023 survey by BloombergNEF indicating an average PPA price for onshore wind in Sweden around €60 per megawatt-hour.
“We were all incredibly enthusiastic when the agreement was reached. It was innovative, pioneering work,” recalled Giles Dickson, CEO of WindEurope. This deal effectively doubled the contracted power volume under new corporate PPAs throughout Europe that year, according to statements from GIG.
Markbygden Ett commenced supplying the contracted electricity in 2021, but by the following year, the geopolitical landscape changed drastically with the onset of the Ukraine conflict, which drove electricity prices to unprecedented heights. In a typical scenario, this would benefit generators; however, Markbygden Ett was unable to consistently deliver the 1.65 terawatt-hours it had committed to annually. Consequently, the company found itself in a detrimental situation, needing to acquire electricity from the spot market to fulfill its commitments, as reflected in its 2022 financial report.
As energy prices soared, the financial strain from purchasing the necessary replacement power escalated. Losses surged from €24 million in 2021 to an alarming €175 million by 2023, as detailed in annual financial statements. A restructuring plan was enacted late last year, leading to the voluntary cancellation of the PPA.
As outlined in court documents, Norsk Hydro is owed €248 million, and by the end of 2023, Markbygden Ett’s liabilities to financial institutions amounted to €381.5 million. The ownership of the wind farm was shifted to a Dutch foundation as part of the restructuring process.
Other entities that entered comparable agreements have also faced difficulties. The nearby Aldermyrberget wind park encountered financial struggles after a PPA with Boliden AB necessitated purchasing extra energy from the open market. Further south, the Overturingen wind park has been under restructuring since August, incurring substantial losses after its own PPA with Hydro obligated it to buy supplementary power.
Cloud Snurran AB, the company managing Overturingen, reported in a 2023 review that the park has been producing up to 15% less power than anticipated. At the peak of the energy crisis in late 2022, Aldermyrberget faced challenges from low wind conditions and ice obstructing its turbines, with its management referring to the circumstances as “extraordinary weather conditions,” and characterizing their agreement as “extremely unfavorable.”
Neither the representatives from Overturingen nor Aldermyrberget provided comments for this article.
David Hargrave, a UK-based restructuring expert who became chairman and director in September, stated that the operating company for Markbygden Ett intends to sell the wind farm eventually. He indicated the possibility of entering into a new agreement, possibly a revised PPA, explaining, “In an ideal scenario, you want more stability in your revenue streams rather than depending solely on daily market prices.”
Despite these setbacks, PPAs will continue to play a critical role in the market. A report by the European Commission in September underlined their importance in enhancing European competitiveness by providing price certainty to major industrial players.
In light of the struggles faced by wind farm operators, Alexander Esser, head of Nordics at Aurora Energy Research, noted that many are now pursuing “more flexible offtake agreements that better mitigate volume and price risks.”
Customers are adjusting their strategies as well. Norsk Hydro secured three additional long-term PPAs during the fourth quarter of the last year, but acknowledged that the era of lengthy, large-scale agreements may be drawing to a close. The company now aims to establish a diversified portfolio of smaller contracts.
Matilda Afzelius, CEO for the Nordic region at Renewable Energy Systems Holdings Ltd., emphasized the need for smarter financing approaches within the industry for large-scale green projects. “We’re working with a dynamic natural resource,” she stated. “Naturally, unexpected challenges can surface.”
Despite the difficulties experienced by Markbygden Ett, the region retains its appeal for new investments. In 2023, Norway’s state-owned utility Statkraft AS acquired a new wind project in the area. In December, it signed a memorandum of understanding with iron ore giant LKAB to supply electricity from the prospective wind park, which, if developed, could be operational by 2029.
Jakob Norstrom, CEO of Statkraft in Sweden, praised the site’s potential but underscored the importance of careful consideration in drafting PPAs, cautioning, “Finding the right balance is crucial to ensure that promises don’t exceed feasibility.”
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finance.yahoo.com