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The art of adapting to a continually changing energy business environment

Last year was OX2 Wind’s most successful ever. Four wind power projects were sold to financial investors (totaling 426 MW) and by the end of the year seven wind farms (with a total installed capacity of 751 MW) were under construction in the Nordics. Paul Stormoen, Managing Director at OX2 Wind, tells us about the journey to becoming the leading onshore wind power developer in the Nordics.

I meet with Paul at OX2's head office in the old town of Stockholm. We sit down for coffee in the basement, an old bank vault, and I am told this is the place the company also uses for training in mindfulness. It is about being better at managing oneself and others, Paul explains. Clearly this is something Paul finds useful in developing his teams. In fact, he has just returned from a three-day company culture enhancing activity with the entire staff. “We usually take three days in the summer for a team-building event and three days in the winter for more direct work-related discussions about strategy, planning, financial position and so on,” says Paul.

OX2 is a growth success story. Since Paul joined ten years ago, the number of employees has grown from 15 to 150 and profit has doubled each year for the last three years. Even if OX2 Group has other growing businesses, for example bioenergy and vertical farming, OX2 Wind is the core business in the Group. However, the journey has been bumpy and the critical success factor has been the ability to adapt the business model to the changing business environment. But the foundation has always stayed the same – develop projects as if OX2 would own them in the end to make sure they have the best possible fundamentals. “We do not take shortcuts,” says Paul.

Tailored business models

Paul mentions four changes in the business context for onshore wind in Sweden that have had implications for OX2’s business model since he started:

1. Bank-financing for individual projects hasn’t been possible since the financial crisis in 2008

In 2009, the financing possibilities changed dramatically. At that time, OX2 had mainly been involved in small-scale development and the business model was set for a majority part debt and a small part equity through Proventus and FAM.

Without available bank loans, OX2 found themselves in a financing dilemma. An IPO process was initiated in order to secure sufficient funds to finance the portfolio. Paul looks back on that point in time and tries to explain why the IPO didn’t happen in the end. “It was bad timing,” he says. OX2 had banks on board for SEK 2.4 billion but the right issue round was not sufficiently oversubscribed (they targeted SEK 1.2 billion). It was mainly the institutional investors who were not ready to commit.

When OX2 missed out on the IPO their possibilities to own the farms themselves diminished. They did not have the financial strength to take the projects onto their balance sheet. The idea of turnkey wind farm sales began and that is still the business model they use. Some of their competitors (e.g. Arise and Eolus) are publicly owned and did some projects on the balance sheet but that has hit them hard financially later. The normal business model today for the wind power developers is to sell turnkey wind farms.

Not being on the stock exchange has contributed to greater flexibility and more room for action and risks, mentions Paul.

2. Tax regulation benefits for owners

For a few years during early-2010, companies could benefit from reduced energy tax if they produced and used their own electricity from wind. They could also receive benefits from maximising the depreciations. It created great interest and the demand enabled OX2 to focus focused on selling individual wind turbine generators (WTG) for a couple of years. Both private and public sector invested.

3. 100 per cent equity owners evolved

The turnkey wind farm sales began. It meant that OX2 could focus on what they are best at – thinking as an owner and never as a sales organisation. “To build cost-efficiently is in our DNA,” says Paul.

The project Korpfjället (21 MW) defines the business model of today. It was expensive to build and the banks were not interested at all. Through their sustainability efforts, they got to know IKEA. Naturally, this was a game-changer. IKEA was interested in owning the wind farm to source 100 per cent renewable electricity for its operations in Sweden. OX2 had to learn how to deal with professional advisors from Europe doing due-diligence. The fundamentals of the projects were there and the investors understood that it was feasible. This was the first of many investments to come for IKEA.

4. Corporate PPAs

Corporate PPAs (Power Purchase Agreements) have changed the Nordic wind power market once again and opened the field for low cost capital looking for stable long-term returns with limited risk. The ‘offtake’ is bought from a corporation for a fixed price over time. For OX2, this started in 2012 with Google and Allianz and a 90 MW project, the first European PPA.

At that time, the organisation had not adapted to the changing market conditions. There were still four people working with the ‘one-WTG’ business and only Paul with one colleague working with the turnkey wind farm sales. “Nowadays, no one works with ‘one-WTG’ sales. Instead we are a M&A team close to 15 individuals,” says Paul.

New markets

In 2013, OX2 realised the organisation was too small. Their own development portfolio had shrunk due to lack of management attention. The need to acquire new projects under development were obvious.

At the same time as starting to consider brownfield acquisitions (projects already consented but not built yet) OX2 also started to look into new markets. The first was Finland, which is now a profitable market. The decision to enter the Finnish market was not based on any long-term strategic direction but opportunity driven. Paul says this is a great capability, to be an early adopter and able to change direction fast. His main reason for entering Finland was as a hedge for currency volatility. The investments in Sweden were 80 per cent exposed to the euro, even if the final investment decision was taken in Swedish kronor. Sometimes investments have been stopped because of this.

In terms of mistakes and wrong bets, Paul says Poland has been their biggest. OX2 had a team in Warsaw and the market entry was based on logic, as Paul puts it. Then the Government changed and, even though OX2 had knew that could happen, they were not prepared for the consequences. The political will was not there, the Government increased taxes for wind and made it extremely difficult to develop the wind projects. OX2 had to close-down and no positive news about wind power in Poland has been published in the last four years. So even if the fundamentals are there, the political support is a must. Poland now faces the same challenge as Spain, says Paul: “As Spain, if you ruined the investment climate it takes another 10 years to come back.”

The future

When talking about the future, Paul is very interested in growing outside Sweden. OX2 is present in Germany and France, and both countries present political willingness through high ambitions for renewable growth. Auctions are probably the way forward in Germany and France but in Sweden and Finland you need to be able to show profitability without subsidies. Paul says that the business model for success in Germany and France is still up for grabs.

When talking about financing going forward, he says that Swedish capital is not available today. They lost pace as many investors made losses between 2008 and 2012. However, European capital is more than willing to step in and consider the investments as low risk and stable income. Paul emphasises that the income risk is much lower today compared to 2010-12 when one third of the revenues were expected to come from electricity certificates. Today it is much lower. OX2 are not actively seeking Swedish capital but hopefully the pension funds and banks will reconsider.

Currently, a long-term PPA is requested for the onshore projects in Sweden. Corporate PPA is the norm and they are usually fixed for 10 to 20 years. I ask Paul about what he thinks about blockchain companies bidding for a PPA. He says that this could be the case in the future but most probably the market would need new products to handle the counterparty risk.

Increased consumption

Paul does not like to say that wind power should replace nuclear production in Sweden. “Why can’t it be the case that we have 100 TWh more consumption in Sweden due to new electricity intensive industry?” Nothing says we need to stay constant on the historical consumption. He says that Google increases their need by 20-30 per cent each year.

Investment climate and new possibilities

We continue to discuss the investment climate and I ask him about what will happen when interest rates increase again. Paul thinks the market might change again and go back to more all-equity players. Electricity prices would most probably increase as well and the need for new energy production will remain. “Wind is by far the cheapest energy production source today and in the future,” says Paul. In terms of uncertainty, he raises the grid tariff. He is a bit worried about price increases and he thinks the regulated market should be controlled in a better way.

When I ask why OX2 has not developed any offshore wind he says that they looked at offshore for a long time. He says that it is probably possible today to reach profitability at par with the worst onshore sites. Although he still thinks the big volume of wind power will come from onshore.

Repowering today in Sweden is very limited due to the technology development (larger rotors and higher towers). It will be very few places where you can replace a 120m tip height with 260m. In Sweden today, we have about 3,500 WTGs producing around 17 TWh. If all these are replaced with the newest (largest) WTGs, they would yield over 50 TWh. The development has been sharp, resulting in a turbine that produces four times as much energy compared to a 20-year-old one.

Listening to Paul, it becomes obvious that OX2 has moved through the wind power landscape in an efficient way. Constantly being attentive to changes. Whatever the future will bring, one thing is for sure – Paul will continue to focus on solving short-term problems rather than worrying about long-term potential problems. An agile approach to wind power development.

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