Investors Learn Brutal Lesson From Sweden’s Wind Farm Woes

(Bloomberg) — Located on a blustery plateau just south of the Arctic Circle in Sweden, Markbygden Ett became the crown jewel of Europe’s largest onshore wind development when it went online late last decade. Despite a long-term contract assumed to be safe, it became an expensive lesson in the dangers of making deals based on the predictability of energy prices — or the weather itself.

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In the years since the 179 turbines started spinning, operator Markbygden Ett AB has racked up hundreds of millions of euros in losses and suffered a heavy reputational blow. That traces back to a critical misstep: signing a 19-year contract known as a power purchase agreement that included unrealistic expectations about how much electricity the farm would produce around the clock. When there wasn’t enough wind, or the turbines were offline, Markbygden Ett had to make up the difference by buying electricity on the spot market, where hourly prices are dynamically determined by availability.

Russia’s invasion of Ukraine compounded the problem. That caused power prices to soar, triggering the project’s spiral into financial distress.

The situation that Markbygden Ett found itself in isn’t unique. The operators of at least two other big Swedish wind parks have ended up in similar positions as a result of disastrous power purchase agreements, and solar parks in Chile have been forced to cancel contracts amid energy market upheaval. Other cases in Germany and the Nordic countries haven’t been made public yet, analysts say. As a result, the terms of these multi-year deals are getting more flexible.

Power purchase agreements are supposed to be a win-win. Major industrial consumers like Norwegian aluminum producer Norsk Hydro ASA, which signed the deal with Markbygden Ett, are guaranteed years’ worth of steady power, and wind farm owners in turn can leverage those contracts to secure bank funding and, in theory, avoid the turbulence of the electricity spot market. In the case of Markbygden Ett, analysts and industry sources say that banks required an ambitious PPA to offer funding.

The problem with these arrangements was that, even when the wind didn’t blow, the parks were still contractually obliged to provide energy.

Markbygden at first looked like a safe bet. Plans for the project came into view decades ago when Hans Bergstrom, now a professor emeritus in meteorology at Uppsala University, was hired by a wind developer to find suitable locations. When he discovered the area where Markbygden would later be built, he found that wind speeds on the plateau were up to 40% higher than in the surrounding river valleys.

“It was a surprisingly large area,” he recalled. “If you wanted to build in northern Sweden, without going into the mountain range itself, it was a pretty unique place.”

The project suffered from years of delay due to red tape. In 2017, Macquarie Group Ltd.’s GIG arm and GE Energy Financial Services closed on the Markbygden Ett project for €800 million. It would be the flagship project in the Markbygden complex of wind farms. It was expected to eventually generate the equivalent of 8% of Sweden’s annual power consumption. In 2018, China’s CGN took control of the wind park as part of an expansion into Europe.

The PPA that Markbygden Ett’s owners signed with Norsk Hydro blew all other PPAs out of the water. While the exact commercial terms are closely guarded secrets, industry sources pegged it at a very low level, around €25 per megawatt-hour, reflecting market belief at the time that energy prices would remain low. At 19 years, the contract was also much longer than most at the time. By comparison, a 2023 BloombergNEF survey put the average 10-15 year PPA price for onshore wind in Sweden at just over €60 per megawatt-hour.

“We were all very excited about it when it was agreed. It was groundbreaking, pioneering stuff,” recalled Giles Dickson, CEO of industry group WindEurope. The deal doubled the volume of power contracted under new corporate PPAs in Europe that year, according to a GIG statement at the time.

Markbygden Ett started delivering the contracted power in 2021. But only a year later, Russia invaded Ukraine, sending electricity prices to record levels. That would normally be good for a generator, but since Markbygden Ett wasn’t able to deliver on a constant basis the 1.65 terawatt-hours it had optimistically promised to supply every year, it turned into a disaster. To meet its obligation, it had to buy electricity on the spot market, according to the firm’s 2022 annual accounting.

As electricity prices skyrocketed, the replacement power that Markbygden Ett needed to buy became more of a financial burden. Losses ballooned from €24 million in 2021 to €175 million in 2023, according to annual accounts. A restructuring plan was approved late last year, and the PPA was voluntarily canceled.

Hydro is due €248 million, according to a court document. And as of the end of 2023, liabilities to credit institutions totaled €381.5 million. Ultimate ownership of Markbygden Ett was transferred to a Dutch foundation as part of the restructuring.

Other firms that signed similar deals have also suffered. The Aldermyrberget wind park, about an hour’s drive south from Markbygden, fell into financial distress after a PPA with mining company Boliden AB forced it to buy extra electricity on the open market. Even further south, the Overturingen wind park has been under restructuring since August. It too racked up huge losses after a PPA with Hydro forced it to start buying replacement power.

Cloud Snurran AB, which owns Overturingen, wrote in a 2023 report that the park was generating as much as 15% less electricity than had been expected. And at the height of the energy crisis in late 2022, Aldermyrberget struggled with low wind and ice on turbine blades, its owner said in an annual report. Citing “extraordinary weather conditions,” EB EEE LHI Vindkraftpark Aldermyrberget AB described its deal as “extremely unfavorable.”

Representatives for the owners of Overturingen and Aldermyrberget declined to comment for this article.

The operating company behind Markbygden Ett is planning to eventually sell the wind farm, said David Hargrave, a UK-based restructuring specialist who joined last September as chairman and director. He will look at entering a new deal “maybe of a PPA nature” or similar, he said in an interview. “In an ideal world you’ve got more certainty on your revenues than just being reliant on the day-to-day merchant prices,” Hargrave said.

PPAs will nevertheless remain important. In September, the European Commission’s Draghi report highlighted their role in boosting European competitiveness by offering price certainty to large industrial players.

Having seen wind parks struggle, said Alexander Esser, head of Nordics at Aurora Energy Research, operators are embracing “more flexible offtake agreements with more protection against volume and price risks.”

Customers are also changing their approach. While Hydro secured three new long-term PPAs in the fourth quarter, according to its last annual report, it also acknowledged in an email comment that the era of long and large PPAs is “probably over.” The company now plans to “work actively in the market and build a broad portfolio of smaller contracts.”

Matilda Afzelius, chief executive officer for the Nordic region at Renewable Energy Systems Holdings Ltd., said the industry needs to get smarter when it comes to financing massive green projects. “We’re dealing with a natural resource here that’s always changing,” she said. “Of course things can happen and go wrong.”

Even after Markbygden Ett’s failure, however, the geographic area hasn’t lost its allure. Norway’s state-owned utility Statkraft AS snapped up a new wind project there as part of a portfolio in 2023. In December, it signed a memorandum of understanding with iron ore giant LKAB to sell power from the planned park. If it goes ahead, it could be ready by 2029.

The location is excellent, said Jakob Norstrom, CEO of Statkraft in Sweden. But when signing a PPA, he struck a note of caution: “It’s important to find the right balance so you don’t promise too much.”

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