RE:RE:Time to shineThere are risks, depending on the type of offtake contracts. Also farm-downs will be harder to execute as higher interest rates lower the value of a windfarm. This may affect Northland's funding strategy for future projects.
For example, from Orsted's 2021 annual report on how they deal with higher interest rates and inflation:
1. Inflation and interest rates
Description: To a large extent, our medium- to long-term earnings can be expected to follow the development in consumer and market prices, thereby protecting the real value of our assets and equity. However, fixed nominal subsidies from wind assets in Denmark, Germany, the Netherlands, Taiwan, and the US (the US contracts are indexed with a fixed annual escalator) are exceptions to this. Fixed-price power purchase agreements (PPAs) from assets in the US and Taiwan as well as fixed nominal cash flows related to debt are also exceptions to this. We are exposed to inflation risks in these markets, where an increase in inflation will adversely impact the expected real value of the revenue.
Our farm-down model of funding future wind farms through divestments is exposed to interest rate risks as wind assets are more attractive to buyers when interest rates are low compared to other financial assets with similar risk profiles.
Potential impact: Fluctuations in interest rates and inflation may adversely impact our earnings and farm-down model, thereby affecting the value of our assets.
Mitigating actions: Our inflation and interest rate exposures are managed by matching assets and liabilities in the same currency and with similar payment structures. Hence, our European fixed nominal subsidies are being offset by EUR-denominated fixed-rate debt. In contrast, we have entered into inflation swaps for part of our inflation-indexed revenue in the UK to match our nominal GBP debt. The risks that arise from projects in Taiwan and the US can be reduced by obtaining matching-duration fixed-rate debt denominated in the same currency as the revenue.