Renewable energyWind power as an investment: Which type of investment is right for you? 

Comparison of the most important investment forms 

A wind farm on the Finnish coast is harvesting wind, no matter how the DAX opened this morning. Not least, this independence from the stock market has firmly established wind power as a financial investment. However, as the company’s standing increases, so does the range of investment forms that differ radically:

• Direct investments often bind capital to a single location for two decades.
• Open-end funds can spread it across a continent.
• Thematic funds reconnect wind power to the stock market, including fluctuations. 

In this article, we show you which shapes you should know and which of them might suit you.

How do wind turbines make money?

A wind turbine generates electricity and sells it, so far the simple answer. How she sells it determines the level and reliability of the yields - and this is exactly where the game has turned. “Where guaranteed revenues used to attract, spot market prices, weather data and network capacities now determine the revenue side,” says Timo Werner, fund manager of klimaVest. “Marketing green electricity is becoming more dynamic, but also more demanding.”¹

For years, the bill was simple. The Renewable Energies Act secured plant operators predictable income via a market premium, regardless of where the electricity price was currently trending. This protection will expire for the oldest systems; new parks will no longer be provided in the old form.

Several marketing channels are taking their place, but each of them alone is too little: 

• If a park relies on EEG funding alone, it is only secured for a limited period of time. The guarantee is valid for around twenty years, after which he must sell his electricity on the free market without this protection.
• If it sells everything via the electricity exchange, it is subject to the so-called cannibalisation effect: If there is a strong wind everywhere, all the parks feed in at the same time and the price drops exactly when there is the most electricity.
• If all of its revenue is dependent on a single large customer, the supplieris obligated to deliver and the contract design is an art in itself. Such a constellation is therefore only feasible for providers with volumes and a reliable track record.

The answer to this is a revenue mix where one channel balances out what another is not currently delivering. However, this mixture does not arise by itself. It requires asset management that continually adjusts the sources of revenue depending on the market situation and is present at the negotiation table with large customers.

How does a wind farm sell its electricity?

A wind farm has three ways to turn its electricity into money:  

1. the EEG feed-in tariff
2. direct marketing on the stock exchange
3. the Power Purchase Agreement (PPA) 

They differ in how the price is generated and how reliably the returns flow from it: 

How does a wind power investment pay off?

The current income of a wind farm comes from the saleof electricity. After operation and financing, there remains a predictable, recurring cash flow that benefits investors. This reliability is half of the return.

The other is in the tangible asset itself. A wind farm in a good location doesn't just age. Once grid connection, approval and a reliable yield history are in place, the plant will become more valuable over time, as windy areas are finally and increasingly in demand. Once a turbine has completed its life cycle, repowering with modern technology significantly increases the site’s performance.

The success factors: What distinguishes a good wind power investment from a weak one?

Investing money in a single wind farm can bring high returns, but can also go backwards to total failure. For a long time, the Renewable Energies Act (EEG) mitigated this risk by guaranteeing a fixed electricity price for every plant for twenty years. This promotion is ending and is being replaced by a market in which fluctuating prices and scarce network capacity determine revenue. “If you want to be successful in the long term, you should not only rely on individual technologies, but on well-coordinated overall systems,” says Timo Werner, fund manager at klimaVest, summarising the increased requirements.¹

This requires a certain width at first. A single wind farm depends on the weather in a single region. If there is no wind for weeks, the yield breaks away without anything catching it. This risk is growing, as climate change causes weather conditions to fluctuate more. Multi-site portfolios spread capital across different weather regions and additionally combine wind power with solarso that returns balance each other over the year.

But breadth alone is not enough, as demanding diversification goes beyond power generation. Pure wind turbine portfolios leave a growing part of today’s market unused. Battery storage systems, for example, buffer fluctuations in the electricity market and allow electricity to be sold when prices are high, rather than being wasted when there is an oversupply.

The electricity grids make a particular contribution to stability. “The regulatory framework ensures that grid operators achieve a calculable return on their invested capital regardless of the electricity price,” explains Timo Werner.¹ While a wind farm remains dependent on the weather and market price, a grid delivers its yields regardless of the current electricity price.

All of these success factors require experience. "Building up the diverse know-how for this is not trivial. It can therefore be worth relying on specialised asset managers with market experience and a proven track record," says Dr Nicole Arnold, member of the Commerz Real Board of Management.² After all, it is the price at which a park sells its electricity that decides, not how many megawatts it produces on paper.

The revenue model must be continuously adjusted and a long-term electricity purchase agreement must first be negotiated with a large-scale customer. And when a plant reaches the end of its life cycle after around twenty years, a repowering does not simply replace it one-to-one - modern turbines often deliver two to three times the original output with the same area. This, too, requires capital and technical expertise.

How can you invest money in wind power? The most important forms of investment

Direct Investment and Closed Fund: The concentrated investment

With a direct investment, investors become co-owners of a specific wind power plant. It is common to participate as a limited partner in a limited partnership that bundles the capital of many investors. If the amount required for the project is combined, the fund is closed, hence the name Closed Funds.

The incentive lies in direct ownership, including the right to have a say, profit sharing and tax benefits from the corporate participation. The chance of a return on investment is high if the project goes live. However, this is precisely where the risk lies, up to the total loss of the invested amount.

The capital is concentrated on one or few investments. This means that a weak wind year or a technical failure may affect the entire investment. Making things more difficult is the long-term commitment, often ten years and more. Anyone who commits themselves for so long bets that a first-class plant and location today will still be competitive in ten or fifteen years. The minimum investment is usually in the five-digit range. 

Crowdinvesting: Small amounts, increased risk

In crowdinvesting, a large number of investors pool small amounts for a single wind power project. Legally, this is typically done via a subordinated loan: Investors do not become co-owners, but lend money to the operator for a fixed interest rate. The entry level is low, often from just 100 euros, and the term is manageable.

The tick in the word is secondary. If the operator goes bankrupt, all other creditors are served first, the crowd comes last. In the worst case, this means the complete loss of the capital invested.

Overall, crowdinvesting platforms are currently strugglingto offer high-quality projects at all. The most profitable sites have long been built, new land remains scarce and politically competitive. Convincing projects usually find financially viable donors long before they even reach the crowd for tendering. 

Equity and thematic funds: Wind power on the stock exchange

Wind power equities and thematic funds do not focus on a wind farm, but on the companies behindit that build turbines or operate plants. The return then depends on the share price and the dividend. It therefore follows the laws of the stock exchange like any other security.

This means that the investment can be bought and sold at any time, and the amounts are also more flexible. Thematic funds or ETFs also offer broad diversification. However, the price dances according to the mood on the stock market and the interest rate level, with which the investment plays with what makes wind power so valuable as a tangible asset: their independence from the stock market with stable, predictable cash flows.

The impact, which is quite important to some investors, is also exploding. The capital does not build a new investment, it merely changes ownership on the stock exchange. Behind the green label of many indices are also utilities that have only switched a small part of their business to clean energy.

Open-end funds and ELTIFs: The broadly spread tangible asset

An open-end fund bundles the capital of many investors and distributes it across an entire portfolio. Shares can also be resold subject to certain minimum holding periods and redemption periods. This combines breadth and flexibility, which is exactly what closed-end funds lack. However, this structure did not exist for wind power and renewable energies for a long time, and direct access remained reserved for institutional investors.

The ELTIF (European Long-Term Investment Fund) closes this gap. It allows capital from private investors to flow into real assets that continuously produce electricity and discharge cash flows. ELTIFs also allow wind power to be combined with other assets such as solar, storage and electricity grids in one fund.

In terms of liquidity, it moves between rigid closed constructs and the equity market: Shares can be redeemed before maturity, but not on a trading day, but usually on fixed dates. Since the ELTIF 2.0 reform, the previous minimum investment of EUR 10,000 has also been discontinued.

ELTIFs are not limited to wind power or renewable energy. An ELTIF may also invest in private debt (corporate loans) or other assets. Before making a purchase, it is therefore worth taking a close look at who is behind the fund, what gives it its track record - and especially what it actually invests the capital in.

Wind power as an investment: Which form makes sense when?

For most retail investors who value stability and a real tangible asset, the broadly diversified open-ended fund in the form of the ELTIFis recommended. It is spread over many assets, remains a tangible asset and does not require a high minimum investment.

Those who have a lot of wealth, a long breath and the necessary expertise, on the other hand, can aim for higher returns with a direct investment, but bear the full risk of the individual project. Crowdinvesting is suitable for promoting a specific project with little money, as long as the possible total loss remains painful. And equities or thematic funds offer daily tradeability, but link the investment back to the stock market.

Which shape is right depends on your own situation: How much capital is unnecessary over years? How much risk is tolerable? And is it a single project or a broad spread?