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Wind

22 May 2018
Richard Kemmish

Are windmills eligible assets in cover pools? It depends which country. Should they be? That’s more difficult.


Windmills have to turn at a constant speed in order to produce usable electricity. They also have to deal with very slow moving, high torque power. As the wind isn’t constant and as electricity generators need fast moving parts (with therefore lower torque), some very impressive technology goes into the gearboxes which frequently have a 90:1 ratio and an ability to angle the blades to vary the power:wind speed relationship to equal exactly what turning speed is needed - a bit like the differential on your car’s drivetrain (sorry, I’m from Birmingham, I love this stuff).

Sadly, the impressive ‘real’ engineering behind these things is not often matched by as good financial engineering (if the securitisation market really wanted to rehabilitate it’s reputation….). Recently, for fun I have been asking whether mortgages on windmills are eligible collateral for cover pools in those countries with commercial mortgages covered bonds – the answer is mixed – and whether they should be?

The much-discussed article 6 of the draft covered bond directive contains criteria for other assets which may be considered eligible collateral by member states. Whilst the criteria in this article rule out a lot of possible assets – assets with out security or market value for example - they seemingly rule in loans to windfarms which typically do have these qualities. So why wouldn’t you allow windmill backed covered bonds? What – at least in terms of the things that matter: credit and legal certainty - is the difference between a windmill and any other type of commercial property?

One argument that I have heard is that a windmill doesn’t have an alternative use value like most real estate does. All it can ever do is generate electricity. But shopping malls can’t be converted into hospitals or houses. What is worse, I will always need electricity but personally I haven’t set foot in a shopping mall since subscribing to Amazon prime.

A more convincing argument that I have heard is that the value of the windmill is volatile. Many rely on guaranteed prices for the electricity that they generate and it is reasonably certain that the wind will continue to blow. But others are more expensive than alternative carbon fuel based sources of energy and depend on environmentally motivated government subsidies. As we have seen in the US, policies on the environment, and therefore subsidies for green projects can change. (I wonder if this is what Mark Carney has in mind when he says that banks should include climate change scenarios in their stress tests?).

Alternatively, technology could improve – not that unlikely given the brainpower being extended on this field – making windmills less relevant. Far fetched? Maybe. Perhaps the banks who funded the network of canals in Britain in the 1830s felt the same way..until they heard about trains.

But perhaps the biggest determinant of whether windmills are in or out is the fight between political objectives – the desire to fund climate change preventing assets - or a conservative approach to credit, the desire to protect the integrity of covered bonds? I hate it when those two fight.

 

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