Northland Power Inc

TSX:NPI

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to this Northland Power Conference Call to discuss the 2021 first quarter results. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, May 13, 2021, at 10:00 a.m. Conducting this call for Northland Power are Mike Crawley, President and Chief Executive Officer; Pauline Alimchandani, Chief Financial Officer; and Wassem Khalil, Senior Director of Investor Relations and Strategy.Before we begin, Northland's management has asked me to remind listeners that all figures presented are in Canadian dollars and to caution that certain information presented and responses to questions may contain forward-looking statements that include assumptions and are subject to various risks. Actual results may differ materially from management's expected or forecasted results. Please read the forward-looking statements section in yesterday's news release announcing Northland's Power results and be guided by its contents in making investment decisions or recommendations. The release is available at www.northlandpower.com.I will now turn the call over to Mike Crawley. Please go ahead.

[Mike Crawley, CEO & President]

Thank you, operator, and good morning, everyone. We also have David Povall joining us today. David is the Executive Vice President of Development, of course, and he's joining us from Tokyo actually, where he's been spending the pandemic focused on a lot of our growth opportunities in Asia. So thanks to everybody for joining us this morning. We will review our first quarter 2021 financial results on the call and operating results. Following our prepared remarks, we will take your questions from analysts.To kick things off, we want to reiterate that the health and safety of our employees and share -- stakeholders comes first. Through diligent planning and rigorous adherence to health protocols, we have maintained high levels of facility availability, delivering essential supply of energy to consumers and businesses in Europe, Canada and Colombia.First, looking at our financial results for the first quarter, we reported adjusted EBITDA of $360 million compared to $421 million in first quarter 2020, representing a 14% decrease. Our free cash flow of $134 million was 36% lower compared to $211 million in the same quarter of 2020. On a per share basis, we achieved $0.66 in 2021, which compares to the $1.02 (sic) [ $1.10 ] in 2020. I would point out though that the majority of the decline year-over-year is attributable to lower wind resource at our offshore wind facilities in 2021 compared to the first quarter in 2020. That quarter was a very strong one for offshore wind production, with wind generation well above long-term averages. What we saw in the first quarter 2021 in the North Sea is closer to normal winter wind speeds, albeit somewhat lower than the long-term average. Pauline will provide a more detailed look into the financial numbers later in the call.Strategically, we continue to build momentum on both our short-term and long-term growth initiatives to position ourselves for success. Northland has a growing footprint globally, with positions in key growth markets to participate in the global decarbonization efforts underway. And subsequent to the end of the quarter, we expanded this footprint. First, as we outlined in January, we announced our entry into Poland for the Baltic Power offshore wind project through our partnership with PKN ORLEN, the Polish oil and gas company, a very strong and influential partner in Poland. We completed the acquisition on March 24, 2021. The partnership will provide Northland with a 49% interest in a mid-stage offshore wind development project, with a potential of up to 1.2 gigawatts of capacity to be built in the Polish Baltic Sea in the middle of the decade.Baltic Power provides Northland with a scale entry into a new market, alongside a strong and influential local partner. It gives us a healthy balance between reducing the risks of new market entry on the one hand and development opportunities to extract value on the other. The project will benefit from the first round of revenue support through a 25-year contract for difference offtake agreement with the Polish government. Following the closing on March 24, the project filed an application with Poland's Energy Regulatory Office to secure the CfD, and we expect to receive approval for the CfD in the coming weeks. We expect to reach financial close for the Baltic Power project in 2023 and commercial operations in 2026, which fits nicely with our other offshore wind projects in Asia.While offshore wind remains our primary focus to achieve our long-term growth objectives, we are also enhancing our near-term development pipeline as part of our strategy to further diversify our portfolio and bolster our cash flow profile. This strategy not only supports the advancement of our 4 to 5 gigawatts of identified development projects but it also provides additional critical mass alongside our offshore wind projects to grow our global presence. Most recently, we announced the acquisition of a 540-megawatt onshore renewables portfolio in Spain. This new portfolio aligns well with our priorities and helps to diversify our asset base while adding high-quality regulated cash flow to our business, while expanding our presence in Europe as well.The near-term free cash flow from this portfolio will help fund the development of our large offshore wind projects, particularly as new markets and opportunities continue to emerge for offshore wind globally. In addition, the acquisition provides us with scale and a platform in the growing Spanish renewables market that immediately positions Northland as a top 10 renewables operator in Spain. We expect to leverage this position to grow our presence in Spain and the Iberian Peninsula as a whole and to help us establish a European asset management platform that can support our entry into other attractive European renewables markets.Turning to our development and construction projects, I want to provide a brief update on the various projects we have underway. First, touching on our New York wind onshore projects. In February, we received and accepted contract price offers from NYSERDA for 20-year index renewable energy credit offtake contracts. We are also in the final stages of negotiations regarding key agreements for the projects and expect to be able to sign the turbine supply, service and maintenance and the balance of plant agreements in 2021. These are all key milestones in the development of the projects as we move closer towards financial close, which we expect to execute for 2 of the 3 projects later this year, with 1 following after in 2022. Commercial operations for the first 2 projects are expected by late 2022 and the last one in 2023.At Hai Long, we received confirmation from the Taiwan Bureau of Energy that Hai Long 2A has secured approval for its Industrial Relevance Plan, which sets out Northland's commitment to local supply chain and procurement, making -- marking the achievement, excuse me, of a significant milestone for the project.Now at La Lucha, as we previously disclosed, construction activities are nearing the final stages of completion. Certain construction activities related to the energization of the project have been delayed primarily due to COVID restrictions. Once these activities are completed, Northland expects to commence with grid testing, which will be followed by submission of an application for commercial operations to the Mexican regulatory authorities. Based on the current time line, Northland still expects commercial operations at La Lucha to commence later this year. Efforts to secure commercial offtake and project financing are expected to be finalized after commercial operations at La Lucha.I wanted to quickly discuss our financial risk management activities as they relate to our Gemini project. In 2020, the wholesale market, or APX for short, traded down well below the SDE floor that applies to our Germany -- Gemini PPA. In fact, the APX has averaged below the SDE floor, so Gemini PPA, for 4 of the facility's 5 years of operation, but was the worst in 2020. This resulted in Northland incurring lost revenue of approximately $27 million in 2020 as reported in our annual report.In response to the decline in power consumption caused by COVID-related lockdowns last year and the uncertainty related to the length of the COVID pandemic in the second quarter of 2020, Northland entered into financial derivatives for 2021, and to a lesser extent for 2022 and 2023. These derivatives were effective in mitigating downside risk with some exposure to lost revenues should the APX increase above the SDE floor. Because forward market prices were low relative to the Gemini floor price of EUR 44, the hedge we put in place last year protected our downside risk if market prices declined further. But it effectively gave upside in revenue when market prices rose above the floor price.The APX has strongly rebounded lately, in part prompted by rising natural gas and carbon prices in the EU. As such, the APX hedge ceased to serve its purpose since the APX has now climbed above the floor price in our SDE contract, resulting in $4 million of lost revenue for the first quarter. Subsequent to the first quarter, the APX has continued to increase to the current price of $63 per megawatt hour. And as a result, Northland commenced entering into financial derivatives that will limit Gemini's lost revenue for 2021 to similar levels as experienced in 2020.In closing, we are off to a good start in 2021, with healthy first quarter financial results and good momentum and execution of our growth plans. We continue to accelerate our position as a top 10 global player in offshore wind through our Baltic Power offshore wind project in Poland and secured an attractive entry portfolio for onshore renewables in Europe through our Spanish acquisition. The execution of our strategy in key growth markets will further strengthen Northland's competitive positioning as a global developer and operator within the renewable energy space.I will now turn the call over to Pauline for a more detailed review of our financial results.

[Pauline Alimchandani, Chief Financial Officer]

Thank you, Mike, and good morning, everyone. Last night, Northland Power released operating and financial results for the first quarter of 2021. Our financial performance in the quarter was solid, and we generated healthy results for both adjusted EBITDA and free cash flow despite experiencing lower wind resource in the quarter from our offshore wind segment. Our business is primarily focused on offshore wind, with over 60% of our adjusted EBITDA being generated from our offshore wind facilities in the North Sea. This segment of our business experiences natural variations in wind resource, not only year-over-year but also within any given year. These fluctuations can result in variability from quarter-to-quarter. However, over the course of time, this variability typically balances out. Also, as part of our growth strategy, we will also continue to diversify our portfolio and our cash flows.In the fourth quarter, we generated adjusted EBITDA of approximately $360 million, which was a decrease of $61 million or 14% from the $421 million we generated in the first quarter of 2020. The main factor leading in the year-over-year decrease was the lower wind resource in the North Sea, which saw a 19% decline in production across all 3 of our facilities in the first quarter of 2021 compared to the same period in 2020. Note that the first quarter of last year had wind resource significantly above the long-term average. This decline in adjusted EBITDA was offset by additional positive contributions from EBSA. EBSA only had partial contribution in the first quarter of 2020 due to the timing of that acquisition.With respect to free cash flow, Northland generated approximately $134 million in the first quarter. This was a decrease of $77 million or 36% compared to the same quarter in 2020. As with adjusted EBITDA, the single largest driver behind the year-over-year decrease in free cash flow was the lower offshore wind resource in the quarter that resulted in a decline in overall earnings of $61 million. In addition to the lower wind resource, there was a number of smaller items that contributed to the decrease, including higher scheduled principal repayments primarily relating to Nordsee One and higher non-expansionary expenses at North Battleford and Nordsee One, which were expected. As disclosed in our fourth quarter results, Northland commenced reporting adjusted free cash flow, which excludes growth-related expenditures from the metric. Management believes that adjusted free cash flow provides a relevant presentation of cash flow generated from the business before investment-related decisions and is a good and meaningful measure of Northland's ability to generate cash flow after ongoing obligations to reinvest in growth and fund dividend payments. In the quarter, we reported adjusted free cash flow of $147 million compared to adjusted free cash flow of $224 million in the first quarter of 2020. Adjusted free cash flow was affected by the same factors impacting free cash flow as growth expenditures remained relatively consistent year-over-year. On a per share basis, these figures translated into free cash flow of $0.66 and adjusted free cash flow of $0.73, respectively, in the first quarter. These compared to $1.10 per share and $1.17 per share for free cash flow and adjusted free cash flow during the first quarter of 2020.Our rolling 4 quarter free cash flow and adjusted free cash flow payout ratios, calculated on a cash dividend basis for the quarter ending March 31, were 73% and 58%, respectively. This compares to ratios of 58% and 52% for the same quarter ending March 31, 2020. The increase in both net payout ratios were primarily due to lower free cash flow and adjusted free cash flow as explained prior, partially offset by the reinstatement of the dividend reinvestment program in September of last year.In addition to free cash flow generated, Northland utilizes additional sources of liquidity to fund growth into our capital investments. In March, we successfully completed our Deutsche Bucht refinancing, resulting in a reduction in the interest rate of the facility's senior debt and the release of EUR 50 million, or CAD 74 million, from the funds previously restricted for debt service, immediately enhancing our corporate liquidity. Subsequent to the end of the quarter, Northland completed a bought deal equity offering for 22.5 million common shares for aggregate gross proceeds of $990 million.The net proceeds of the offering will be used to fund the cash purchase price of the Spanish portfolio acquisition that Mike mentioned earlier, expected to close in the third quarter, with the remainder of the net proceeds expected to be applied towards funding capital requirements, including the acquisition of Baltic Power, expected near-term capital commitments for identified development projects and to repay borrowings under our corporate revolver. As a result of the equity offering which closed in April, we estimate we have approximately $875 million of liquidity on hand, providing sufficient liquidity to execute on our identified development initiatives.Turning to our financial outlook. Our 2021 financial guidance remains unchanged from February, with adjusted EBITDA continuing to be in the range of $1.1 billion to $1.2 billion. We expect our free cash flow per share in 2021 to be in the range of $1.30 to $1.50. And lastly, our recently introduced metric, adjusted free cash flow per share, we expect to be in the range of $1.80 to $2 per share.In other corporate events, Northland's corporate credit rating of BBB stable was reaffirmed by Standard & Poor in their most recent review in March of 2021. Last but not least, we released our Fourth Annual Sustainability Report, highlighting Northland's 2020 ESG achievements and sustainability strategy going forward. This report is centered around the 4 pillars of planet, people, community and business and sets out how Northland will meet its 2030 targets of reducing its electricity generation carbon intensity by 65% from 2019 levels while increasing our gross renewable energy capacity by 4 to 5 gigawatts around the globe. Our vision is to create a carbon-free world and is centered around our efforts to embed the principles of sustainability and ESG into all aspects of our business.In 2021, we formally launched our ESG framework, which provides greater transparency in how we mitigate risk, meet our ESG reporting obligations and broader stakeholder expectations, while at the same time, creating long-term value for our shareholders and our partners. We are committed to enhancing our disclosures in order to further demonstrate our transparency and effective management by reporting in alignment with the GRI standard core, also reporting in alignment with SASB based on our industries and aligning our commitments with the relevant UN Sustainable Development Goals. We have also committed to reporting in line with TCFD by 2022.All in all, it was a productive quarter for the company as we work to deliver on our growth objectives, key milestones on our development projects to derisk our projects and increase their value and achieve our financial guidance.With that, I will turn the call back over to Mike for his concluding comments.

[Mike Crawley, CEO & President]

Thank you, Pauline. Northland is in an advantageous position to participate in the global growth in renewable energy. We have the market position, the growth pipeline, the talent and the balance sheet to seize the opportunity and create significant value for our shareholders over the long term.This concludes our prepared remarks. We'd now be happy to take questions from our analysts. Operator, please open up the lines.

[Operator]

[Operator Instructions] Our first question comes from the line of Rupert Merer with National Bank.

[Rupert M. Merer, Managing Director and Research Analyst]

Inflation is very topical today. Can you talk about the impact of inflation on the cost of your development projects? Maybe if you could give us some color on what you're seeing in rising costs? And how much of the cost is locked in for your contracted projects? And do you see any risk to returns with rising costs?

[Mike Crawley, CEO & President]

Well, so we certainly track commodity prices closely, particularly on our larger projects. On those projects, we always include sufficient buffer, in our view, to account for any rise in commodity prices driven by inflation overall, Rupert. So when we look at our current pipeline of projects right now, we're generally comfortable with where they stand and the basis on which we underwrote the initial decision to begin spending development dollars in them. But it's something that we obviously track on an ongoing basis. At certain points, as the project matures, we are able to hedge some of that commodity exposure. And so we keep track of that and obviously take advantage of that the moment -- when the opportunity is available for us to hedge. I'll leave it like that. And then, of course, in terms of interest rates, we also similarly include a buffer in all of our financial models, particularly on projects where you have an offtake agreement that is not indexed to inflation. So we try and account for that in the project model to make sure that we're -- have adequate buffer.

[Rupert M. Merer, Managing Director and Research Analyst]

Okay. And so putting it all together, you're comfortable you'll achieve your target returns on the development projects that are in under construction?

[Mike Crawley, CEO & President]

We are.

[Rupert M. Merer, Managing Director and Research Analyst]

Okay. Great. And then sticking on the topic of hedging, you gave us some color on the APX pricing and the derivatives you had in place. It sounds like you've closed out the position. I'm wondering if you can give us some more color on how the derivatives were structured. And the impact we're going to see, if you have closed out that position, is that primarily a Q2 event or is this going to be spread through the next few quarters?

[Mike Crawley, CEO & President]

Yes. I'll start off and then I'll hand it over to Pauline. I think we're well on our way to closing out our position in 2021, 2022 and 2023, where we have hedged a smaller portion of the cash flows in both years. That process is just starting now. But I'll turn it over to Pauline to give you a bit more color on the actual derivative and the impact.

[Pauline Alimchandani, Chief Financial Officer]

Yes. It will -- the impact will occur over the balance of the year as revenue is earned under the contract for Gemini. So the -- it won't be exactly even through the quarters, but it will follow the revenue pattern of Gemini.

[Rupert M. Merer, Managing Director and Research Analyst]

Okay. Then can you give me some color on how the contracts are structured?

[Mike Crawley, CEO & President]

Sure. So I mean it was basically -- the contract basically put in a floor at which -- below which we would not suffer any further loss. So it's basically to protect us on the downside if the APX price fell -- continue to fall below the SDE floor price where we would suffer economically under the SDE contract. To the extent that the APX price rose above the floor, we would have to trade back -- give back some of that upside going forward. So as we articulated in the introductory remarks, once the APX price on a sustained basis settled in the first quarter of this year above that floor price, we deemed that those hedges were no longer effective, and we put in place swaps to basically offset those hedges going forward. And so as -- and so the impact of that will be realized as those swaps come due moving forward.

[Pauline Alimchandani, Chief Financial Officer]

And then going forward now, I mean the -- because of where the APX price is, it's actually very economical to buy puts right at the SDE floor level and have that to be the downside protection going forward.

[Mike Crawley, CEO & President]

So we have better options now to protect against the downside than we had when the APX price was lower. But at this point last year, when the pandemic was just starting and it was unclear how long it would last and how significant the economic impact would be, at that point, the correct decision in our view was to protect ourselves against the downside. Now there doesn't seem to be that downside risk in the immediate term. We're unwinding those hedges. But we, as Pauline said, now have the opportunity to buy a fixed price put option which will protect us moving forward against the downside in future years.

[Operator]

Our next question comes from the line of Sean Steuart with TD Securities.

[Sean Steuart, Research Analyst]

First question is on Spain. And Mike, you touched on part of the motivation here is to participate in future onshore growth given aggressive procurement targets at the country level. Can you give us some detail on the organic opportunity set tied to this acquisition? And how you're thinking about organic development versus M&A-driven opportunities for onshore renewables in Europe?

[Mike Crawley, CEO & President]

Yes, for sure. So I mean -- Sean, I mean, as you know, well, any large platform of operating onshore renewables is much sought after these days and trades at a pretty high valuation. We think we were able to secure this platform at what we view, in the current market context, to be a reasonable valuation is the diversity of it, which suits us well in terms of a mixture of solar, wind and also concentrated solar. But we think for other, perhaps more passive investors, the diversity was less appealing. So what we see going forward in terms of growth in onshore renewables is generally not going to begin acquiring larger platforms. As you know, we haven't generally participated in that market in terms of M&A. Where we see the better -- the opportunities going forward in Spain is, number one, it's a highly fragmented market in terms of ownership of renewable assets. So we've identified about 9 gigawatts of portfolios that are between 100 and 200 megawatts. So we think as either of those portfolio owners look to exit or as we hopefully approach them, that we'll be able to secure bilateral acquisition opportunities at more favorable economics than you see in well-marketed, larger-scale platforms for renewables. So that's number one. And number two is, in time, we would look to -- look at development as well. There's a very ambitious growth target, I think, of 35 to 40 gigawatts of new renewables in Spain by 2030. They also have specific storage, and hydrogen objectives in Spain. So we'd also see as a good platform to participate in that growth. But that will take a bit more time to develop a strategy over that. And we've also noted that the last procurement was quite competitive. So we want to kind of take our time and come up with the right development strategy. So in the meantime, it would be more of a focus on acquisition of either smaller late-stage projects or smaller operating portfolios.

[Sean Steuart, Research Analyst]

Second question, in late April, Orsted identified some issues with their offshore cable protection systems. They're spending a lot of money to retrofit some of those assets. And it looks like most of them were built around the same time you guys built out your European platform. Can you comment on comfort that this won't be an issue for Northland? And does this have any bearing on your thoughts for future offshore wind project CapEx and potentially returns?

[Mike Crawley, CEO & President]

Yes. So we -- at all 3 of our facilities, we did look into our interconnection cables, our inter-array cables as well at the same time and looked at the cable protection designs that we have. The Nordsee One project uses a very different cable design, a much more robust cable design. So our view is that it would not be impacted. Nevertheless, we do regular underwater inspections of those cable and protection systems, and we will continue to do so at Nordsee One and perhaps pay a bit more closer attention to ensure that this different cable design -- protection design system proves as robust as we think it will be.On the Gemini and Deutsche Bucht wind farms, they do use a similar cable protection design, albeit a more recent design than Orsted uses. But our subsea inspection campaigns have not identified any issues on those. In some ways, Orsted's news does give us a good opportunity to add some more rigor and some more detail to those inspection campaigns because as long as you identify the deterioration before it reaches the protection system on the cable, the protection sheath on the cable, it can be easily repaired at a relatively low cost. The problem is, as per Orsted's announcement, if you don't identify it early enough, the repairs can be very costly. So we've scheduled in our 2021 survey campaign for Gemini and Deutsche Bucht to not only we will be doing the inspection campaign anyway but to add some more rigor to it to make sure that we do identify any issues.There is also the impact of the sea currents where the projects are located. I mean, I believe the Orsted U.K. projects are in an area which would have stronger currents which would cause more movement as well. But nevertheless, it's a good opportunity for us to track these cable protection systems more closely to ensure we don't get in the same position. But to be clear, we have identified no issues in all of our inspection campaigns on our cables.

[Operator]

Our next question comes from the line of Nelson Ng with RBC Capital Markets.

[Nelson Ng, Analyst]

Great. A quick question on Baltic Power. I think a few months ago there was like -- they set the -- I think, the maximum price, and I think it translates to about, I think, EUR 68 per megawatt hour. Can you just give some more color as to how the actual price is set? And like how -- and how it relates to the -- like maximum price? Like what's the process in setting the final price?

[Mike Crawley, CEO & President]

So -- and David can jump in here as well, but I believe that the initial PPAs that were CfD contracts have been issued so far have been at the maximum price level to the project. They're kind of being -- they're more or less seem to be issued in the order of application roughly. So it is identified as a maximum price, but so far, the CfDs have been issued at that price. I'm not sure if that answers your question. And David, is there any other color you'd add to that?

[David Edward Povall, Executive Vice President of Development]

No, that is correct. Mike, it's a fairly structured form filling submission process. First -- and then considered on a sort of an application time-based those are submitted first have been considered and those who have been awarded now have received at the maximum price, PLN 319.6, which I'd say, depending on the FX rate is around EUR 70. And yes, so as Mike said in his introduction, we're in that process. There's a Q&A back and forward some clarifications, and that's what we're just answering those questions at the moment and expect to receive in the next couple of weeks.

[Nelson Ng, Analyst]

Okay. So you're obviously in the queue and you're pretty confident that you'll receive a contract as well?

[David Edward Povall, Executive Vice President of Development]

Absolutely. Yes.

[Mike Crawley, CEO & President]

Yes.

[Nelson Ng, Analyst]

Okay. Great. And then just following up on Rupert's comment on cost escalation and inflation. So for the -- you mentioned that there's 2 wind projects in New York that will reach completion by the end of next year. So in terms of locking the price, would you be fixing your construction price like over the next couple of months or at the end of the year? Can you just give a bit more color as to timing?And then, I guess, on a related question, can you also talk about Taiwan, which is obviously a much bigger project? And I think its financial close still expected for like sometime mid next year? So I guess you'll have to lock in your price sometime mid-year -- mid-2022?

[Mike Crawley, CEO & President]

I mean steel prices would get locked in at the point that we secure the -- we sign the turbine supply agreement -- execute the turbine supply agreement. So on the 2 projects that would be going to construction this year in New York, those contracts have been executed and the steel price has been locked in. And we're also moving to secure the balance of plant contracts as well which will lock in other price -- all the other -- the balance of the costs in the projects.With respect to Hai Long, the current intent is to reach financial close in third quarter of 2022. And so that's a track we're on. We would be in a position to enter into supply contracts before that, at which point we would be locking in steel prices. As I said, there may be other opportunities to hedge some of the exposure to commodity prices moving forward as well prior to locking in the supply contracts.

[Pauline Alimchandani, Chief Financial Officer]

Yes. And on the interest rate side, we are hedged for 20 years on the New York projects as well. And as soon as we know sort of the structure term of debt, we do hedge. And for Hai Long, that's something that's in process. And as that starts to get structured and firmed up, we would look to do the same.

[Nelson Ng, Analyst]

Okay. And then just one last question on Taiwan, it looks like there's going to be like a few years of offshore wind RFPs in Taiwan. I think in the past, Mike, you mentioned that you have a -- you're working on about 1.8 gigawatts of offshore wind on your own. Like can you just tell us or give us a bit more color as to the landscape in Taiwan? Has the land grab happened already? And is -- like are you -- you're working on that 1.8 gigawatts and is it difficult to kind of grow that development capacity right now?

[Mike Crawley, CEO & President]

Well, David is obviously closest to that. So I'll turn it to you, David.

[David Edward Povall, Executive Vice President of Development]

Yes, I can pick that up. So you would have been tracking the news. So the rules for what's called the Round 3 were announced. I think it was depending on your time zone, I think, yesterday or the day before. So we're just analyzing the detail of that. So that's the positive news and the confirmation that we were expecting that Taiwan will contract for further offshore wind. So that's been good news this week. In anticipation of that, and as Mike has referred to in the past, we have been basically identifying the coast line where we think the optimum sites are. And it has been announced locally in the press in Taiwan the 2 sites that we're looking at. And we're developing those sites at the moment. So yes, it's getting increasingly crowded space off the coast of Taiwan, but there are still some good sites which we believe we've identified are now developing and will be -- are ready to participate in the Round 3.

[Nelson Ng, Analyst]

Okay. Just to clarify, those 2 sites relate to the 1.8 gigawatts or they are in addition to those?

[David Edward Povall, Executive Vice President of Development]

No, that's part of.

[Mike Crawley, CEO & President]

It's part of. Yes.

[Operator]

Our next question comes from the line of David Quezada with Raymond James.

[David Quezada, Equity Analyst]

My first question, just, I guess, related to the European market in general. We've seen carbon prices move quite a bit higher recently, and I believe there's even been some commentary from other players that PPA prices have gotten higher. I'm curious -- I know you certainly have a strategy of being a first mover in new markets, but do you see things shaping up in such a way potentially in Europe that the combination of higher carbon prices and potentially, I guess, the corporate PPA could be an attractive proposition for you, either for offshore or onshore, I guess?

[Mike Crawley, CEO & President]

I think that's a correct observation. The -- so as you know, we've got 2 expansion projects on Nordsee One. So Nordsee Two and Three, total of, call it, roughly 900 megawatts between the 2. On those projects, we have a step-in right. So we basically can match the winning bid on those sites in the procurements that are scheduled for 2020 -- this September on Nordsee Two and then 2023 on Nordsee Three. So this step-in right, we basically have to accept whatever the winning bid price is. So we've been running various scenarios, obviously, from a zero-subsidy bid, which has been seen in North Sea offshore wind projects in the last few years, all the way up to the ceiling price of -- I think, it's EUR 70 or EUR 74. David would be tighter on that number than I am. But - so we've been running all these different scenarios. So obviously, in a scenario where you've got a zero-subsidy bid or a lower subsidy bid, you're going to be looking at what revenue you can recover from the market either through merchant revenue or preferably through, as you say, a corporate PPA. So I think it -- for that project, what we're seeing on carbon pricing has been encouraging the trend lines. And the other thing that is encouraging on that project and other future offshore wind projects, too, is the pressure that -- increasing pressure that you're seeing on large, particularly listed companies but also private companies to procure renewable power. And certainly, the one way to get it at scale is through offshore wind projects. So it is something that we're very focused on, and we have a head of origination, as you may know, offtake originations, who's based out of London now and is working on the N2 opportunity and other opportunities.

[David Quezada, Equity Analyst]

That's great color. And then maybe just one more, maybe since David is in Japan right now, just wondering if there's any update on the early development activities in Japan and Korea? Anything you can share there?

[David Edward Povall, Executive Vice President of Development]

Yes, Raymond (sic) [ David ] I guess the most key event that's happened is the -- in Japan, we have a different rounds and the -- our Chiba project, we are positioning to participate in Round 3. So that's progressing well. The Chiba prefecture has, in the use of sort of layman's terms, put their hands up to the government for that round to be included or that area to be included into the third round. So we don't know the outcome of that. We'll know that later this year. But if so, that's the great confirmation that the project will then be able to bid into the Round 3. So project development continues on track to -- for that to participate in Round 3, if it's chosen so that's good news. And then in the Dado project in Korea, on track, the key milestone there. I think we've talked about before is the securing new electricity business license, and we remain on track to secure that this year based on the project activities. So yes, the 2 key highlights in those 2 markets.

[Operator]

Our next question comes from the line of Ben Pham with BMO.

[Benjamin Pham, Analyst]

Okay. I wanted to go back to the -- some of the questions around raw material costs moving higher. It looks like you're well protected with your buffer and given the fact a lot of your projects, you're not going to put the shovels in the ground a few years out. So it's probably more the developers that are building next 1 or 2 years because if you see steel, copper go up to more than 50% over since last August has been quite incredible.So I'm just -- I'm wondering, maybe more of a broader question then is, we've seen cycles like this in the past. You had inflation in the 80s. So you had these PPA contracts with inflation protection. You had this commodity boom in the past. So the industry has seen this before. And it's more a consumer that's been hit. So how do you see this playing out then for the next couple of years here because the move has been pretty powerful. Is there really consumers that are going to take the -- I guess, the pain of this increase? Like how does the industry respond here?

[Mike Crawley, CEO & President]

Well, I mean, certainly on any offtake agreements that have not yet been allocated and where there's a bidding process, then it will get translated into higher bid prices and the same thing with the corporate PPA. So in that case, it would probably, all other things equal, create a higher price on a corporate PPA as a result.The -- on existing PPAs, as I said, I mean we keep a close eye on that, particularly any existing PPA where there is no indexation on that PPA, we keep a close eye and that's -- I mean -- and to be clear, I mean, there's an overall contingency in all of our budgets to account for a number of different unforeseen circumstances, including movements on commodity prices. So yes, as I said, to some extent, it will be absorbed by the offtakers, but other extent, it will have to be factored in and absorbed by contingency in primarily the developer's budget, but also there's contingency in the supplier's budget, too, because it's a point at which a developer will choose to decline to procure equipment if the price is too high. So I think it shakes out on both sides. It depends on the nature of the offtake agreement and the stage of the project.

[Benjamin Pham, Analyst]

Okay. So it seems like that there's a per sharing situation, but the direction it sounds like the power price could potentially go higher here. Can I ask you that do you get the sense that in some of these recent bids that you've seen where prices have been really low and you've backed off because of the behavior that those developers are bidding on expectation that levelized costs are going to continue moving forward versus using today's equipment cost to derive the returns?

[Mike Crawley, CEO & President]

Yes. I mean, we -- I mean to be candid, Ben, for better or for worse, we have not really played that game in the past. For some developers it has worked in their favor and some others have been caught out. So we generally have not played in that game. You see it most in the most pronounced way on solar projects in the last few years. I think some of the movement in commodity prices will, going forward, discipline some of that behavior because it will indicate just how unpredictable supply prices can be overall for equipment for a project. And I think in the last couple of years there's been some fairly big swings in solar panel prices as well. So I think all of that together will, I hope, discipline some of the more aggressive bidding and procurements going forward. As you know, we've got some solar projects we're developing in New York State. So we'll see how that plays its way out.

[Benjamin Pham, Analyst]

Okay. That's good to hear. And then maybe on -- keeping on the Spain side of things, are you more focused on developing that market out first before looking to adjacent markets?

[Mike Crawley, CEO & President]

I think what we've communicated at Investor Day was that we are -- we've communicated our focus on New York State, Columbia, for the reasons given in terms of the -- what we see as a growth in both those markets and renewables. And we communicated that we were looking at Eastern Europe, select markets in Eastern Europe, where we see still a lot of coal in the grids. But we also take comfort from the fact that a number of those countries are part of the EU. And we see a positive long-term economic trajectory for those countries and we see a near-term need for both at a state level but also at a corporate level to procure renewable energy in those markets given the carbon intensity, so -- of the grid.So that would be the other market that we would be open to in the near term if we found the right opportunity. Given the state that those markets are out in Eastern Europe, it would more than likely, if we did anything, be more of a development play so -- as opposed to something with operating assets.

[Operator]

Our next question comes from the line of Andrew Kuske with Credit Suisse.

[Andrew M. Kuske]

I guess question is for Mike. And when you start to think about just the longer-term nature of returns and the big capital needs for offshore wind, does that really help preserve the competitive advantage for some of the early movers like yourself on a longer-term basis for this industry?

[Mike Crawley, CEO & President]

Can you just repeat the first part of your question again, sorry?

[Andrew M. Kuske]

Well, if we just think about offshore wind and how long it takes to bring a project online, to win a project, to bring it online and just the capital that's involved, it limits the audience on this. And we've seen in other aspects of renewables, a lot of money chasing things. So do you see your competitive advantages being preserved in part because of those realities of offshore wind?

[Mike Crawley, CEO & President]

Yes. I mean so there's a -- I mean you say I'm mixing my analogy -- metaphors, but there's a moat around offshore wind, a greater moat around offshore wind and there is around onshore renewables. In other words, a greater barrier to entry, both in terms of the talent that it requires to both develop and construct the projects, but also, as you say, the length of time that it requires and the development expense that it requires to move the projects forward. And as well, this new market still opening up for offshore wind. So I mean the -- in our view, the way to secure these projects and move them forward successfully is to, in most cases, get the right -- a good local partner like we did in Poland, like we've done in Taiwan and in Japan. So -- sorry, I got a bit of a beeping in my ear. I'm not sure if this -- it's my headset. Okay.So yes, so I think in all of those, we see ourselves as having a bit of an advantage that we want to leverage moving forward. And as you -- I mean the defining -- 2 defining characteristics of our sector right now and I think for the near-term future at least is the need for a lot of additional renewable energy supply in a lot of markets around the world to meet carbon reduction goals. And number two, just the amount of capital that's coming into the sector, right, to invest in renewable assets. So that means to me that the best opportunity right now is in developing those projects, so -- and to which can supply the energy and create an investment vehicle for the capital that's coming in to the sector. And that's what we're looking to do with offshore wind, where those projects are -- have a scale, too, which allows us to bring in other investors into those projects alongside our own capital.

[Andrew M. Kuske]

And if I may, just as a follow-up to that and really builds upon the farm downs that you plan on doing in the future. Just given the uniqueness of the offshore environment and a few players, do you think you have greater preservation of returns and farm downs than you would say if you were trying to do the same thing with onshore renewables, whether it be solar or wind?

[Mike Crawley, CEO & President]

I think there's probably a greater lift that you can get on the farm down -- I mean to be determined because I think you've got a -- you're starting off with a better return in offshore wind. And given the scale of the investment on the farm down, you're probably attracting a larger pool of investors, so you probably have a bigger spread there. So that's to be determined, that's the thesis. So I'd say the answer is probably yes. But until something is done, I never like to get too far ahead of myself.

[Operator]

Our next question comes from the line of Mark Jarvi with CIBC Capital Markets.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Just a continuation of the discussion on procurement and kind of lock-in costs. It looks like you've expanded the turbine supply agreement in Taiwan to Hai Long 2B and 3. Are those costs offset for Taiwan? And then are there options in the agreement with Siemens in terms of like procurement of turbines for Baltic Power or Nordsee Two if you do that in terms of being able to sort of also lock-in sort of some indicative pricing on other projects that you're looking at doing?

[Mike Crawley, CEO & President]

So good question, Mark. I mean on the second part of it, there's no explicit connection to any other projects. And as you know, we have different partners on different projects as well already, right? So there wouldn't be any explicit -- anything explicit in the contracts on that and the supply contracts on that. However, your best leverage with any supplier is other opportunities for them, right, and a pipeline. So having the pipeline of offshore wind projects we have globally coming up, it certainly, in our view, enhances our negotiations -- our negotiating position with any turbine supplier and other suppliers to our projects as well with particular turbine -- particularly turbine suppliers.The prices or the cost on those projects, the Taiwan projects, will not be locked in until we execute the turbine supply agreement and the service -- associated service contract, which we wouldn't anticipate being in a position to -- and we have never anticipated being in a position to do until the end of this year or the first kind of quarter of 2022 as we work through the local supply chain and confirm on Hai Long 2A, the local supply commitments that we have to make according to the Industrial Relevance Plan that we referred to in the script at the beginning and as well just working with the regional supply chain on the balance of the procurement for the project. So we'd expect to be, as I said, locked-in end of this year, early 2022 on the supply prices.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

Okay. And then just coming back to the sell-down of the farm downs, continue to see a number of deals get done. When you track some of the deals that have been done, either operating assets like Orsted's sell-down to Norges or even some of the processes that happened already in Taiwan, have you been able to triangulate like what is sort of the difference between the returns and the buyers' IRR out of project at financial close versus COD? And how those sort of relative time point in terms of you trying to optimize your returns, how you've seen other transactions play out to inform your view of whether or not the sell-down at financial closes, are you leaving money on the table at that point?

[Mike Crawley, CEO & President]

Yes. So I'll flip it to Pauline because we've walked through an example at the Investor Day back in early February. But I mean, high level, well, typically a sell-down at financial close would seem optimal and particularly if you end up guaranteeing some of the construction costs and arguably if you get the lowest cost capital at financial close on a sell-down. There are other reasons to do sell-downs earlier, both at the project level or they can be other reasons posed at the project level, but also from a Northland standpoint as we manage how we fund our portfolio globally. So it is a -- there are multiple considerations in terms of when we do the sell-down. We are seeing more interest from investors in coming into offshore wind projects, in particular, at earlier stages. So that perhaps does change our calculation a bit on it. But I don't know, Pauline would...

[Pauline Alimchandani, Chief Financial Officer]

Yes. I mean our strategy, I guess, right now, for the most part, is still to sell down in and around financial close and all the transactions we look at each and every single one. And I think the metrics that we showed at our Investor Day still hold intact, right? And so in that example, we put out that illustrative 10%, a 300-basis point promote, which is going to be lower or higher depending on the market and the specific nuances and risks of each project and each project is different. And in that case, that means the buyers' IRR is 7. I think that still feels reasonable to us looking at recent transactions.

[Mark Thomas Jarvi, Director of Institutional Equity Research]

And just to -- my comments about the number of buyers, the people that would have been there at post COD or operating assets are essentially migrating closer to financial close. So you still think there's a really strong competitive tension out there for -- at the time of the sell-down at financial close?

[Pauline Alimchandani, Chief Financial Officer]

You know, it's interesting because I think what we're starting to hear more of is interest to come in earlier because it's very competitive to come in at financial close. So if there is an avenue to come in earlier, we are hearing more and more interest for that. So I think time will tell.

[Operator]

Mr. Crawley, there are no further questions at this time. I will now turn the call back to you.

[Mike Crawley, CEO & President]

Well, thanks, everyone, for joining us today. We will hold our next call following the release of our second quarter 2020 result -- 2021 results in August. In the meantime, we thank everybody for your continued confidence and support.

[Operator]

Ladies and gentlemen, that does conclude the conference call for today. Thank you for participating, and have a pleasant day.