Published : 5 years ago, on 23/09/2019

Clean energy is an exciting opportunity creating profitable ways of investing in protecting the earth. The emergence of investment vehicles allowing investors to access equity in projects at different stages of the supply chain has been paramount to the growth of the renewable energy sector. Global investment in clean energy exceeded $300B in 2018, and despite a more complex investment climate in 2019, these vehicles will continue to be key enablers.

A high rate of merger & acquisition (M&A) activity and greater private equity and venture capital resources have sustainably supported projects throughout the high-risk early phases, before handing over to long term investors using vehicles such as green bonds, dedicated funds and asset financing options.

Karun Harrar, Analyst, Kene Partners, explores the options available to investors in more detail.

• Sources of Equity & Debt 

There are several possible methods to fund renewable energy projects. Just two examples include on-balance-sheet via a utility or IPP (Independent Power Producer) or non-recourse project finance, using a blend of debt from banks and equity from smaller investors.

When it comes to particular sectors of the clean energy market, whole-life costs for verticals such as wind and solar schemes are generally accrued in the construction phase, rather than the operational and maintenance phase, and this results in low capital costs. Consequently, these technologies offer a low levelized cost of electricity in comparison to traditional methods, meaning that they are not just attractive to investors but also to the end-users.

Depending on the bond market for central funding are on-balance finance options, typically progressed by utilities. One of the largest investors in renewable energy schemes during 2016 and 2017 was Enel, a repeat implementer of these methods. It made a significant bond deal recently in 2017, issuing €1 billion of 10-year bond coupons at 1.375%, which when combined with the bond coupons issued in 2012 at 4.875% was worth a combined total of €1.25B in January 2017.

Considering borrowing costs and interest swaps, investors have many factors to consider when choosing bank loans, which are primarily characterised as a non-recourse debt finance option. In recent years, France, in particular, has exhibited a significant drop in the interest rate swap to fix the cost of borrowing, falling 2.5% between 2012 and 2017. It was thought that a number of factors affected this decline, including reductions in the European Central Bank interest rates. Furthermore, as most of the refinancing of these projects is primarily required at the low-risk post-construction phase, the majority of investment is only drawn into the equity at this point.

• Green Bonds 

Nearly a decade ago, the potential of green bonds went largely unnoticed, but now they are a crucial private-sector solution enabling the financing of projects, as well as providing many benefits for investors. Climate Awareness bonds were first issued in 2007 by the European Investment Bank, and since then, the Green Bond Market has undergone monumental growth over the last decade, growing by 78% to over $155B globally in 2017, and is predicted to reach $180B in 2019 according to ICMA Group.

Projects are often looking for funding alternatives from pension funds and insurance companies which are accessible in the global capital markets. Investors are now looking for smart initiatives which exhibit suitable risk-reward profiles, meeting particular criteria for factors including geographic diversity and rating.

In developing countries, a large proportion of green bonds were issued in China and India, yet, experts have identified other emerging markets that could be potential areas of focus in the market. For example, Brazilian Development Bank BNDES secured $1B of funding in May 2017 – at the time this was the single largest green bond issuance in Latin America, with the investment being used for the financing of a number of Brazilian solar and wind projects.

Green Bonds are an investment opportunity that is experiencing rapid growth. From 2008 to 2012, the World Bank’s annual global green bond issuance had increased from $440 million to $2.6 billion – an extraordinary increase even before the recently well-publicised ‘Blue Planet effect’ even came into play. The world’s largest green bond to date at $4.3B was set by China’s Bank of Communication in 2016 and the annual issuance was raised to $155B in 2017. In 2018 Europe’s largest asset manager Amundi partnered with IFC and launched the largest green bond investment vehicle so far. The Amundi Planet Emerging Green One (EGO) fund is aimed at emerging markets and closed at $1.4B. As the earnings are deployed over the next seven years, it is predicted to pump $2 billion into the targeted markets.

• Venture Capital & Private Equity 

Between 2017 and 2018, the market saw a 127% increase in global venture capital and private equity investment, reaching a total of $9.2 billion. In recent years, research and development in this field has become increasingly focused upon large manufacturers as the sector matures, which means that the rate of early-stage investment is predicted to reduce.

Moreover, as the drive to improve existing clean energy technologies is primarily fuelled by larger manufacturers dominating the industry with sufficient resources, smaller companies, except for some specific boutiques, would find it challenging to develop and commercialise particular technology by themselves.

• Mergers & Acquisitions

There are many sectors within renewable energy to consider; particularly looking at wind, while there was a decline of 12% in M&A activity between 2016 and 2017, it continues to dominate the market, valued at $62 billion. A majority of this stemmed from offshore projects in the North Sea, with the largest M&A deal made between LM Wind Power Holding and General Electric, valued at $1.65B in Denmark. Out of the top 30 M&A deals in 2017, 23 of these were wind-related, which highlights its potential over other clean energies to consistently control the M&A segment.

Acquisition activity in 2017 was valued at $11.4 billion, slightly dropping by 1% after four years of continuous growth. Corporate Merger and Acquisition activity fell in 2017 to $14.3B, a 52% decline from the value in 2016, however, private equity buy-outs at $11.2B were four times greater than that seen in the year prior. Whilst Europe and the United States both saw refinancing details totalling $37.2 billion and $30.8 billion, the largest increase came from developing regions of Brazil, increasing by 112% to $6.1 billion.