What future for renewables investment?
Cutting subsidies from clean-energy projects has hurt banks and private equity investors – but there are still opportunities
Clean energy has been a boon for venture capitalists and private-equity firms with money to splash in the market in recent years—and output has followed.
Last year, falling costs led to a record rise in renewable capacity globally. Investors ploughed more money into the sector than they did in fossil fuels.
As BNP Paribas's Mark Muldowney told the Bloomberg New Energy Finance's (BNEF) summit in London this week, investing in renewables is "the right thing to do, but also it's a great business opportunity".
But the happy overlap between the profitable and the ethical may be coming to an end. In 2008, private-equity and venture-capital investment in clean energy hit $12.4bn. It fell to a low of $4.3bn in 2013, climbing again to $5.3bn, $6.3bn and $7.5bn in 2014, 2015 and 2016 respectively, Bloomberg New Energy Finance says. But investors now say a new kind of market is emerging-and it might stunt growth.
Blame governments in Europe and elsewhere, which are cutting subsidies. The UK pledged two years ago, for example, to end support for onshore wind. The shrinking of the safety net for investors heralds the arrival of uncertain times.
"The structure of the market is changing in northern Europe, away from the feed-in-tariff model," Neil Auerbach, of private-equity firm Hudson Clean Energy Partners, told the BNEF summit.
BNP Paribas, a bank, is investing €15bn in renewables between 2015 and 2020. Muldowney agreed that the "zero subsidy" model was a new market trend.
"We are very interested in it, but also cautious about it. This is an area of real concern to the market as a whole," he said.
He says one of the hurdles is finding other investors willing to take on the extra risk, now that clean energy like wind and solar have gone mainstream and don't get the same government support in many regions.
"We like to see debt repayment supported by fixed or guaranteed price. We are cautious. We are always interested to read consultants' views, but we wouldn't really use those to make serious investment decisions, because we've seen before that the prices change.
"If it isn't governments taking that risk anymore, is it going to be a big corporate?"
Muldowney suggests that large utility and oil companies could ideally offer subsidies or other forms of risk mitigation for investors in clean energy, since they know the industry best.
The difficulty of forecasting prices in power markets is another risk. "Our job as lenders is always to worry, but we see the cost reductions in the industry—and if cost reduction drives lower prices, then that is a positive," Muldowney told the panel.
Specific regions offer greater investment opportunities than others, but even countries with huge potential on paper bring their own problems.
Auerbach, of Hudson Green Energy Partners, cited Ireland, lagging on its EU renewable-energy targets, as a country ripe for more wind farms. But opposition from residents has proved a setback, as has the difficulty in appealing planning decisions.
Ireland may incur hefty fines if it doesn't meet its target of reducing emissions by 20% by 2020, along with all EU member states. It also has a specific target of producing from renewable sources at least 16% of all energy consumed, by the same year.
"The nimby problem in Ireland is quite severe," Auerbach said, adding that northern Europe was generally an attractive market but moves to restructure it could rub off some of its shine.
Lila Preston, partner at Generation Investment Management fund, highlighted projects such as Kopa Solar in Kenya, a decentralised pay-as-you-go power company in which Generation had recently invested, as an example of promising investment opportunities outside Europe and North America.
But while the energy mix is greening in many territories, the prospect of peak energy demand is looming. Some believe this could happen by 2040 or even earlier, as population and economic growth is not enough to offset efficiency gains, both in production and consumption of energy.
"A lot of capital is going to be destroyed because demand is not growing, even though the mix is shifting," Auerbach said.
Still, the group expressed optimism at some of the innovations emerging in the clean energy sector. Opportunities around storage and batteries, as well as transport, were singled out as the ones to watch for the future.
"Storage is under-researched, but we haven't seen the right business model for us just yet," said Preston, of Generation Investment Management.
She predicted that consumer innovation models—technology letting consumers buy and manage their own energy directly from the home-will become key areas for investment in the coming decades.