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Cashing in on green energy

The explosion in renewables projects is transforming the energy investment landscape

For green energy investments, traditional sources of finance don't cut it any longer.

As the latest report by WindPower magazine points out, the growth in the size of wind farms, to take one sector, requires a spread of investors. "Offshore wind farms are generally owned by multiple parties, due to the large investments needed and the need to diversify risk," Windpower says.

That is why in the first half of 2017, no fewer than 18 owners were involved in the six wind farms that connected wind turbines to the European grid.

While power companies still raise most of the funds required for installations, financial entities including infrastructure and private equity funds are gradually increasing their participation in both onshore and offshore wind markets," Windpower adds.

Although power producers own nearly half of the total capacity connected in the first six months of last year, pure investors are seeing the attractions of wind power as well as other renewables-based energy projects. Where even big-ticket investors can be intimidated by the inherent riskiness of upstream projects, they value the stable long-term revenues flowing from wind farms. In the first half of 2017, these two categories of investors alone funded 38% of new capacity compared with just over 25% in the same period last year, a significant increase that shows little sign of slowing.

Some of the manufacturers are owned by private capital. Senvion, which provided 31% of new wind power in the first half of 2017, is controlled by Centerbridge Partners, for example.

€75-95bn—Investment before 2020 to meet Brussels-mandated emission targets

In this way, renewables technology and capital investment are on a mutually advantageous path. As Netherlands-based lender ING notes in a blog, the combination is leading to shorter payback periods. "We are witnessing a major transition in the energy landscape," it comments. "This transformation will affect the banking landscape as well. [We will] profit from their combined competencies."

ING is an investor in geothermal power, a relatively neglected sector in renewables that is making a comeback in Asia, notably in Indonesia. A consortium of international lenders, including ING, raised $1.17bn for the Sarulla project that's slated to produce 320 megawatts of clean energy when fully operational. Main contractor Sarulla Operations believes it will serve as a catalyst for similar developments in the region. "The venture is widely regarded as a breakthrough that could stoke interest elsewhere in Southeast Asia in this largely undeveloped segment of the energy sector," predicts project finance manager Jumpei Sakaue.

The Indonesian government has set a tough target for Sarulla and other mainly geothermal projects—by 2025, renewables are required to meet 23% of the nation's total energy needs.

Secure investment environment

As renewables technology improves, the time to reach profits will shrink and the commercial proposition become proportionately more attractive. In 2016, for instance, the average price of a wind turbine measured by each megawatt produced was €0.83m ($1m), down from €0.91m in 2015. Even better, turbines are delivering more power. Approximately 66% of the sites completed or under development in Europe in 2017 deployed 7MW turbines, while two sites are installing 8MW turbines. The same trend is observable elsewhere.

In this more secure investment environment, one of the most active of alternative financiers is investment bank Laidlaw Capital. It owns 10.2% of the new wind-power capacity in Europe, while Copenhagen Infrastructure Partners (CIP), a renewables-oriented investor barely five years old, accounted for 7.6%. (CIP also has a 35% stake in the £2.6bn [$3.41bn] Beatrice offshore wind farm in Outer Moray Firth in the North Sea that's due to come fully on-stream in 2019.)

CIP provides a good illustration of where renewables finance is heading. The firm continues to tap a ready source of private capital for the right kind of projects. As it points out, these are the ones that deliver long-term stable cash flows and, preferably, above-target investment returns.

In a supposedly tough market for private-equity fund raising, CIP won commitments of €1.9bn in just four months, way ahead of schedule, for an eventual €3bn pot. This is dedicated mainly to large-scale wind, solar, biomass, waste-to-energy, transmission and distribution. Even before its close in late 2017, the fund had €1.5bn of potential investments in the pipeline. While most of the firm's investors are based in the Nordics and UK, it's attracting a growing percentage of its funds from North America.

CIP also boasts an impressive portfolio of investors in biomass. In mid-October, a broad range of banks and institutional investors, including Royal Bank of Scotland, Investec and Aviva, piled into a £250m financing of senior debt in two biomass power plants in the United Kingdom. "We see a strong demand from pension funds for assets that deliver reliable, long-dated cashflows with appropriate risk-adjusted returns," said Sarah Wall, senior portfolio manager at Aviva.

Increasingly, a project's green credentials are seen as bankable rather than merely virtuous. The biomass plants fit the bill, producing enough energy to meet the requirements of 152,800 households, while saving over 550,000 tonnes of CO2 a year.

Although non-industry funding is growing, more is needed. Around €75-95bn will be required between now and 2020 to meet Brussels-mandated emissions targets—and that's just for wind power. The OECD sets the bar even higher, estimating that annual investment in renewables will have to rise by 150% if the goals of the Paris Agreement on climate change are to be met.

Green-bond bandwagon

Green bonds could help plug this yawning investment gap in Europe and elsewhere. There's already $200bn in currently outstanding green bonds, according to London-based Climate Bonds Initiative, a not-for-profit organisation. And there's another $115-130bn in green bond-backed projects in the pipeline, estimates Swedish bank SEB, which combined with the World Bank to develop the concept of such bonds a decade ago.

There's no shortage of blue-chip finance for these instruments. Along with impeccably green investors such as Mirova, a subsidiary of French investment bank Natixis, and Netherlands-based Actiam, with over €54bn under management, they include mainstream financiers like BlackRock, State Street and ING. The Dutch institution launched its own green bond two years ago and financed nearly €28bn in renewables-oriented projects in the first half of 2016 alone. Currently, ING allocates 34% of its latest €1.35bn bond to wind and 24% to solar.

Increasingly, a project's green credentials are seen as bankable rather than merely virtuous

Sovereign and municipal governments that have jumped aboard the green-bond bandwagon include the Central Bank of Peru and the California State Treasurer, while retail investors have entered the market through wealth management giants such as Merrill Lynch and Morgan Stanley.

It's helped that the definition of what's exactly a green bond has been toughened up—as recently as three years ago it was enough if a company simply declared that its bond met the criteria. During 2017, credit-rating agencies S&P, Global and Moody's began to apply a much more rigorous methodology that has made investors more confident they are buying into the real thing.

But they're also influenced by the declining cost of energy sourced from renewables. According to OECD economist Geraldine Ang, a specialist in green finance and investment, the capital cost of utility-scale photovoltaic energy has fallen by more than 60% since 2010—that is, at a rate of nearly 10% a year—while that of onshore wind energy is down by 20% over the same period.

GIBs on the rise

Largely under the radar, a new wave of green investment banks (GIB) is also funding sizeable energy infrastructure, particularly at local level. In a typical initiative, in September 2017, Connecticut Green Bank, America's first GIB, announced a project with solar specialist Onyx Renewables Partners that will finance the creation of 15-20MW of commercial-scale solar power in the state.

An analysis of Onyx's sources of finance illustrates how rapidly funding for renewables is diversifying. Established by Blackstone Partners in 2014, Onyx has a close relationship with Credit Suisse. It also raises funds from private investors—so-called tax equity partners. And now, in combination with Connecticut Green Bank, it has established another fund that will provide power purchase agreements to a wide range of commercial property owners under a state-subsidised programme.

The number of GIBs is growing. Some have been established by national governments such as those in Australia, Japan, Malaysia, Switzerland and the UK; others at state and city level, particularly in America. They're raising money from pension funds, insurance companies, sovereign wealth funds and, in the US, mutuals. As such, they help mobilise private investment into energy projects.

Renewables-focused investors are, however, by no means averse to hydrocarbons. ING, for instance, recognises that oil and gas are fundamental in many economies and will continue to be so for years to come. One of the institution's biggest recent investments was a loan for the Gate liquefied natural gas terminal in Rotterdam that will feed vessels currently running on heavy bunker fuel.

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