Since the withdrawal of subsidies from all solar projects built after March 2017, barely a day has gone by without new thought piece on where the next big investment opportunity will be within the clean energy sphere.
Whilst the M&A market remains buoyant across clean energy technologies and funds are also keeping one eye on subsidy free solar and wind, increasingly investors are finding opportunity for returns through means other than traditional acquisition and sale.
Over the next couple of months, we will be publishing commentary on four different topics, starting with an introduction into the world of clean energy investments before moving into more detail around venture capital and private equity, debt funding, and joint venture arrangements.
From a technical point of view this first article is aimed at investors who may have a passing awareness of renewable energy projects, but are either not traditionally establish investors in the area or have invested from a distance.
How does it work?
The basic principle behind renewable energy projects is relatively simple. Let us take solar for example, which is at the forefront of the public image of renewable energy alongside wind. In theory a developer agrees with a landowner to rent a space on their field, obtains planning permission and secures a connection to the grid. They then hire a contractor to install the solar panels on the field and connect the project to the grid. The project exports electricity and the project owner is paid for that electricity.
Stepping into the financials around this shows some of the difficulties that earlier developers faced. For many years the cost of building a renewable energy project outweighed the price received for the sale of electricity and as such many projects simply weren't viable. To counteract this the government introduced a number of schemes to encourage the development of renewable energy projects, whereby not only would payment be received in respect of the electricity taken by the purchaser, but "bonus" income streams would be available based on the amount of electricity generated.
The two most recognised of the schemes were Feed in Tariffs (FITs) and Renewable Obligation (RO) scheme. Under the FIT scheme, not only would there be a fixed "floor-price" for the electricity exported to the grid, but the owner would also receive an amount for the electricity generated – whether or not this was exported to the grid. Under the RO scheme the owner would receive Renewable Obligation Certificates (ROCs) from Ofgem. Electricity companies are required to collect a certain number of these ROCs per year, and as such they would pay for them on top of paying for the electricity.
The FIT scheme and RO scheme have now all but come to an end for new projects and as such developers are looking for new and innovate ways to tap into the clean energy market.
Economies of scale
Whilst the costs of clean energy technologies are falling, we have increasingly seen developers turning to economies of scale to maximise their returns. Larger projects do ultimately make a higher return, however they do also cost more to get up and running, which opens the door to investors and debt providers where otherwise a developer may go it alone.
A typical area where this line of thought is being followed through is solar. Historically developers would fund the project themselves up until it was construction ready, at which point they would either sell to a party who would build the project, or seek bank finance. With scale being a significant consideration, developers often have to seek funds prior to development, in particular to get over the increased planning permission requirements, as any project over 50MWp must go through the development consent order (DCO) process rather than your more typical planning permission, which brings with it the cost of surveyors, environmental specialists, and various other advisors. Investors and fund providers can help bridge this gap and help make the project a success where it otherwise would not have been able to get off the ground.
Like any investment it is important that careful due diligence is undertaken to ensure that the develop has all the other parts of the puzzle slotted into place and that the DCO has a reasonable chance of success.
Utilisation of new technologies
Another trend we have seen recently is the use of new technologies, either in innovate ways by themselves, or as a method to "sweat out" returns from current projects.
Typically the use of new technologies in this manner has focused around battery storage and co-location. Under this arrangement a battery storage project is added to an existing generation technology, such as wind or solar, in order to maximise returns. One way of doing this is by having the wind or solar project feed into the battery when the grid's use of electricity is low (and therefore prices are low), and then export from the battery to the grid during times of high grid usage (when prices are high). Another is to ensure that these periods of high use and prices can be tapped into. For example, a solar project will not be generating much energy during peak time (around 6pm) in winter, so feeding to the battery during daylight hours and having that feed into the grid when electricity prices are higher in the evening also adds a benefit.
Another area which has seen interesting developments is the "behind-the-meter" sector. Behind the meter projects are generally those which feed directly to a private user (i.e. so if you have some solar panels on your roof and you use the electricity from these instead of drawing it from the grid, this is "behind the meter"). One such arrangement can be seen in the joint venture TLT acted on between Thrive and Aura, whereby battery storage projects will be installed for free on site at high energy users' premises, and in exchange the joint venture company retains a percentage of the revenue from the battery storage project in exchange for lowering the costs of electricity for the high energy user.
Such arrangements require capital to develop, and as such it is usual for a developer or existing project owner to partner with a funder or investor to make these returns a possibility.
Although the adoption and introduction of electric vehicles is gaining pace, charging infrastructure remains mainly in the development phase, meaning great opportunities for investors and fund providers to get on board early.
There are a number of possibilities as to what form electric vehicle charging will finally take. Some existing car park owners may look to install solar on their roof alongside battery storage. Some landowners may seek to build a project in the usual course (as you would for example a wind or solar project), and alongside that build a car charging facility.
Another possibility is the aggregating of batteries. A number of batteries could be installed in different houses or at business or just at different locations. They could then all be pooled though an aggregator system such that where excess electricity is available in one battery, another battery owner could use it (for example to charge their car).
All of these options are currently being explored by various parties, and if diesel and electric cars are to be banned by 2040, then a lot of investment will be needed, which means plenty of opportunities for returns.