Preserving capital and making more money is the main aim of any investment, but over the last few years sustainability has shifted noticeably closer towards the forefront of investors’ minds.
According to the Association of Investment Companies’ (AICs’) figures, 2013 was a strong year for investment company fundraising, with significant sectors including sector specialist: infrastructure - renewable energy. The largest launch was Riverstone Energy in October, which raised £760 million, followed by Renewables Infrastructure Group, which raised £300 million at its launch in July. Additionally, figures from the Department of Energy and Climate Change showed “a sharp rise” in power coming from renewable energies. The environmental sector covers an increasingly diverse range of companies - from alternative energies through to water and waste - and is up an average of 29 percent in share price total return terms over one year, compared to a wider industry average of 16 percent.
thewealthnet spoke to James E. Brathwaite CBE, executive chairman and founder of DRENL, a London-based renewable energy company about the opportunities in the sector.
“The renewable energy market is slowly reaching maturity, and more investors are becoming involved. The government and energy industry have indicated that this market must continue to grow significantly in order to help fill the looming energy gap,” Mr Brathwaite said.
There are many existing funds that specialise in renewable energy. Renewable energy is a broad term, it includes UK onshore wind, UK offshore wind, solar, biomass, energy from waste, and, as Mr Brathwaite stressed, not all renewables are equal, “they all have pros and cons.” An investor new to this sector must first identify which renewable in particular he or she wants to invest, and what their risk appetite is. Risk, in turn, is determined by which stage of the process an investor comes in. Pre-planning carries the highest risk, as planning permission could get rejected. Post-planning and pre-financial close both carry medium risk, and post financial close is the lowest risk strategy.
“At this late stage, there is the most influx of investors. People need educating, they need to realise what the best technologies are, and what technologies fit their risk profile so that the industry can have access to the right educated investors in order to move forward.”
As a rule, renewables sector doesn’t offer truly short term returns, with the fastest realistically being three to five years. In this category lie the small scale commercial roof mounted solar PV projects under 250kwp, as there is no planning permission required, and the government provides the maximum feed in tariffs (FITs).
According to Mr Brathwaite, the safest option for a long term investor is biomass energy projects, as there are three revenue streams – power sales, renewable obligations certificates (ROCs –government subsidies) and feed stock (fuel). “Unlike a conventional power station where they purchase gas or coal, the biomass energy plant gets paid for taking that fuel, which has a big impact on the investor rate of return”. Currently in the UK there are several biomass energy projects operating and even more in development, but it is “by no means a mature market yet”.
One of the biggest risks at the moment is the change from ROCs to CFDs (contract for difference), which has had an impact on funding projects past 2017 due to investors’ uncertainty over the CFD market. As an example, Mr Brathwaite highlighted ground mounted solar projects, which used to be one of the largest renewable energy sectors, but which will effectively stop in April 2015. “The government doesn’t want to use agricultural land for energy production, however experts’ opinion is very much divided on that subject.”
Currently, there are many wind and solar investors, but very few for biomass and energy from waste, even though this is where the highest returns can be found – “it is not yet an established technology in the UK, unlike Germany, France and Scandinavia.” For example, the UK pays to export part of its waste to Scandinavia, where it is converted into energy, which is then sold back to the UK to balance the energy gap, “which is absurd, if you think about it”.
For all renewables, “peer-to-peer” (P2P) lending is “very interesting”. When the projects are in the early stages (pre-planning permission), there are few, if any, large investors interested. “But we have seen P2P lending fill this gap, and significant returns as a result of the high risk profile. This high risk profile can be reduced by investors through research into technology, location, and company profile. This is especially interesting to smaller mass affluent investors.”
Mass affluent, high and ultra high net worth investors can benefit from the sector through EIS, VCTs and other vehicles, but, as Mr Brathwaite reiterated, for the market to grow more significantly, levels of education and awareness need to be raised continuously – only then will the UK be able to compare and compete with Scandinavia and Europe, and ensure a healthier environment for future generations.