Tools of asset development: Renewable Energy Projects case

European Sting reporter, Nataliya Katser-Buchkovska, moderating a panel discussion on renewable energy during Energy Forecast in Brussels

Energy Forecast Pan European 2014 Outlook organized by Premier Cercle in Brussels has become a platform for networking between the EU officials, key market players and financial institution representatives. In February delegates had a unique opportunity at the center of Brussels to discuss long-term trends, perspectives, and challenges in energy sector in Europe and worldwide. Political, financial, and technical issues were discussed during this honourable event where the European Sting had an opportunity to contribute by moderating financial roundtable discussions.

The EU Commission set ambitious targets for the energy industry.The enormous efforts and transformation should be implemented by member states to cut carbon emissions by 40% to 2030, where fossil fuels are still leading energy source. Implementation of renewable energy sources into the energy system is a possible solution to reduce emission. Therefore, introduction of the energy efficiency schemes and innovation technology is the global trend. In this case, the key challenge is high cost of renewables requiring investments for sustainable development.

The World Economic Forum estimates that  5.7 billion  US-Dollars of green infrastructure is needed by 2020 in order to achieve environmental policy objectives. Even though the trend towards renewable energy will become stronger worldwide in the next few years, renewable investment is a second consecutive year of decline in Europe, the US and China, according to the Bloomberg New Energy Finance. But it should be taken into account that such decline is caused not only by reduction in investments but also by significant change in market structure, consolidation, reduction in price of technology and geographical shift of energy investments. Thus, while developed markets slow down, Brazil, Chile, Mexico, Uruguay and CIS, in particular Ukraine, gain momentum in RES implementation.

Tools of asset development

During the ‘Tools of asset development’, panel discussion moderated by Nataliya Katser-Buchkovska, Energy Analyst of the European Sting, key financial players in energy market such as European Investment Bank, Demeter and Partners, Moody’s, Green Investment Bank, Marguerite Fund, Electronova Capital, Triodos, discussed main drivers to finance renewable energy projects, global infrastructure investment trends and possibilities to increase project value. Participants debated how to choose attractive project and work with private equity investments to generate sustainable growth and acceptable returns for investments, peculiarities of debt financing, green bonds, green company IPO, international institutional financing, private –public partnership and join venture in the industry.

Private equity

As a rule, renewable projects are financed by the specialized private equity funds of financial institutions. This is because of specific nature of renewable investment, including high risks and innovative technologies. For instance, Jan Poppe, Head of Structure Finance TRIODOS bank told us that the bank was established to build sustainable economy and focus only at green projects that delivered social and environmental benefits. Wholly owned subsidiary of Triodos Bank, manages 18 sustainable investment funds, with a total value of EUR 2.2 billion at year-end 2012. Laurent Chatelin, Investment Director MARGUERITE FUND, European fund of energy, climate change and infrastructure, created by major European financial Institutions, explained at the panel that she targeted at long-term and stable risk adjusted returns from sustainable investments. The same example is Virgin Green Fund – leading, independent private equity firm investing growth capital in the renewable energy and resource efficiency sectors. Private equity is an excellent choice for RES project as apart from money, fund managers provide an expertise accelerating project development.

Debt finance

Renewable projects could obtain debt finance from the specialised institutions or banks with special programs. Certain programs are specialized and limited by territory. For instance, the EBRD established Ukraine Sustainable Energy Lending Facility (USELF) is an investment facility for fostering renewable energy projects in the country. By the way, the EBRD is the largest financial investor into energy efficiency and renewables in Ukraine with over €8.63 billion commitment through 337 projects in Ukraine.

Deutsche Bank, European Investment Bank and other banks provide debt finance for projects meeting commercial, technical and environmental eligibility criteria. However, such criteria are strict and application procedure is quite long as banks should comply with numerous regulatory requirements. Such tool of financing is almost unacceptable for start-up projects or companies with no credit history. Therefore, in order to obtain a loan from big financial institutions, the project should be mature enough to meet with all lender requirements.

Green bonds

Green bonds are one possible way to finance big green infrastructural projects. For instance,  the World Bank launched the “Strategic Framework for Development and Climate Change” in 2008 to help stimulate and coordinate public and private sector activity to tackle climate change. For investors World Bank Green Bonds are an opportunity to invest in climate solutions through a high quality credit fixed income product, such as the triple-A credit green bonds. This tool of finance is also available for big infrastructural projects with high credit rating.

Green IPOs

Green IPO has become a trend since 2000. The last decades were productive for renewable energy industry due to the governmental policy and long-term CO2 reduction targets. More than 100 wind, solar, biomass, smart technology and companies worldwide focus on advancing renewable energy, are listed in sector-specific indexes, like the WilderHill New Energy Global Innovation Index (NEX). The NEX index soared by over 54% in 2013 and equity raising by quoted clean energy companies more than doubled, beating wider market indices such as the S&P500 and the FTSE100.

Conclusion

There are various tools of renewable asset development, depending on size, geography, type of renewable, technology, project maturity. Green bonds, IPO are available for big infrastructural projects with high credit rating in developed countries, while small start-up projects have less possibility to attract finance at international market. ‘Cleantech’ startups or greenfield projects should apply to private equity funds or business incubators at the early stage of their development. The same situation stands with jurisdiction, markets with developed financial infrastructure offer wide range of tools to support renewable project development starting from IPO, structured finance, bonds, syndicated loans to micro finance. At the same time developing markets are limited in financial instruments and liquidity. Regarding tendencies, while investment in Europe is steadily declined, new emerging markets with good potential are opening for development.