PrimeEnergy Cleantech News: Factors which influence investment attractiveness in solar sector.
Prime Energy Cleantech: The attractiveness of cleantech investments is dependent upon a number of factors, including the country in which they are made and the technology selected.
A complex landscape
The attractiveness of cleantech investments is dependent upon a number of factors, including the country in which they are made and the technology selected. However, the structure, market positioning and capital agenda of each investor impacts on the attractiveness of any particular opportunity to them. It is therefore not easy to make generalizations common to all investors which reflect how they behave in the marketplace in which they operate.
However, to help to demonstrate the various dynamics at work and the ways in which they may correlate with each other, some specific examples are considered below.
Utilities
During the early development of renewable technologies within the UK, the majority of wind projects were small scale, funded by equity from a project developer and sold their output to one of the large utilities under the terms of a power purchase agreement. The UK Renewables Obligation required these utilities to either generate a prescribed percentage of the electricity they supplied from renewable sources, or to instead pay a contribution to a ‘buy-out’ fund (which was distributed to providers of renewable electricity). To a large extent, it was more economically advantageous for utilities to meet their obligations by a combination of power purchase agreements and buy-out fund payments than to invest directly in wind farms, and thus they did not take significant positions in the sector.
However, with the increasing scales of renewable energy generation now agreed under the European Union Renewables Directive, this situation has changed significantly. The Directive, published in January 2008, requires member countries to commit to an agreed share of energy generation from renewable source with the aim that the EU as a whole will generate at least 20% of total energy from renewable sources by 2020. Utility companies have entered the market quite aggressively, seeking to generate significant portfolios of assets within a short space of time. The requirement to develop market positions rapidly, combined with the limited volumes that can be generated organically from their own pipelines, i.e., those projects still in development phase.
This has resulted in a great deal of consolidation activity in the marketplace in recent years, and some very sizeable transactions — with a significant proportion of the transaction value sometimes being attributed to the target’s own development pipeline.A more recent development is that, even with their ‘big balance sheets,’ utilities are unwilling to commit the high levels of investment capital required for major projects such as the London Array. As a result, a number of joint venture structures and other strategic alliances are increasingly emerging, as they look to share the risks involved, and manage their scarce capital.SolarOne final example is provided by the solar photovoltaic (PV) industry in Spain. In order to stimulate the local market, a very attractive Spanish solar PV feed-in tariff regime was set up in 2007. This was highly successful in attracting both local and overseas investors, in the form of equity providers, banks and infrastructure funds. This resulted in build levels significantly exceeding the targets set and concerns about the overall cost of the subsidy, resulting in the support regime being considerably scaled back in 2008. This gave rise to a flurry of development activity aimed at securing the higher tariff before the deadline expired, and then a high level of interest in secondary transactions, as investors who had missed out on the ‘development’ phase sought to establish positions by acquisition, but in a market with very few willing sellers.
Taken from the Project research of Ernst &Young
Summary
It is potentially misleading to make broad generalizations in an industry as wide, as diverse and as dynamic as the cleantech sector. However, the examples above illustrate the wide range of factors that may influence the valuation of a renewables project, depending upon the investor’s capital agenda, the technology and the country in question. Furthermore, understanding these valuations is clearly increasingly important, at a time when investors move forward from their current positions after the industry’s early growth phase towards a promising, but uncertain, future.
