Investment 2.0: The Future of Renewable Financing

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In Bloomberg’s 2016 New Energy Outlook, analysts maintained that we are on track to invest $9.4 trillion in carbon-free energy, globally, by 2040. However, the report also estimates that an additional $5.4 trillion will have to be spent in order to keep atmospheric carbon levels under the critical number of 450 parts-per-million. Given our renewable investment strategies thus far, it is difficult to see where we will make up the difference.

As we look at the renewable landscape today, we see that the industry is shifting from one that is largely subsidized to one that is more market-based. This, in combination with an industry that is outgrowing the grid, is leading more investors to adjust their strategies.

For years, large scale utilities have funded renewables as pet-projects. As the market grows tighter, this model is now becoming more difficult to maintain. This year, in a move eerily similar to the YieldCo strategy that sunk SunEdison, German utility, RWE, spun its renewable investments into a separate company, Innogy. Since offering IPO in October, the company has gotten off to a shaky start, citing poor returns from the grid and slim margins brought on by heavy competition in the renewable sector.

Much of this new competition is coming from an increasing trend of IPPs deepening their pockets by partnering with private equity funds. In February, the developer Gestamp Solar morphed into X-ELIO when it partnered with global investment firm KKR. This transaction left X-ELIO at a total enterprise value of nearly $1 billion. By combining the technical expertise of an IPP with the financial resources of an equity fund, partnerships like these are becoming a hyper-competitive option in renewable development.

While we are seeing a shift in financing strategy, one is still forced to wonder where the additional $5.4 trillion, called for by Bloomberg analysts might come from. In the interests of profits, these companies are largely investing in more economically sound renewables, which are becoming increasingly grid constrained. Thus, we are posed with a bit of a catch 22 — emerging technologies, which might allow for greater grid penetration, are seeing less investment capital in a world of diminishing government investment.

In our energy investment market, there is a strong need for groups that are willing to take riskier, longer term investments in technology research, as opposed to project development of existing technologies. Last week, we got a beacon of hope with the announcement of the Bill Gates led Breakthrough Energy Ventures (BEV) fund.

In his post, A New Model for Investing in Energy Innovation, Bill Gates describes the BEV coalition as an  “incredible group of people who care a lot about energy innovation,” and stating a commitment to fund a slew of emerging renewable technologies. Gates points out some of our best innovation has come when private companies carry on the early work done by government; but government alone is not enough to push through the innovations needed in the energy sector.

By filling in the missing link between the lab and the market, BEV may represent a model that will help reach the investment numbers that the Bloomberg deems necessary. While the group’s motives may appear to be rooted in altruism, the group does expect this fund to pay off, just on a much longer timeline.  Hopefully, these captains of industry will inspire others to try the same model.  

This is one example of the many exciting financial strategies that are emerging in today’s energy market. As the clean tech revolution continues, we can expect to see many more diversified renewable investment portfolios from IPPs to global utilities alike. As these portfolios become more complex, so does the financing, development and operation of assets. When these practices become too complex to manage, trouble begins, as we’ve learned this past year. Proper management of the investment lifecycle is essential for maintaining these processes, and with that comes the need for data visibility, compliance and speed of decision making. With an automated system like the Mercatus Energy Investment Lifecycle Management (ILM) solution, investors, developers, financiers and now asset managers alike can responsibly manage their processes in sync; while decreasing operational costs and increasing revenue.

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