Ask any infrastructure investor what’s of interest at the moment, and they’ll likely reply: “Renewables.”The market has been exploding since 2005, when the Kyoto Protocol committed most countries around the world to reducing their reliance on smelly fossil fuels, which still hog 80 percent of global production. One of the best ways to do that is to increase the use of renewable energy sources, such as wind, sun, water and plants. And governments from Europe to China have been throwing money at the problem ever since.
Estimates vary, but 12-17 percent of energy now comes from renewable sources. Up to 9 percent comes from biomass (or burning plants), with hydro (water) accounting for up to 5.7 percent. Solar and wind production remains small, although investment is rising fast. Private equity and venture capital investment into photovoltaic and turbine energy production nearly doubled over the past two years to $5.6 billion last year, up from $3.2 billion in 2007.
More broadly, progress has been rapid enough for this to become a big market for private investors – and it should become much bigger. Some $155 billion of private capital was invested in renewable energy last year, and analysts from New Energy Finance reckon that needs to rise to $515 billion a year to 2030. Otherwise, carbon emissions will make global temperatures surge by two degrees. If that happens, there will be rising sea levels, violent storms and shifting climate patterns.
But the market does rely on government subsidies, although this might not be the huge obstacle it appears. Some $15 billion was spent on subsidising renewable energy production last year, but that’s a drop in the rising ocean of fossil fuel subsidies hitting $200 billion annually.
Set to surge
Already, there is a reasonably well developed industry for renewable power production – perhaps unsurprisingly given that it’s more than a decade since investors began looking at wind projects in Europe (Germany, Spain, the UK, Italy and France are the main proponents) and more than five years since they became active in America and China. “People understand the risks and understand how to price those risks and understand the different role finance can play in the capital structure and development of those assets. We are seeing a move down the capital cost curve such that the required rate of return for the development and ownership of wind energy, for example, is coming down,” says Mark Woodall, chief executive of Climate Change Capital in London.
Maybe, but no-one believes renewable energy can replace fossil fuels within the next 10 or 20 years. Some in the industry even question whether the targets are realistic given that spiking energy consumption rates are likely to offset any carbon savings. “Despite significant progress in the development of certain energy sources, for example wind, the reality is that, for Europe, an increase in gas-fired power is the only way of preventing a shortfall in generation capacity within the next decade,” says Mark Kerr, a director of 3i’s power team.
“In the big picture it is important to recognise that fossil fuels are not going away any time soon,” says Richard Youngman, managing director of the Cleantech Group.
That’s especially true of America, which remains the dirty old man of the developed countries. Under President George Bush, the US was seen as “very oil friendly and, some would argue, environmentally unfriendly,” says Youngman. But he says there has been a recent surge in investment into “clean technology”, including renewables. Last year the US generated more than 20 gigawatts from wind turbines – overtaking (previous leader) Germany’s wind energy output for the first time.
As recently as 2000, America produced just 2 percent of its energy generation through non-hydro renewables, and another 7 percent through hydro. By last year, non-hydro renewable production had surged to nearly 7 percent of the total, with hydro remaining flat.
So there’s progress, although it’s mixed because renewables are managed at state, rather than federal, level – California, Texas and New England are among the most advanced here. California is perhaps the most ambitious, aiming for 20 percent of total energy production to be from renewables by 2010 and 33 percent by 2020 (over 50 percent higher than the EU’s targets). There are also federal tax incentives for private renewables investment. The Renewable Energy Production Incentive provides payments of 1.5 cents per kilowatt hour for the first 10 years of a renewable plant’s operations, for example.
“President Obama has made it very clear that he is supportive of reducing carbon and generating renewables,” says Woodall. “One would expect to see significant growth in that sector but, to be honest, it has already grown considerably in the past three or four years.”
Last year, US venture firms invested $5.5 billion into clean technology, 25 percent more than in 2007. One high profile project was a $400 million wind power transmission line in Texas, awarded to the local Brookfield Asset Management and Spanish constructor Isolux Corsan in January. This is the biggest such project in the state and one of several power transmission projects across Texas totalling nearly $5 billion.
Like America, it is difficult to look at Europe’s progress in renewables as a whole because of the varying government policies, different Kyoto targets and the numerous national incentive schemes such as tax breaks and tradable green certificates. But a new EU directive has set a 20 percent target for overall renewable energy generation by 2020, creating plenty of work for financiers.
Fossil fuels make up around 79 percent of Europe’s energy consumption, with over 54 percent of the fuel imported. Energy consumption generally is rising fast, up 1.7 percent a year between 1990 and 2005. And that’s denting attemptsm to shift over to renewables, although renewables consumption surged by 3.4 percent a year over the same period. The big push is towards wind power, which accounted for three quarters of Europe’s renewable production in 2006 (and has seen the bulk of investment since then). Biomass accounts for 10-20 percent.
Germany is one of the biggest wind energy players. It has encouraged private investment by offering generous tariffs for renewables. The bung reduces each year, encouraging investors to build their plants as quickly as possible to exploit the higher rates. Denmark is also a significant producer (and exporter) of wind energy, having been among the first to commit to wind energy back in the early 1990s.
Germany’s ‘feed-in’ tariffs could work, judging by Spain. It has become one of the biggest recipients of solar energy investment after introducing attractive feed-in tariffs, which expired last September. There was a first past the post rush to invest in Spanish solar, according to Simon Page of Private equity advisor Platina Partners – and this has created three times as much solar energy capacity as the government had originally intended. A Platina subsidiary, Anemoi Renovables, bought three Spanish solar plants in Cantillana, Andalucia and Ocana last year.
Solar activities in Italy have also been on the increase, with renewable focused private equity firm Foresight Capital setting up shop in Rome last year to help raise its latest solar fund. Scandinavia and some East European countries like Romania, Bulgaria and Poland are also entering the renewable radar: “I think the renewable revolution is going Eastwards,” says Woodall.
European energy schemes generate investment returns of 9-12 percent, according to industry sources – not unattractive when so many other markets look wobbly.
After Kyoto the Chinese government brought in German-style subsidised tariffs to attract renewable energy investment, especially into biomass, which are only on offer until the beginning of 2010. “China has already met its 2010 targets [10 percent] for renewable energy generation and it will probably be double, maybe even treble, the targets set by 2010,” says Woodall, adding that the emphasis on renewables in China is more about energy security than climate change.
“They have coal but they don’t have gas or oil in any quantities. Therefore if they can make energy through renewable opportunities then they are going to be much more amenable to doing that,” he says. That’s unlocking plenty of business for private investors, although returns on investment are surprisingly modest at 8-12 percent — similar to those in far more stable Europe.
The other Asian giant, India, is only just starting to wake up to the need for private cash. In the past two years, just $700 million in private funds has been invested in the sector. However, the Indian government has introduced several measures to encourage private investment, including a preferential tariff for renewable energy projects. And it says that 9 percent of Indian power production now comes from renewables, after heavy state investment over the past decade.
“India and China are, in one sense, the countries that matter in renewables,” says Youngman. “The expansion is happening in terms of population and energy demand in these countries. Frankly, as a consequence, they are the ones that move the needle and why the problem is so hard to solve, as they need the West’s help.”