Taking a look at the bigger picture

Amid the furore over Spain’s decision to apply retroactive measures to its solar photovoltaic (PV) tariff regime, it would be easy to lose sight of the bigger picture. The latest royal decree issued by the Spanish government made waves in part because such decisions have the potential to undermine the investment rationale for clean energy funds and their limited partner backers – most obviously, reliable, long-term cash flows. But to extrapolate a grave outlook for European renewable energy investment as a whole from one isolated policy decision would arguably be unwise.

Peter Dickson, an investment director at London-based fund manager BNP Paribas Clean Energy Partners (BNP CEP), insists that the investing environment for funds like his remains extremely attractive. “Governments’ policies and targets in Europe are seen as solid and unwavering in the long term,” he says. “Investors like this because it offers a hedge against inflation and it’s not correlated to economic volatility. We benefit from security, mature legislation, the presence of a lot of experienced developers and a good pipeline of opportunities.” Spanish solar, in other words, is the exception rather than the rule.

Vindication

This may be reassuring to BNP CEP’s limited partners, who helped the firm reach a €437 million final close on its debut European clean energy fund in November last year. One of the standout infrastructure fundraisings of 2010, it provided vindication for a fund which was literally born out of crisis.

“We launched the fundraising five days before Lehman Brothers collapsed [in September 2008],” says Joost Bergsma, BNP CEP chief executive and managing director. “So we suffered from the financial crisis because there was little money to go round in late 2008 and 2009. There was interest in sustainability and clean energy but investors were protecting their existing portfolios rather than looking at new allocations.”

The fund was helped, however, by a €50 million cornerstone commitment from parent group BNP Paribas Investment Partners. “That allowed us to get through a difficult period and demonstrate that we could make successful investments,” reflects Bergsma. With institutional balance sheets gradually improving, BNP CEP was able to announce a first closing on €160 million in September 2009, before taking another 14 months to reach final close. The final figure of €437 million compared with a target of between €400 million and €450 million.    

So with money in its pocket, where has the firm been seeing spending opportunities? Dickson points to the acquisition of Gortahile Windfarm, owner and operator of a 20-megawatt wind project in County Laois in Ireland, in August last year. “There is very good wind speed in Ireland and a very secure feed-in tariff and, hence, income stream. We are comfortable with the turbine technology and, crucially, it was an off-market deal that came to us thanks to the relationship we formed with the developer [Germany’s ABO Wind].”

That relationship involved BNP CEP agreeing to team up with ABO Wind to transact 50 megawatts of generation capacity over a period of around 16 months. The role of German developers in European renewable energy investment may be little discussed but is highly significant according to Bergsma. “Germany quickly developed a large solar energy market and put in place Europe’s first feed-in tariff. A strong industry of developers, turbine manufacturers, solar firms and panel makers grew up and then branched out when the German market became saturated.”

Debt revival

Two months after the Gortahile transaction, BNP CEP announced financial close on a 30-megawatt solar PV power plant in the north-west of Italy [in partnership with another German developer, Photovolt Development Partners]. Dickson says one of the notable aspects of this deal was the ability to raise €93.5 million in senior debt from a consortium comprising Deutsche Bank, Rabobank and Centrobanca.

“A year ago, liquidity was very tight and banks were focused on their domestic markets. Now we see some cross-border activity, more banks open for business, and more competition. We were delighted to raise finance for the Italian solar project, for which there was a lot of interest.”

Dickson says the firm is now also receiving strong interest from the banking community for a biomass project in which BNP CEP is currently in exclusive negotiations. Dickson sees biomass as a significant opportunity in the years ahead. “I developed biomass strategies for utilities in the UK [Dickson previously worked for United Utilities and Welsh Water] and I see it as a way of increasing returns without increasing risk. Renewable energy is maturing and prices are hardening generally but biomass is an opportunity.”

He adds: “We won’t take technology and regulatory risk [due to the generally conservative nature of the fund’s pension and insurance company investors] so we like a simple [biomass] combustion process rather than things like advanced thermal processes such as pyrolysis and gasification.” The firm is seeking modestly sized projects so it can invest alone rather than alongside others and is seeking biomass exposure in markets including the UK, Spain and Italy.

With its track record of investment in Ireland and Italy and in areas such as wind and biomass, it’s perhaps not surprising that the firm has a pragmatic view of Spanish solar, where it has no current exposure. “There is some uncertainty, but the doubts people have about Spanish solar are not necessarily in proportion to the risk,” suggests Dickson. “Governments have regularly reviewed tariffs and what we’ve seen in Spain is not far from what has always happened. The regret is that they’ve taken retroactive measures.”

He adds:  “There was a particular set of circumstances in Spanish solar that we would have preferred not to see, but you can at least follow a path of logic regarding the changes to the solar tariff. That same logic would suggest that feed-in tariffs for wind and biomass are not at risk of significant adjustment.”

Committed governments

Bergsma is asked whether the potential for governments to adjust regulatory regimes in the face of fiscal pressures erodes the predictability associated with investment in infrastructure projects. In response, he acknowledges a degree of unpredictability as a fact of life.

“If Ireland increases its  corporate tax level, wind farms will pay more tax. So there are potential impacts of the Crisis on our investments. If you raise tax, the bottom line is lower  and therefore our pricing strategy in Ireland accomodates this risk. Ireland remains committed to the 2020 [European Union renewable energy production] targets and as long as we accomodate risk in our valuations, we will continue to pursue opportunities in Irish wind.”

Their success on the fundraising trail has given the two men a belief that clean energy is carving out a place in institutional portfolios – but caution that, despite the strength of commitment from governments (as mentioned above), complacency is not an option.

“In terms of weight of money [invested in clean energy] it will grow from here,” says Bergsma, “but post-financial crisis, I’m hesitant to talk about exponential growth.”