Vanishing vanilla

Catching the Underground to join our annual renewables roundtable in the first week of May, many of the press stands I walk past display newspapers with two words on the front page: “second round”. The headlines are not covering the sophomore fundraising cycle of a UK start-up; nor do they provide an update on a cricket tournament. They are referring to the second round of the French presidential elections, which, a few days later, could have installed an anti-euro, protectionist candidate as the leader of Europe’s third-largest economy.

Soon enough, of course, those fears would be disproved, with Europe breathing a sigh of relief as centrist Emmanuel Macron scored a decisive win against the far-right’s Marine Le Pen. But even without knowledge of this outcome, my renewables roundtable participants remain sanguine in the face of uncertainties arising from elections in France and Germany, Brexit and the Trump presidency.

“There is a clear understanding to move away from fossil fuels and increase the weight of renewables in the energy mix across the political spectrum,” says Oldrik Verloop, a managing director at Aquila Capital. “There are not that many political parties in Europe advocating: ‘No, we must only go with nuclear, we want nothing to do with renewables.’ In that sense, the sector is less dependent on what the political landscape is doing.”

In France, says Raphael Lance, head of renewable energy funds at Mirova, the energy transition law passed last year will continue to underpin demand for clean energy projects. “It seems there is a consensus around the fact there should be renewables in the energy mix. This consensus is now about three or four years old. It’s driven in large part by the fact that renewables have become a competitive industry. As such, the burden for the government and consumers is much less than it used to be.”

Peter Rossbach, executive director at Impax Asset Management, is equally enthusiastic. “There’s reportedly a huge backlog of 30GW of tariffable assets which are now ready to get permits and which will create a construction programme in France over the next four years, regardless of whether you have a strong president or a weak cohabitation. It’s a massive market opportunity. And the French market is not like the American market, where a new president can come in and cancel some previous commitments at the stroke of a pen.”

This positive outlook extends to Europe at large. Rosheen McGuckian, chief executive of NTR, explains that EU countries have signed up to a set of targets that will need to be respected, whether or not the continent witnesses political change. “Interestingly, France, Ireland and the UK are the three furthest behind on the targets at the moment. So they have a lot of momentum to keep renewables going. But even across the Nordics, everyone is driven by the same underlying current, which is that Europe is moving towards auction-based procurement rather than state aid.”
This shift is driving costs down, which Dominik Thumfart, managing director for infrastructure and energy at Deutsche Bank, also sees as a reason to be optimistic. “The outcome of the latest German offshore wind auction is unprecedented: three of the projects awarded will require zero subsidy. In May 2012, when the Crown Estate published its pathway study on how to make offshore wind more competitive, they were looking for ways to drive the UK levelised cost of energy below £100 per MWh by 2020. Now we’re at €40 in Germany, €60 in Denmark and €50 in the Netherlands.”

There is a catch: electricity prices remain low throughout Europe, which, in theory, could make it difficult for projects to stand on their own two feet. That is particularly true of the Nordics, but Verloop is undeterred. “The good thing about the current price environment is that it brings about market discipline. If you are able to make an investment viable now, then when power markets rebound, you’ll have a solid project. And specifically for hydropower, as Europe builds more wind and solar we need to have a steady stream of baseload within the grid. So, there is still room to grow small hydro in the Nordics and elsewhere in Europe.”

The picture is less clear-cut in Ireland, McGuckian says. “We have a cohabitation government and decisions can’t be made easily. In Europe, Ireland is the last frontier in terms of solar deployment, but we still have no tariff. I think Ireland will wait to see what happens in Germany and France. It will look at auctions and it’s looking at the rapid reduction of prices. And it will borrow the best as it sees it.”

While European markets vary in their degree of maturity, the US seems to be in a distinct universe. “The American market has suffered a lot from very high residual value dependent on very high merchant risk projects,” Rossbach observes.

“That’s something which probably needs to sift through the market a little bit. But if you still have over 30 percent of your total project value as residual merchant risk, that remains significant. Some projects, I’ve been told, even have about 50 percent of their total value accounted for by merchant risk. Since we don’t know what the future price will be, that long-term market needs to be differently rewarded.”


At a time when investors look for opportunities higher up the risk curve, another set of players may well come into the fray: development banks. As financing projects becomes more complex, such institutions have a bigger role to play, suggests Thumfart.

“Here is an example of that much-discussed additionality, where the public sector or a development bank with public sector involvement can really make a difference by providing first-loss guarantees, for example. As a commercial bank, you simply can’t provide certain risk tranches because, in the absence of sufficient junior funds ahead of you, senior debt will be at risk of being reclassified as quasi-equity. So you need a piece of first-loss position ahead of you. I think this is one of the solutions by which the development banks can add value in this new environment of grid parity, no feed-in tariffs [and] no subsidies anymore.”

Lance is not so sure, though. The European Investment Bank, under the EU’s €315 billion ‘Juncker Plan’, can make use of such additionality by investing in infrastructure funds, for instance. “But if you look at the reality, most of the funds they invest in do mainly plain-vanilla transactions. And if you talk to them to convince them to do more complex projects, it’s not easy to get them to take on that sort of risk as they have market-like risk-reward targets.”

The EIB looms large, argues Thumfart. “There’s clearly a role for a pan-European development bank, because climate change doesn’t stop at the borders. And I know that the EIB will be very keen until the last moment that the UK is a member of the EU – and probably beyond that time – to provide financing tools for UK projects. Because, ultimately, whatever emissions leave these islands will impact continental Europe.”

Verloop, however, has some reservations. “The natural firms to invest in power generation would be either the utilities or the energy multinationals. And you see that the latter announced moves towards renewables again. These are the risk takers and they’re used to complex, long-term investments, whether it’s oil and gas or renewables. So, there is capital available and if we then look at investors and the amount of capital available across the risk spectrum, I wonder what the role of such publicly funded lending entities should be. It seems ambiguous.”

While she agrees the role of development financiers is not to act as venture capitalists, McGuckian sees them as capable of crowding in private money. “They play a role in getting technologies that are just at the pre-commercial level to a point where they become fully fledged infrastructure assets,” she notes.

“Twelve years ago, some labs were experimenting with little PV panels; today, it’s a major part of our infrastructure. We do need the sort of capital that can support that. It’s not going to come from family offices and it’s not from funds like ours either just yet. We know the risk, we’re looking at storage and quite possibly, in two-three years’ time, we’re all going to be in there. But somebody needs to take less-proven technologies or revenue models to the next level.”

Rossbach remains sceptical of storage. “If you’re in the equity investment business, you can own it, you can build it, you can profit from it, and maybe you can contract out obsolescence risk, but then to how many buyers can you sell that unique asset?” he wonders.

“You have a 20-year contracted cashflow so you stick to it,” replies Lance, noting that Mirova’s already done a 5MW solar and storage plant on the French island of Corsica. “You have 20-year feed-in tariffs, so it works because of that. If you had to take obsolescence risk, it would be a different story.”


Storage is not the only sector to trigger a debate among panellists. “In the last few years, biomass has gone through a massive scale-up. Big projects are in construction in the UK and they are rather more complex than wind and solar assets. In biomass you pay for your fuel, so you need to lock in that supply and potentially you also need to lock in the currency if you’re importing from overseas. Yet some investors are looking at that,” says Thumfart.

Rossbach is cautious. “Fuel supply can be a monster,” he says. “These biomass projects have liability mismatch and operational issues. They are unique projects that need watching, and not just when you build them. But you also have to ask yourself, is it core infrastructure? Is it something that you can sell, once you’ve built it? Biomass, tidal and others… These are projects for somebody that wants to hold the assets after they build them rather than join the secondary market.”

A related issue is that of diversification, which Rossbach says is harder to achieve when backing biomass assets. “It’s not just the complexity of the assets themselves, it’s the lack of portfolio diversification created among similar assets. In a biomass portfolio, everything is a little bit different.”

But to Thumfart, that is precisely the point: “That’s why you also get different equity returns. There is a certain premium on top of onshore wind and solar and also there is an ability to optimise the performance of those assets through diligent operations and maintenance.”

That such divergences should exist is not surprising – they simply hint at the co-existence of different strategies within the renewables segment. To Verloop, this is proof that LPs themselves are also maturing. “Investors have a more modular approach to renewables. The first wave of LPs wanted to allocate to renewables in the broadest geographical or technological sense. Now their programmes are much more targeted to diversify exposure. If you already have an allocation to wind in Germany, you can look for hydro in Sweden, or greenfield assets, or specific regulatory environments.”

McGuckian agrees, though she would caveat investors’ varying preferences in terms of risk appetite. “I don’t think we would typically find investors that would like to fund a portfolio of projects ranging from onshore wind to biomass, for example. LPs might say they want wind and solar, wind and solar and a bit of storage, or just biomass, but not all of it at the same time.”

At the top-end of the scale, demands also change in nature. “The larger cheque sizes are looking for the opportunity to do some infrastructure debt alongside equity,” McGuckian says.

One thing is clear, says Lance: clean energy remains an environment where funds have much legitimacy to operate. “Large sophisticated investors that tend to do direct investments into infrastructure can’t easily access the renewables market because it’s too fragmented. So they have to find ways and going through funds is one solution. We’ve also seen much smaller institutional investors starting to put their first infrastructure tickets into renewable energy.”

Beyond the headlines, he concludes, it helps that government risk has also reduced. “It used to be the first and last topic at most conferences. No longer.”