The sun will rise again

Highly attractive feed-in tariffs make solar investments a good bet for investors in renewable energy. Market conditions have also made solar projects more cost-effective, helping to counteract a perceived disadvantage.

Background: A decline in global solar energy investment by financial, third-party investors in 2009 needs to be put in perspective. From virtually no such investment six years ago, the sector accounted for almost $33 billion of investor capital in 2008 and more than $23 billion last year. Furthermore, for reasons outlined below, solar energy has become much more cost-effective recently. An upsurge of interest in the sector might reasonably be expected.   

Key attractions: A straightforward and highly attractive incentive mechanism by way of feed-in tariffs is a major draw for investors in this area (more of which below). These generous incentives mean solar is generally perceived as good return for low risk. According to Jamie Richards, chief executive of Foresight Solar, a solar-focused fund owned by UK-based environmental infrastructure investors Foresight Group: “Annual returns in traditional infrastructure are typically single digits whereas solar infrastructure returns get into double digits. And that’s not because of higher risk, but because of government support.”  

In the past, solar’s lack of cost-effectiveness has been a drawback. Last year, however, solar equipment prices fell by up to 40 percent following a boost in manufacturing capacity combined with less demand due to the banks’ weaker appetite for financing projects. In Spain, a 25 percent cut in the feed-in tariff for plants built after 2008 initially meant solar plant developers exited the country en masse for neighbouring Italy. The declining cost of equipment has since mitigated the less attractive tariff and lured many interested parties back.  

Key drawbacks: As discussed above, solar has become increasingly viable from a cost perspective. Nonetheless, as one investor in the renewable energy space puts it: “Solar was incredibly expensive in the past and is now just expensive”. Solar is also restricted to certain geographic areas – namely, those where the sun shines for sufficient periods of time and with the required intensity. In a European context, this confines solar energy production to a handful of countries in Southern Europe such as Spain, Italy and Greece. Despite the suitability of large tracts of the US for solar energy production, it is likely to remain less scalable than wind energy.        

Regulatory environment: European solar energy producers typically benefit from the feed-in tariff (FIT) incentive mechanism. It guarantees grid access, long-term contracts for the electricity produced and purchase prices based on the cost of generation. Under the tariff, an obligation is imposed on regional and national electricity utilities to buy renewable electricity from all eligible participants.  

One danger of generous tariffs is that, especially in times of general economic hardship, they might be perceived as too generous – and scaled back. When Germany slashed solar subsidies in 2008, the country’s entire solar industry was considered to be under threat. On the other hand, it could be argued that tariffs offer investors greater predictability than the certificates-based incentives often used in the wind sector. As the latter are tradable commodities, they are subject to market risk.    
Recent deals: 

Sep 2009: The UK’s HSBC Environmental Infrastructure Fund and Spanish solar plant developer Solarig sign an agreement to invest a combined €200 million developing solar projects across Spain and Italy. 

Jul 2009: Foresight Group of the UK secures €25 million in project financing for a solar project in Puglia, Italy. The project is in conjunction with Italian clean energy contractor Ecoware. 

Mar 2009: London-based HgCapital invests €300 million in three solar energy plants in southern Spain. The plants are acquired in a secondary transaction from AIG Financial Products, an American International Group subsidiary, and Spanish investment bank 360 Corporate.