Friday Letter: Proof of concept

Why emerging market investor Actis is advancing an $800 million bet on renewable energy

There have been many reports published on the cost-competitiveness of renewable energy and its inexorable march toward grid parity with other energy sources. But it’s always refreshing to see this pan out in an investment scenario.

That’s easily the most exciting take-away from a just published interview with emerging markets investor Actis in our sister title Clean Energy Investor. You can read it in full here but in a nutshell, Actis is probably going to end up investing about $800 million of its $1.15 billion third energy fund in renewable generation businesses. Why? Because renewable power happens to be the cheapest source of generation in the countries it’s investing in.

Now Actis didn’t set out to make Fund III a renewables-focused fund. It’s true the firm is a private equity investor with strong environmental, social and government principles, but ultimately, Actis is in the business of building businesses. More specifically, when it comes to its energy funds, it’s in the business of building large-scale power generation businesses using whatever generation source is the most cost-effective.

With Fund III – which is in the process of developing five renewable energy platforms in Chile, Brazil, Mexico, India and Africa – it’s discovered that the most cost-effective generation source across its five markets is renewable energy. And unsubsidised renewable energy at that.

On the one hand that’s encouraging, because, according to the International Energy Agency (IEA), about 70 percent of renewable energy growth to 2020 will come from non-OECD markets, although it will still only meet 35 percent of those markets’ needs.
On the other, you can argue emerging markets have very special characteristics. They are power hungry, to begin with, so need as many generating sources as they can get. Many are also heavily reliant on fuel imports, which makes locally-sourced energy a relief. Finally, as Actis’ Lucy Heintz puts it, some of these markets just have formidable renewable endowments.

But that doesn’t tell the full story. Put simply, the cost of renewable energy has been consistently overestimated. A recent report by the US’ National Renewable Energy Laboratory and the Lawrence Berkeley National Laboratory shows that four years ago analysts predicted the cost of utility-scale US solar energy would be 59 percent more expensive than it actually is today. Talk about a margin of error.

What about those pesky renewable subsidies that are making energy so expensive in places like Europe, though? A new report by the IEA published this week shows that renewable subsidies cost the world around $120 billion in 2013. That number is falling. It’s also more than four times less the $550 billion spent last year subsidising fossil fuels.

In the Middle East, where it’s not exactly surprising to find that oil is widely used to generate electricity, renewables would be competitive with oil-fired power plants tomorrow, if fossil fuel subsidies were removed, the IEA says.

Which is what makes the policy uncertainty surrounding renewable energy in places like Australia – where investment in the sector has dropped by 70 percent last year – so frustrating. In many ways, renewable energy has already made it. The subsidies that were its lifeblood initially have accomplished their mission of introducing these technologies and lowering their cost. Actis and others like it know this.

What it now needs from governments is a fair shot at securing its place in the energy mix. Emphasis on fair.