Energy: Clearing the way for clean energy

The energy investment opportunities opened up by the Paris climate agreement were a hot topic at the recent PEI-PRI Responsible Investment Forum in London.

Panellists hailed the historic accord clinched by world leaders in December at the COP21 meeting as a potential game changer for clean energy – “the investment opportunity of a lifetime”, Renee Beaumont, partner at Generation Investment Management told the forum in May.

Breakout sessions saw representatives from pension funds and investment firms – many themselves under pressure to bolster their environmental, social and governance credentials – eagerly quizzing renewable experts about whether wind and solar energy had really come of age as an investment opportunity.

There was widespread consensus that the Paris agreement in which 195 governments committed to cut carbon emissions and limit rises in global temperatures to below two degrees Celsius does have huge potential for clean energy investment.

But major stumbling blocks remain, especially over areas such as energy transmission and grid capacity, as Japan has discovered. European subsidy cuts for solar and wind projects are also a concern.

So where in the world is best placed to take advantage of the Paris agreement and where are the potential pitfalls? Our colleagues at Infrastructure Investor have looked at the progress of clean energy investment in some of the world’s most promising markets. Here is their verdict.

WINDS OF CHANGE IN EUROPE
Cuts to subsidies for solar and onshore wind in Europe have opened up support for fields that investors previously feared to tread – chiefly offshore wind.

The UK government has mooted plans to offer up to three offshore wind tenders of 500-1,000MW for the period running until 2020 and targeted 10GW in new capacity in the decade to 2030.

The Netherlands plans 750MW worth of offshore wind farms a year over the next five years. Germany also has plans and France recently awarded a spate of tenders to utilities, which should yield good opportunities for investors.

This is not being lost on institutional investors. Germany’s 330MW Gode 1 Wind Farm, developed by Dong Energy, counts Global Infrastructure Partners as a shareholder and a club of German insurers as debt providers, while Macquarie Capital and the Green Investment Bank restarted construction of the UK’s £1.5 billion (€2 billion; $2.2 billion) Galloper wind farm in November.

“The industry has matured faster than many believed,” says Martin Neubert, head of commercial transactions and market development at Danish developer Dong Energy. “There’s rising appetite from both equity and debt investors for these projects”.

INDIA: THE GREAT BUILD-OUT

Asia is another key area of interest for investors. India has some of the most ambitious renewable investment goals.

India, which has more than 4GW of solar capacity, aims to increase it to 100GW by 2022, and is envisaging $100 billion of investment in the wider renewable energy sector, including wind, over the next five years. Investors are taking note, attracted by the scale, strong regulatory frameworks, high power prices and subtle non-financial forms of support. Given the size of the country’s energy deficit and the speed at which it wants to grow, it’s a given that renewable investments will increase.

Andrew Newman, co-founder of renewable investor Armstrong Energy Global, says his firm is bullish on Indian solar, highlighting the country’s very high irradiance and relatively high power prices. While there are other markets with these characteristics, “there is the scale of the market in India, which is very exciting”. When it comes to wind power, which has over 20GW of installed capacity in India and a 60GW target by 2022, the sector’s maturity plays in its favour.

Sanjiv Aggarwal, Actis’s Asian head of energy investments, says the firm created Indian wind platform Ostro Energy “because wind is more or less at grid parity with thermal power and requires very little to no subsidy”.

But India’s “woefully inadequate” transmission capacity is holding it back. Sushi Shyamal, partner at Ernst & Young, says that potential wind sites are often located in remote locations, far from where electricity is needed. “States such as Tamil Nadu, with large wind capacity, have already seen assets stranded due to a lack of [transmission] infrastructure,” he says.

RAPID ASIAN DEVELOPMENT
Thailand’s solar sector had pretty much been in limbo until last year, when Thailand’s Energy Regulatory Commission launched a programme to grant 600MW of solar licences to private developers. As a result, the Thai government estimates that more than $1 billion will be invested in solar this year, as it aims to increase capacity from 1.57GW in 2014 to 6GW by 2036.

But Gavin Smith, director of clean development at Vietnam-based investment firm Dragon Capital, stresses that investors have to be “extremely flexible” when looking at the region’s energy markets, as they vary greatly in terms of resources, political and business environments.

John Yeap, a partner at law firm Pinsent Masons, echoes the rapid development of solar – not just in Thailand, but also in China, Japan, India and Indonesia.

Indonesia has particularly ambitious renewable goals, with 25 percent of all energy to come from renewables by 2025, through $38 billion in investments. At present, renewables account for 5-6 percent of the energy mix.

Now that renewable policies are being clarified, a “lack of bankable projects” and poor “project implementation” emerge as two of the region’s key problems, says Edgare Kerkwijk, managing director of renewable asset manager Asia Green Capital.

JAPAN: LAND OF THE SETTING SUN
But grid capacity in Asia remains a concern, as Japan has demonstrated.

Japan, the world’s fourth largest solar market, has been hungry for renewables since the 2011 Fukushima nuclear disaster. But while installed solar capacity tripled over the last three years, the country now seems wary of the sector.

In 2012, Japan’s Ministry of Economy, Trade and Industry introduced a feed-in tariff (FiT) scheme with a record-high rate to attract significant investment, especially into solar. That translated into the approval of some 80GW of solar FiT applications. That was expected to help replace nuclear power, which provided nearly 30 percent of Japan’s energy in 2010 with renewables, mainly hydropower, making up less than 10 percent. But only 29 percent, or roughly 23GW, of approved solar facilities, are generating power.

Dick Talbert, chief executive of US-headquartered Greenpower Capital, sees Japan as a developed, stable market with predictable returns, but grid connectivity is a big issue. Solar projects have been cancelled in the Hokkaido, Shikoku and Kyushu regions because the grid is unable to handle the electricity generated. While a solar plant can be constructed within two years, it can take six or seven to get grid approval, Talbert says. Tariff rates for solar projects have also been cut.

Talbert expects a number of projects to start operations over the next two years, but then expects new capacity to fall after 2017, unless there are new incentives. What’s more, nuclear is back, with some of the country’s power utilities restarting nuclear operations. The utilities argue they can’t supply reliably without nuclear energy and that there is no economic incentive for clean energy. It’s that balance between energy security, price and environmental protection that Japanese renewables – and particularly solar – will have to contend with now that the boom is over.

NEW YORK GRID REFORMS

New York appears to be taking some of these lessons to heart by putting the reliability of the grid at the heart of its energy reforms, as part of a programme to encourage more renewables.

Under a $5 billion plan from governor Andrew Cuomo called Reforming the Energy Vision (REV), New York is building the “grid of tomorrow”, that requires utilities to act as distribution companies. To spur innovation, utilities will not be allowed to own distributed solutions.

“By changing the role of the utilities, we want to encourage more competitive markets,” Richard Kauffman, New York’s chairman of energy and finance, said.

REV has also set ambitious environmental targets. By 2030, it aims to reduce 40 percent of greenhouse gas emissions from 1990 levels, generate 50 percent of electricity from renewables and decrease energy consumption from buildings by 23 percent of 2012 levels.

The most notable programme is the New York Green Bank, which launched in September 2013 as a $1 billion initiative to use “public-support dollars” to unlock markets. The green bank has invested money in energy projects that promise innovation, but need funding. This helped catalyse $350 million from partners such as Bank of America Merrill Lynch that will be leveraged more than three times.

One example is small-scale wind developer United Wind. The Brooklyn-based company received a $4 million investment from the New York Green Bank in October 2015. With funding to prove its distributed wind financing model, United Wind announced in January a $200 million investment from a Toronto private equity firm.

Another example is New York’s solar financing programme the NY-Sun Initiative which began in 2012, before Cuomo announced REV, but received $1 billion two years later to further expand solar capacity.

The Paris agreement certainly has its flaws, most notably because it is not legally binding. But judging by the dizzying array of clean energy project being unveiled across the world, there is little doubt that it will have an impact. Achieving the signatories’ nationally determined contributions alone will require the staggering figure of $16.5 trillion over the next 15 years, according to the International Energy Agency.

“We believe that given the right incentives, market mechanisms and policies, this transition could happen and at a far quicker pace than many expect,” S&P’s head of environmental and climate risk research Michael Wilkins asserts.

Investors would do well to get ready for it now.