The chance to go green

“It’s not easy being green” is the tagline of an advertising campaign currently running in the UK on behalf of French utility EDF Energy. And for many utilities, going green certainly hasn’t been as easy as anticipated. But the difficulties they have experienced are now helping to open up the renewable energy infrastructure space to infrastructure funds and their investors.

To explain why is to delve back into the history of renewable energy infrastructure investing, which began with small investment groups and entrepreneurs doing the initial spadework of gaining consents for wind farms, solar plants and the like and then beginning to build some scale. As this critical mass began to develop, it fortuitously coincided with the determination of many of Europe’s national monopoly utilities to begin aggressively growing outside of their home markets for the first time. As they did so they snapped up a range of energy assets, including some in the renewable space.

Because the motivation for these utilities was primarily strategic rather than profit-driven, infrastructure funds were not able to compete at the bidding stage. However, the high prices paid for these assets (and the large slugs of leverage used to support the purchases) meant that utilities’ balance sheets were stretched going into the financial crisis. Under pressure from their own balance sheets and from credit rating agencies, many of these same assets are now coming back onto the market – and this time at sensible prices. Combined with the unbundling of infrastructure assets that has been forced on some utilities by the European Commission in order to promote greater competition, infrastructure funds are now being presented with some ripe dealflow.

Greater access to renewable energy infrastructure assets is good news for fund managers and their end-investors alike. Not least, they frequently benefit from highly generous incentive mechanisms such as tradable green certificates or feed-in tariffs which help to make risk/return profiles highly attractive.

In the February 2010 issue of InfrastructureInvestor, we will take a detailed look at the opportunities and challenges of green infrastructure investing. Make sure you check it out.