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Distributed Energy

By Ruchir Punjabi, Co-Founder, Distributed Energy

 

No investment is without risk. The holy grail lies in striking a balance between high returns & its associated risks. While there are no set formulas to achieve this, three important steps that will help find the right balance between risk and return are:

1) Diversifying your portfolio – by increasing your exposure to diversified investments, you are essentially spreading your risk.
2) Reviewing your investments – evaluate your risk tolerance periodically so that it is aligned to different life stages.
3) Staying invested for the long-term – this will give your investments enough time to generate returns and ride out the periodic market fluctuations.

Now the question is, why the focus on long term investments in renewable energy?

Climate change has been framed as an ethical issue for years, with a mixed success rate.Let’s take a look at the main drivers for this lag – the fossil fuel industry, which has not only exacerbated the impacts of climate change, but also affected the deployment and investments into renewable energy resources. Coincidentally, oil and gas prices historically have been subject to wild fluctuations (even after fossil fuel subsidies)and represent nothing but massive risk exposure for any investor/portfolio manager. The oil industry is now on the front lines of rising investor fears about the long term returns of fossil fuel energy sources.

Now let’s examine renewable energy sources. Let’s set aside the environmental advantages of avoided carbon and the reputational benefits garnered by reaching inspiring corporate sustainability goals. What you are left with are compelling financial reasons to voluntarily source clean energy in your investment portfolio.

Nearly all the costs of solar and wind energy are in the infrastructure required to capture it. Fortunately, these costs have plummeted at a rate beyond what any expert predicted. The same cannot be said for fossil fuels, and these sectors will eventually or are already recognising that the economics of renewables are becoming irresistible. For example, the cost of fossil fuel-based electricity is expected to increase over time, while the cost of renewables is rapidly decreasing. More importantly, mainstream institutional investors are acknowledging that climate change is not just a threat to the environment, but also a threat to the wealth of their clients.

Renewables have been picking pace over the last decade, and taking the example of solar power, it is fair to say that technology and performance have evolved considerably during this time. This is one of the key drivers for companies, such as us, having entered this field. Our business model is more sustainable, and returns on invested capital in our renewable energy projects have improved to the point where a solar plant producing power with a predictable regularity and predefined Power Purchase Agreement (PPA) rates can now be structured as a reliable, long-term financial investment.

Without a doubt, renewable energy is on its way to becoming the new mainstream energy source (refer to diagram below). This is supported by drivers such as:

• Regulatory frameworks and reduction in CAPEX as a result of technological progress.
• Investors and developers looking to inject capital in dormant sectors, opening up substantial growth, especially in developing countries.
• Renewable energy projects continuing to attract institutional investors such as BlackRock and Goldman Sachs, due to attractive and stable yields.

By the end of 2018, renewables represented more than a third of the world’s installed capacity. This translates to more than 26% of global electricity produced.
Advances in renewable energy technology, coupled with growing cost-competitiveness have strengthened the business and investment case for renewables. This has opened up new investment opportunities that will transform the energy systems for many countries, particularly developing countries that are looking to improve their energy infrastructure and broaden their energy mix. Accelerating the deployment of renewable energy will fuel economic growth, create new employment opportunities and contribute to a climate safe future.

Policy makers will have a key role to play in maximising the benefits of the transition to renewable energy.In a post COVID-19 era (so to speak), where global economies have slowly started opening up, world leaders are faced with a choice to either reopen economies powered by the failing fuel sources of the past, or jump-start their path towards a clean, secure and more energy resilient future.

By Ruchir Punjabi, Co-Founder, Distributed Energy

 

According to the International Monetary Fund (IMF), the human tragedy of the COVID-19 pandemic and global restrictions resulting in business closures and travel prohibitions may contribute to the worst economic downturn since the Great Depression. As a result, the global economy is expected to contract by 3 percent in 2020.

The scale of this crisis is generating unparalleled challenges for the global economy. Businesses are growing wary of large capital investments as the economic risks are the most likely and concerned fallout i.e. prolonged recession of the global economy. Some companies are already inevitably being pushed into bankruptcy as the number of indebtedness, both public and private, increases.

In light of this crisis it’s important to not overlook other, equally important global risks and challenges we have been facing for decades now. A passage in a recent publication by the World Economic Forum does a compelling job in capturing this and I’d like to share the same:

One of the most important fallouts for the world when dealing with a global crisis like COVID-19 is ignoring other existential global risks – in particular, any shortfall in activity to address sustainability risks, especially climate change adaptation and mitigation. As countries emerge from the immediate health crisis and reboot their economies, changes in our working practices, attitudes towards travelling, commuting and consumption might make it easier to find business opportunities to capitalise on a lower carbon and more sustainable recovery. This could enable society to adapt responsibly, to return cleaner and greener, and to develop through sustainable growth with people and communities at the centre of society.”

Governments around the world are ramping up stimulus packages to create jobs and reflate their economies. These actions have made two things very clear (WRI, 2020).

  1. We should invest in things that strengthen the health and well-being of our citizens; and
  2. We must look at reducing economic and infrastructure vulnerability. Propping up old, polluting industries is not a solution.

Renewable energy, on the other hand, can help avoid greenhouse gas emissions and protect communities from dangerous health and environmental effects of climate change. According to the World Health Organization (WHO), about 4.2 million deaths every year occur as a result of exposure to ambient (outdoor) air pollution, while a recent Harvard study showed that people living in contaminated cities were more likely to die of COVID-19.

Solar PV and onshore wind are now the cheapest sources of new-build generation for at least two-thirds of the global population.

 

In the most recent Global Renewables Outlook published by the International Renewable Energy Agency (IRENA),  they present a “Transforming Energy Scenario” – an ambitious yet realistic energy transformation that would limit global temperature rise to below 2 degrees Celsius. To make this a reality, it would cost an additional $19 trillion more than the current business as usual approach. However, this would bring benefits worth $50-$142 trillion by 2050 and grow the world GDP by 2.4 percent. The report also details a “Deeper Decarbonisation Perspective”. This basically outlines that a net-zero emission world by 2050-2060 would cost anywhere between $35-$45 trillion BUT yield $62-169 trillion in cumulative savings.

Now let’s put this into context in terms of the current COVID-19 crisis. In USA itself, we’ve just seen the House pass a $3 trillion coronavirus relief package.These relief packages are trending on a global level. It’s not hard to argue that some, if not more, of the current economic fallouts could have been mitigated or better managed if there was a relevant framework in place to apprehend and address this crisis. While the R&D and associated costs require preliminary capital, the accrued tangible and non-tangible benefits to be realised as a result of this pre-emptive measure needs to be properly studied and documented.

It’s not only about renewable energy investments. It’s an investment that also mitigates the financial and other risk of climate change. With this mandate in mind, our company, Distributed Energy, was formed in early 2019. We leverage finance, technology and innovation to accelerate our commitment to sustainability and drive a low-carbon transition in developing countries.

 

The COVID-19 crisis reinforces the need to adopt and capitalise on lower carbon and more sustainable recovery.In parallel, the fossil fuel industry is now in the spotlight, as it happens to be one of the hardest hit sectors – a consequence of curtailing of commercial air travel and stay-at-home orders. The pandemic has caused massive declines in demand for oil and gas. Leading oil, gas and petrochemical companies lost an average of 45% of their total market value since the start of 2020 and their stock prices continue to plummet.

In the midst of this crisis, oil, gas, and petrochemical companies are lobbying governments worldwide to seek direct and indirect support, including bailouts, buyouts, regulatory rollbacks, exemption. This has resulted in some of the largest financial institutions i.e. BlackRock, to rapidly divest from fossil fuels, having recognized the growing financial risks of carbon-intensive investments.

Bloomberg New Energy Finance (BNEF) estimated last year that between now and 2050, 77% of investments in new power generation will be in renewables. There is a compelling case, now more than ever, that governments and investors treat COVID-19 not as a signal to slow down, but rather to ramp up and embrace renewable energy.

By Ramez Naam, Non-Executive Director and Investor at Distributed Energy  

 

Solar is plunging in cost faster than anyone, including me, predicted. Today I’m publishing an update of my solar cost forecasts from 2015, with more data & improved methods. Solar is on path to become insanely, world-changingly cheap.

 

 

Over the last decade, from 2010 – 2020, the unsubsidized cost of solar electricity from utility scale projects has dropped by a factor of 5 or more. That’s consistent in global average data, and in the US, India, & China. Solar is now often competitive with new coal or gas.

 

 

Solar has dropped in cost far faster than any forecaster expected. Solar prices in 2020 are half of what I projected in 2011. They’re a quarter of what the IEA projected in 2010.

 

 

Solar costs are now decades ahead of what most forecasts predicted. Solar prices are now:

  • 7-10 years ahead of my 2015 forecast
  • 10-15 years ahead of my 2011 forecast
  • 30-40 years ahead of IEA’s 2014 forecast
  • 50-100 years ahead of IEA’s 2010 forecast

 

 

To model future solar costs, we’ll use the learning rate, also known as Wright’s Law. It predicts that every doubling of cumulative production of a technology leads to a consistent percent decline in cost. It applies as far back as the Ford Model T. More information on this can be found here.

 

 

To see if Wright’s Law applies to solar, we need to look at the cost of solar electricity as a function how much solar the world has deployed (rather than solar cost over time). And we can see that solar costs have dropped smoothly as scale has increased.

 

 

That chart is on a linear scale, tho. Wright’s law is an exponential process. Every *doubling* of scale drives a *percent* change in cost. If Wright’s Law holds, then on a log-log graph of cost vs. scale, we should see straight lines. We do. And we get excellent fits (R^2).

 

 

And this chart tells us that solar learning is fast. Incredibly fast. Solar electricity costs are dropping by an incredible 30-40% per doubling. That’s consistent across all 7 data series on this chart.

 

 

That’s an incredible, unexpectedly high learning rate. It’s roughly twice the learning rate found in most of the literature, in my 2015 forecast, and in reports from bodies like the IEA and EIA.

Let’s be conservative and use the low end of this range, a 30% learning rate. At 5 more doublings (32x current scale) the *average* cost of solar in sunny places would be 1 cent /kWh. Ultra-low cost deals would be half a cent. Even northern Europe would see 2 cents.

 

 

Astute readers will see that the far end of that scale is 20 TW of solar, or enough to supply roughly 2/3 of the world’s current electricity demand. That may seem utterly pathological. But there are many reasons to expect higher demand, and more use of the cheapest power.

Electricity demand is likely to rise over the coming decades, and demand for the cheapest electricity in particular, as:

1. A richer world. Incomes and consumption rise in the developing world.

2. Electric transport. Ground transportation becomes electrified, boosting global electricity demand by as much as 50%

3. Flexible demand. More and more electricity demand (including EV charging) becomes flexible, to use electricity at the hours that it’s cheapest (frequently meaning solar).

4. Cheap energy storage. Cheap energy storage allows shifting of solar (the cheapest electricity) to use in evening hours, increasing the amount of solar that can be productively used each day.

5. Industrial decarbonization. Cheap clean electricity is used to either power industrial processes or to power the creation of chemical energy carriers (e.g., hydrogen) that can be used for industrial processes such as making heat and cement, that are currently difficult to decarbonize.

What will solar prices look like as a function of time? Here’s what it looks like if we use the IEA’s forecast of 16% annual growth for solar. These are insanely cheap prices, almost everywhere on earth.

 

 

By 2030, solar prices are lower than the *operating cost* of existing coal & gas plants across most of the world. That would lead to economic disruption of those plants, particularly coal plants. I talk about this as the Third Phase of Clean Energy.

 

 

These future solar cost forecasts at a 30% learning rate also project costs far lower than the IEA’s most recent assumptions in their 2019 WEO. By 2030, a 30% learning rate projects solar costs 1/2 of IEA’s assumptions. By 2040, less than 1/4 of IEA’s assumptions.

 

 

Why have past forecasts been so wrong?

1. Academic studies often end at 2011, when less than 10% of today’s solar had been built.

2. IEA/EIA use much lower learning rates.

3. My 2015 forecast used US scale, instead of global scale, to find the learning rate.

Solar this cheap, if it arrives, will have a massive impact. It’ll help decarbonize electricity. It’ll also help decarbonize industrial processes that use direct heat today, either by electrifying them, or by creating cheaper green hydrogen. More in a future post.

At the same time, this forecast of cheap solar is NOT a panacea. 1. Learning could slow, or prices could hit a floor. 2. We need cheap storage for evenings. 3. We need cheap winter electricity in places like Europe, when days are short, & electricity demand is high.

In short, we need to continue to push for policies that help scale solar and fund additional innovation, and also continue to push for deployment & innovation in complementary energy sources like wind, geothermal, and nuclear.

All the same, this incredible pace of technological innovation – which was kickstarted by pro-solar policies in places like Germany – should give us a measure of hope. We have enormous innovative capabilities which we can bring to bear.

 

The full article can be found here. This is a republish, with permission from Ramez’s Twiiter.

 

 

 

By Ruchir Punjabi, Co-Founder, Distributed Energy

 

I write this not long after the US Oil futures contract price was negative. Oil is trading at unprecedented low levels. Low prices are usually a curse for green energy, but this time may be different.

India happens to be the world’s third largest consumer of energy. Currently 5% of the world’s energy production is consumed in India. This consumption is expected to be 11% by 2040.

COVID-19 has already had a strong impact on global supply chains. In some ways the world has retracted from globalisation, making every country look more inward. Added with the fact that India imports 80% of its oil, 18% of its gas and 23% of its coal, India’s energy security is also under scrutiny. Of course, more than 200 million people do not have access to electricity in India, so this is not just about energy security but also about human rights.

The price of energy that most regulators and energy planners in the world monitor is the ‘Levelised Cost of Energy’ (LCOE). LCOE for Solar Photovoltaic (PV) is less than a tenth of what it was when crude oil traded low during the 08-09 recession.

In fact, LCOE of Solar PV in India is the lowest around the world. According to a report from IRENA (International Renewable Energy Agency), the cost to deploy a Kilo Watt of Solar PV in India in 2018 was on average the lowest around the world. The same report also states that globally, onshore wind and solar deployment costs are now lower than fossil-fuel based energy sources. Effectively it is now cheaper to install new solar and wind projects than it is to install coal fired plants.

India has set an ambitious target of 175GW of renewable energy by 2022. As of February 2020, the installed renewable energy capacity is roughly 87 GW which is close to 50% of the proposed target.

In 2018, for the first time, we had more renewable capacity installed than thermal and traditional sources of power. But there is still a long way to go. Based on data published by the Central Electricity Authority, renewables including solar, large dams, etc. accounted for 21.2% of India’s energy mix in the last financial year (2019-20).

Relative to China on per capita electricity consumption, India is 4x behind; however, when it comes to generation capacity, India is nearly 5x behind. Chinese capacity grew 5x since 2001 on the back of thermal sources. India has the opportunity to write its own growth story with renewables over the next 20 years.

To solve energy security, we need provide power to those who need it and remove the burden from our environment. At the moment,India has a real opportunity to re-think and revamp its energy landscape. The Indian economy will soon need significant stimulus support revival. One of the best things we can do is to focus most of our energy stimulus on fast-tracking renewable energy.

Of course, renewable energy production cannot in its current form solve India’s energy mix requirements. If the stimulus is focused on innovation, energy storage and innovative financial models, it can certainly fast track the deployment of energy.

A lot of the deployment speed can come through financial innovation. For example, greater depreciation benefits for investors who choose to invest in renewable energy can lead to an increased investment in the sector. My own Distributed Energy is pooling Investors to invest in commercial and industrial renewable energy projects offering a win-win for both sides. Offering capital and incentives to the energy ecosystem for such innovations can stimulate a bustling renewable energy sector much faster.

I will be amiss if I don’t bring to light the large chink in the armor of Indian energy landscape, that is the financial solvency of a lot of the state energy distributors (or DISCOMs) and generators. From the known data, DISCOMs owe more than ₹25,000 Crore to the power generators.The solvency question also puts reliability and rates of electricity in question.

The Uday scheme launched in 2015 has attempted to force distributors to restructure their financials while accelerating renewable energy deployment. While the DISCOM losses have declined overall since the scheme launch, a lot of pending collection from consumers have made some state distributors more stressed. This is a major limitation in ensuring 24×7 energy supply.

This is a good time to take a hit across the board and create a focused approach to tackling the problem.A financial clean up act, technology and the right interventions can ensure that we continue to protect the interests of India’s most vulnerable while keeping an open door to the capital that is interested in scaling and innovating renewable energy.

India was on the right track before the COVID-19 outbreak. But we can really use the current situation as an opportunity to enable a very strong renewable growth curve and address India’s energy needs.

 

This article was originally published at: https://www.newworldorder.today/post/india-s-energy-options-after-covid-19

Companies and banks are eager to find investments that generate business and social returns. Why? There are a variety of social/environmental problems that needs addressing. These include social issues such as humanitarian crisis of refugees, alleviating the impact from climate change-induced extreme weather events, reducing air pollution in cities, addressing ocean plastics, transforming our energy system to clean energy and finding sustainable ways of food production.

The Global Impact Investors Network (GIIN) define impact investments as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”.

Over the last decade, there have been similar ideas that have evolved alongside impact investing – ethical investing, sustainable investing and socially responsible investing (SRI). Global initiatives and targets such as the United Nations launching the Sustainable Development Goals (SDGs) have helped catalyse the implementation of these financial tools. For many impact investors, funds, and philanthropists, the 17 SDG’s have become a guideline for key performance indicators. At Distributed Energy, we invest in renewable assets that allow you to make an attractive return while doing good for the environment.

Why impact investing? – Investing for good

Different types of investors are entering the emerging impact investing market. This offers diverse and viable opportunities for advancing social and environmental solutions.

As Millennials start to gain more and more equity in the markets, this is an absolute sector that will continue to grow. Currently, there are financial ventures using creative means to change the world through social impact investing. The Australian-based Impact Investment Group (IIG) have several on-going funds aimed at providing the opportunity to invest in renewable energy that is part of Australia’s long term transition to a clean energy system. Another notable mention is Social Ventures Australia (SVA). The venture offers social impact bonds with an overall objective aimed at alleviating disadvantages for individuals and communities. The bonds enable service providers to enter into outcomes-based contracts with governments that promote social change.

The on-going coronavirus pandemic has shown what one crisis could do to health, economy and livelihood – as the pandemic unfolds around us, our entire world is changing in unimaginable ways. It has also brought to light the relevance and significance of impact investing now more than ever. Financial ventures such as CNote, an award-winning financial platform operating out of California, are helping current and potential investors determine how to respond to address some of the challenges that this pandemic raises – both now, in the medium term, and in the long term. CNote are primarily focused on helping fund female and minority-led small businesses, affordable housing development, and financially underserved communities across America. However, the pandemic brought to attention the critical need for cash and bridge financing, especially for small businesses. In order to bridge this financing gap, CNote created the Rapid Response Fund to quickly deploy patient loan capital to CDFIs so they can fill the critical lending gap until federal and state aid is implemented.

What we’ve seen happening, more so now, are financial ventures with a targeted social investment mandate. This is a result of specific motivations and values investors hope to accomplish with their investments. Some common motivations include:

  • Stabilising your portfolio and LOWERING the VOLATILITY in your portfolio. Investing with Distributed Energy and the likes of CNote and IIG is one way to reduce your portfolio risk.
  • Organisations providing impact investing services can PROVIDE CLIENT INVESTMENT OPPORTUNITIES to both individuals and institutions that want to align values with investments.
  • Government investors and development finance institutions can PROVIDE PROOF OF FINANCIAL VIABILITY for private-sector investors while targeting specific social and environmental goals.

Who all are making impact investments?

There are two sides of any impact investing deal: the impact investor and the impact investee. The goal is for both sides to benefit. As an impact investor, investments are made with the intention to generate measurable social impact alongside a financial return. The Impact Investee is a mission-driven organisation (for-profit, non-profit or hybrid) with a market-based strategy and clearly defined and accepted performance metrics/targets.

The growing impact investment market provides capital to address the world’s most pressing challenges in sectors such as sustainable agriculture, renewable energy and conservation. The GIIN estimates the current size of the global impact investing market to be $502 billion.
Impact investments has attracted a wide variety of investors, both individual and institutional. Some of these include:

• Fund Managers
• Development finance institutions
• Diversified financial institutions/banks
• Private foundations
• Pension funds and insurance companies
• Family Offices
• Individual investors
• NGOs
• Religious institutions

How do impact investments perform financially?

Impact investors have diverse financial return expectations. Some intentionally invest for below-market-rate returns, in-line with their strategic objectives. Others pursue market-competitive and market-beating returns, sometimes required by fiduciary responsibility. We’ve shared some of the key findings from investors surveyed in the GIIN’s 2019 Annual Impact Investor Survey. Respondents reported that portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging markets, developed markets, and the market as a whole.

 

Moving Forward

There is much more that needs to be done to bridge the funding gap to achieve the SGD’s by 2030 and help the world from irreversible consequences. The potential of making returns from impact investing is comparable to traditional investments, and although are slightly lower depending on the benchmark, purpose-driven people and investors are aware of the importance of the change on expectations over the greater benefit for society.

Whether impact investing is a strategy you would consider will depend on your values and goals, and on how well you understand the opportunities before you. But what is for certain is impact investing is here to stay and to grow exponentially over the next decade and beyond.

The key is to take action – starting today.

By Ruchir Punjabi, Co-Founder, Distributed Energy

 

When we think about investing in energy assets, the primary consideration is what is the customer willing to pay for generation of their power and what is the cost to generate it? Historically, it was not just about the cost of power, but also about creating an energy mix including one that was responsible for a cleaner environment. But now, it boils down to which energy source can reliably power our growing energy needs in a sustainable and affordable manner.

When considering renewable energy, we primarily consider solar photovoltaic (PV), concentrated solar power, onshore wind, offshore wind, biomass, hydropower and geothermal energy.

While the availability of the sources is often infinite (sunlight and wind), the cost is mainly attached to the equipment/plant setup.

As of 2019, according to the US Department of Energy and IRENA, below is the Levelized Cost of Energy (LCOE). The LCOE represents the total cost to build and operate a new power plant over its life divided to equal annual payments and amortised over expected annual electricity generation.

Your initial reaction may be that wind onshore and geothermal are relatively cheaper so we should focus on them more than solar PV or hydropower. Without looking at their viability and sustainability, let’s consider the practicality of these costs.

Geothermal energy primarily relates to the internal heat of the Earth. There are multiple types of geothermal power plants which draw hot water and steam from the ground to spin turbines, which then generate mechanical electricity. The primary challenge with geothermal energy is the that construction of a plant is roughly $2,500 per installed Kilowatt. In comparison with solar PV where the comparable cost is roughly $600 per installed, the upfront cost is often a large barrier to entry.

With onshore wind, the main issue is the inconsistency of generation and the inability of various grids to accept or evacuate the fluctuating power. Onshore wind used to be the most popular non-hydro renewable energy source for investors. However, over a period of time we’ve found that due to the ineffective transfer of electricity in a lot of electricity grids, the return on investment (ROI) is often inconsistent.

Hydro power is primarily based on dams and availability of river water. While dams have been an effective investment and the LCOE is quite low, the availability of this power has started to become seasonal. This is primarily due to climate change and over consumption of river water. If river or natural water availability is not a problem and there aren’t multiple dams on the same river source, hydro power continues to be the cheapest source of electricity.

This brings us to solar PV. Cost of solar panels have been reducing more than 10% YoY for the last decade. In fact, the cost of solar PV modules is now 99% cheaper over the last four decades. Solar PV has now reached a stage where in some instances of utility scale, it is cheaper to produce than fossil-based energy sources. Solar’s challenge is that it is sunlight dependent and hence only available during a mostly sunny day. If and when batteries become affordable, we imagine solar PV to become a more dependable source for power, very fast.

At this stage, this analysis is to help you understand why we focus on solar PV. Long term we remain open to opportunities depending on which renewable energy source provides the best case for scaling and IRR.

 

By Ruchir Punjabi, Co-Founder, Distributed Energy

 

As I write this the stock market has just had its most recent downturn. The prophecy of the 10 year bull market continues, although the drops wipe out substantial value.

I had a small exposure in this market and was forced to heed to margin calls to hold my stock positions. Thankfully it was not a big exposure. This is my first bear market as an ‘investor’; when the last major crisis hit, I was still at University.

The idea of asset allocation is not new. Every investment advisor and smart investors will tell you to spread your risk on investments, to find the right balance for your risk profile. Thankfully, as a younger investor I understood that advice and already had a healthy mix of real estate, international stock, CFDs, bonds, commodities, cash and renewable energy.

I am writing this to tell you about why renewable energy, or more specifically solar assets are part of that investment mix.

Private equity funds and private wealth investors have been investing in renewable energy for close to a decade. The normal model is this: find a utility scale (very, very large) power buyer who is willing to buy power. Normally these are governments of different states or countries. Sign a ‘Power Purchase Agreement’ (PPA) for a period of 20 years or more and lock in rates from now. If the power buyer has a good credit rating and is not likely to default, find capital from large institutional investors and pay that capital upfront. Historically, utility scale renewable power plants have offered an IRR of 8%+ dollar returns across the world.

In the early stages the governments were willing to lock in “higher” rates (compared to conventional sources of power) to diversify their energy mix and invest in a greener future. However, over a period of time, as the deployment of renewable energy has accelerated, the cost of deploying these assets has reduced.

No energy asset has seen a higher drop in cost than solar panels in the last decade. At utility scale levels, this cost is as low as $500/kW in places such as India today. There are many estimates available online that show that this cost will continue to fall 10% every year for a while.  The graph below is an extract from a study conducted by IRENA. It illustrates the margins involved in this business around the world in 2018 and how the cost of solar panel is a major component of the cost.

We have now reached a place where the per kW cost can actually make power a lot more affordable for energy consumers – especially businesses. In most countries including India and East Africa, governments subsidise residential electricity by charging businesses higher. This means businesses are usually paying more than 8c/kWHr. By having the cost of solar panel that’s already lower or, lowering, on an ongoing basis, we can position the same PPAs mentioned before and offer businesses a rate that is lower than their commercial grid rate.

In most of these businesses, electricity is a critical part of their business and if the right due diligence is done around their ability to generate cash and the stability of their business, we can actually install and supply power to them through solar that saves the business 20% or more on their bills while yielding 15%+ IRR annually over the length of the PPA. Further, if the asset or the asset pool is leveraged, the same IRR on the original equity amount shoots up past 20%.

As a type of asset, solar panels don’t move much. Their durability is fairly good long-term and with the right kind of preventative maintenance they should last 25 years or more. Given what electricity means to businesses who consume this power for their manufacturing, lights, compression moulding, cooling, etc – they usually pay their bills on time or their power gets cut. Also, these panels can be moved easily to different customers if the original customer defaults.

With such durability, and economics that work, solar power offers a unique advantage to an investor that is not dependent on market dynamics. If enough plants are aggregated, the risk of default can be minimized and the cash flow is highly dependable.

For portfolio allocation, an investor wants a good mix of assets ranging from high growth strategies, capital accumulation allocation, but also cash yielding and stable annuity assets. Of course, every investor has their preference around what matters to them. But in the end, there are few assets that offer the stability and annuity that solar assets do.

This is one of the main reasons why the likes of Warburg Pincus, Goldman Sachs and some of the largest investment houses in the world invest substantial funds into solar farms.

Distributed Energy is making access these kinds of new investments possible for smaller investors. Why should only the big investors get this opportunity. I for one, have already taken advantage of the opportunity, and invested part of my portfolio in solar based PPAs.

If you’re interested to invest in a managed portfolio, like me, click here and our team at Distributed Energy will be in touch with you shortly.

 

From the middle of this decade onwards, the ongoing cost reductions in solar PV have become more obvious to policy-makers, investors and incumbent energy companies. This has engendered a new environment in which the growing importance of low-cost renewables is widely recognized. At the same time, solar projects have sprung up in an increasing number of countries, notably in the developing world. New methods of integrating their variable generating output have emerged, including more flexible grids and the deployment of batteries and other forms of energy storage.

 

Lelized cost of electricity, by main renewable energy technology, 2009 to 2019, $/MWH

In the context of solar, IRR can help you understand the rate of growth that you can expect from your investment in a solar power system. IRR is one of the important parameters which can be used to compare and set a benchmark for measuring returns for alternative projects.

Two key factors affecting the internal rate of return of your solar investment are:

  1. Electricity tariffs: higher tariff means higher savings, thus better IRR.
  2. Performance of solar plant: it is important to select good quality equipment and workmanship to maximize electricity generation. At the same time, managing the overall cost of installation by finding the right balance of premium quality materials to actual costs will greatly affect the IRR.

Other factors that directly and indirectly affect a solar rooftop projects IRR are instances where government bodies on national and local levels together with some utilities have launched policies and financial incentives of support for photovoltaic systems. Policies that promote financial incentives such as feed-in tariff, net-metering, green pricing, low interest loans and capital subsidy all add to creating a cost competitive environment that promotes the deployment of solar rooftop projects in a country.

Diagram of climate finance sources and rooftop solar accelerator

Hence, it goes without saying, that based on the region of solar installation, a culmination of the above factors, including the type of financing schemes available, will affect a projects IRR. Consequently, this has given rise to various rooftop solar accelerator instrument mechanics.

Take for example the solar industry in India. On average, the cost per kW for a 100-kW solar rooftop installation for commercial/industrial customers is $580, which equates to $58,000 for the system. Assuming a solar tariff rate of $0.07 per kWh, you can expect an IRR above 16%, unleveraged. If leveraged at 30:70, the IRR will surge over 23%. However, even between states in India, the overall cost of the solar project will vary as a result of various state-sanctioned fees and soft costs. Furthermore, each state-owned utility company responsible for electrical power generation, transmission and distribution have varying tariff rates. This can significantly impact and limit the solar tariff rate offerings and consequently, the IRR for PPA-led solar project models. Having said that, over the last decade, the return potential of solar rooftop investments has been on the rise and based on the projected global investments in solar energy capacity, will continue to do so for the next 5-10 years at least.

A pair of decades ago, solar photovoltaic panels were an experimental technology, with extremely high costs and zero business potential. Now, on the other hand, as a result of technological advancements, funding sources from local government and banks, economies of scale, tax incentives and lower soft costs, the popularity and rise of rooftop solar is apparent and there is little doubt that solar energy has a place in the future of the worlds electricity generation.

Click here if you want our team to get in touch and help you invest in solar in the developing world.

 

 

 

The renewable energy industry has entered a new phase of growth, driven largely by increasing customer demand, cost competitiveness, innovation, and collaboration. Global investments in renewable energy was $272.9 billion in 2018, the 5th successive year in which it has exceeded $250 billion. With many forms of renewable energy becoming economically viable, consumers have started to embrace these technologies amid growing concerns over carbon dioxide emissions and environmental degradation. Investors have also started to reconsider the market because of rapid innovation and cost declines in renewable energy. Additionally, clean energy portfolios can often be procured at significant net cost savings, with lower risk and zero carbon and air emissions.

 

In this article, we will take a look at how investors can capitalize on these trends by allocating private capital into renewable energy investment portfolios and consequently help promote market ready, investor-grade green projects get off the ground.

Renewable Energy in Your Portfolio

An investment portfolio is a basket of assets that can hold stocks, bonds, cash and more. Investors aim for a return by mixing these securities in a way that reflects their risk tolerance and financial goals. The portfolio is constructed based on the expected return, the risk that the investor is willing to accept, and the level of liquidity.

A balanced portfolio investment strategy is a way of combining investments in a portfolio that aims to balance risk and return. Finding the right balance, largely depends on an investor’s financial resources and risk tolerance. Diversification is a key component to balancing and building a successful investment portfolio. If economic or political events harm a single company or industry, good diversification will keep the rest of the portfolio safe.

Over the last decade, renewable energy has become an excellent addition to investment portfolios and is a smart allocation strategy for building a geographically diverse portfolio. Investments in renewable energy projects continue to tick off all the right boxes when screening for long-term, investor-grade, high-quality, contracted assets. This is evident whereby major investment firms such as KKR and Blackstone are expanding its renewable energy portfolios through the purchase of several utility-scale projects in North America, Asia and Africa. There are a range of reasons for this, including the growth of ethical investing (ESG), speed of technological growth, tax incentives, positive impact on trade and various national green investment policies (Renewable Portfolio Standards). Solar energy, in particular, has seen the highest capacity investments in the last decade, comprising over 50% of total renewable energy investments. Since the second half of 2008, the cost comparison has changed out of all recognition – the benchmark global levelized cost of electricity for solar photovoltaics has fallen by 81%. In many countries, the cheapest source of new generation capacity as of 2019 is either solar or wind.

Given the evident growth potential of the renewable energy sector over the last decade, many investment firms have begun to offer services aimed at managing investor capital with a specific investment mandate to deploy capital into renewable energy projects across various geographical regions.

Benefits for Investors 

1) Diversification – benefit from investing across multiple renewable energy projects in various geographies.

2) Reduced minimums – Websites such as ours give an investor the opportunity to invest in multiple assets at a substantially lower minimum compared to investing in individual assets. Based on the experience of the portfolio manager, these investments can be balanced to give an attractive IRR.

3) Further leverage options – once the capital is invested, through banking relationships, a mix of debt to equity financing can be arranged at attractive interest rates, vastly improving IRR.

At the same time, it is important to be mindful of several drawbacks. Medium to large investment firms will be focused on deploying capital in large-scale utilities, implying the initial capital contributions required to manage an investor’s portfolio may be significantly higher. This might dissuade some investors that are looking for lower “ticket size” investments. Smaller-scale investment firms or aggregators such as Distributed Energy, on the other hand, are likelier to build a diversified portfolio for a smaller initial capital investment. Furthermore, the investment mandate is likely to have more flexibility and can be tailored to the personal interests of the investor.

For return expectations, most renewable assets are designed to offer 10% + dollar based IRR. Distributed Energy focuses on investments with 16%+ unleveraged IRR with a portfolio focus in commercial and industrial centric projects.

Moving forward, investors with investments in renewable energy portfolios have good reason to continue investing and moving forward in this direction. As for the observing investors, yet to take advantage of this opportunity, by the end of the decade of 2010-2019, we have seen over $2.6 trillion invested globally in renewable energy capacity, more than treble the amount invested in the previous decade.

Investing in renewable energy is investing in a sustainable and profitable future, as the last decade of incredible growth in renewables has shown. Expanding your portfolio investment strategy to accommodate renewable energy projects will not only provide attractive returns but will also be your contribution towards addressing our climate crisis. It is the right time to allocate a percentage of your portfolio to renewables. Contact us to find out more information.

The whole definition of what is value creation is rapidly changing. More and more companies are transitioning away from the singular focus of shareholder value creation and have learned to also appreciate the significance of value creation for entire communities and society.

 

Renewable Energy Investing, what does it mean?

 

An increasing number of companies are looking to increase their investments into sustainable initiatives. This is largely because the idea that investors can improve society while seeking solid financial returns is rapidly gaining ground. In addition to this, the shift to sustainable portfolios and impact investing reflects growing public concern for the environment, social inequality and the well-evidenced existence of climate change and its devastating consequences. The potential for strong financial returns on capital coupled with growing public concerns about the environmental implications of unsustainable business practices have been a catalyst in driving forward technological advancements and investments into alternative renewable energy resources such as wind, solar and biofuels. Renewable energy investment, in a nutshell, is an environmental/socially responsible investment (SRI) specifically relating to investments into supporting companies that are focused on providing their customers with services and solutions by utilising renewable energy resources.

Our company, Distributed Energy, have kept an eye on the mounting investor concerns surrounding the environmental and social issues in investment decisions made by their general partners (GP). In response to this, GP’s are scrambling to demonstrate that they are fully integrating environmental, social and governance (ESG) considerations at the investment committee level or are taking action to improve ESG performance of their portfolio’s. On the other hand, the very nature of the investment decisions we’ve made at Distributed Energy, on behalf of our investors and the solutions we provide to our energy customers, have been ESG focused since our onset. This approach has been embedded in our core business model. To make this observation a reality, we have assembled a team with deep sector understanding, internal technical capabilities and investment know-how across multiple technologies. Our overarching goal is to provide efficient, sustainable and environmentally-friendly energy alternatives for our energy consumers in developing countries while generating top-tier returns for our investors.

What to look for when investing in renewable energy?

Greenwashing has unfortunately become a common business practice, especially now. It is the practice of making an unsubstantiated or misleading claim about the environmental benefits of a product, service, technology or business practice. This dishonest form of self promotion is largely driven by external pressures such as stricter environmental regulations, differentiating factor for competitive advantage, and from investor / public pressure for businesses to adopt more environmentally-friendly practices.

This aside, one of the biggest challenges investment companies that are looking to legitimately adopt ESG practices face is finding the right investment approach for it and integrating it into their existing investment model. One reason for this is because investors and the media use the labels- ESG investing, social and responsible investing, and impact investing- interchangeably, blurring the boundaries between different aims. Equally important, as an investor, is understanding the company you are looking to invest in. Questions you need to be asking yourself are (a) How have they been performing financially?; (b) What is the teams background, experience and execution capability in the industry?; (c) How is the company unique?; (d) Do they have a rock solid business plan; (e) Are there opportunities for growth in the current market they are operating in and finally; (f) Investor relevance. The last point is particularly important and should not be underestimated. If there are multiple connections between your investment strategy and the business investment structure, you are likely to get more deeply engaged and the investor “fit” becomes more obvious.

It goes without saying that the best investment opportunities in energy markets are with companies that have:

  • business readiness i.e. proven track record of success in the energy field
  • excellent execution and synergy capabilities
  • local expertise and business partnerships in area of operation
  • dynamic market opportunity
  • a strong narrative and a business model with a unique edge over competitors i.e. usage of innovative IoT’s

Moving Forward

Once you’ve done your due diligence, you’ll realise there are several options for investing in green energy, which vary for investors with different levels of risk appetite. While low-risk investments like solar PV projects are unlikely to go wrong once the system is installed and operational, it’s important to thoroughly review the Power Purchase Agreement (PPA) to ensure there is a clear investment structure. This brings me to my concluding point. While there are different kinds of renewable energy options available for investment, how does a potential investor determine whether to prioritise investments on solar energy, or wind or hydropower? This depends on scalability opportunities in the market; finding synergies among different players; understanding the relevance of your energy option and its applicability based on the current and future policies and regulatory environment; and finally, deliberating over the feasibility of one energy option over the other in terms of cost, efficiency and practicality.

As we become increasingly environmentally conscious, more investments in this sector will address the environmental challenges we are currently facing. Being an early bird and investing in this field while it’s still picking up pace could be a winning strategy, with financial rewards; not to mention the ethical considerations as well.

Distributed Energy