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Distributed Energy

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.

 

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.

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.

As the costs of solar photovoltaic (PV) panels continues to decline, niche business opportunities are emerging. In addition to the traditional model of generating electricity at large-scale centralised facilities and selling to businesses, a new dynamic model of direct electricity selling is beginning to take shape.

 

What does a good Power Purchase Agreement (PPA) cover?

A Power Purchase Agreement is a legal contract between two parties, one which generates electricity (seller/developer) and one which is looking to purchase electricity (buyer). Take for example a solar PPA. The seller arranges for the design, permitting, financing, and installation of the solar energy system on a customers property at little to no cost.  The developer sells the power generated to the energy customer at a fixed rate that is typically lower than the local utility’s retail rate. PPA’s are particularly important in the renewable energy sector and are widespread in energy markets, across all types of technology.There are other benefits to this approach. Energy customers can decrease electricity losses, potentially improve reliability, resiliency and have upgradability options.

While this all sounds great, it’s important to review and understand the contents of the PPA and making sure that you are benefiting from this business transaction in the short-term and the long-term. Here are some things that you, as a energy customer, need to be looking out for while looking over your PPA:

  1. Ownership of the system
  2. Minimum electricity purchase requirements
  3. Clear lines between force majeure and events of default
  4. Regulatory environment
  5. Payment terms
  6. Contract timeline
  7. Operation and maintenance
  8. Performance terms

While this is not an exhaustive list, what’s important to remember is agreements are designed to be flexible to meet the needs of the energy customer. So it is important to prioritise what areas of the PPA you are willing to budge on and where you will hold your ground. With so many things to consider, you might be thinking whether it’s worth the trouble. Here are a couple of reasons why you should partner with a developer, like Distributed Energy,  for your energy requirements:

  • You get direct contracts with us to secure renewable energy production over the short and long-term.
  •  We provide flexibility on term duration and type of agreement. In addition to this, we also provide security of supply and transparency about the cost of electricity.
  • You will be contributing to sustainability targets set by your government to reduce carbon emission in a transparent, traceable way and we will have publishable data regarding your energy savings readily available for you through our use of IoT’s.
  • As someone who is running a business, you can demonstrate to customers your commitment towards environmental stewardship. This can attract new customers, investors and other key stakeholders.
  • As your business grows you might have additional energy requirements. Our PPA’s are flexible and we will provide you with options to build additional renewable energy capacity.

 

How to choose the right Operations and Maintenance for solar rooftops ?

PPA’s typically range from 10-25 years and the developer remains responsible for the operation and maintenance of the system for the duration of the agreement. So you can see why it’s important that the developer not only has well developed metrics for assessing the functionality of the system but also has the capabilities to monitor and predict system reliability on a real-time basis. So the question is, how to select the right developer for your energy needs. The capabilities of the developer can be assessed using parameters such as number of previous projects commissioned, quality of products used in installation, how many of those customers were satisfied with the services, financial position and also the technical credibility of critical components that the developer has mentioned in the PPA i.e. in terms of monitoring electricity demand and maintenance work.

Do your Homework

Before finalising anything, do your due diligence and ask yourself the following questions (a) What products and services are offered by the developer?; (b) How many years has the developer been in this business and how many installations have been completed?; (c) Is the developer familiar with statutory requirements, state policies and regulations?; (d) How accurate is the system design and does it suit your requirements, and finally; (e) What happens if the system doesn’t produce the agreed amount of electricity and what are the limitations of the developer if the system has trouble in its operations? Let’s look at each, one by one. You want to find out the quality and make of the products being used for installation and check the warranties and guarantees offered by the developer. Remember that most solar power projects have a life of 25 years and it is important therefore, to use only quality materials and quality installations. In addition to this, find out more about the developer by checking their credentials via a certification. This is guarantee that they are a trustworthy business that adheres to sound and ethical business practices. You can also ask for the company portfolio and a list of recent projects as well as 2-3 references for you to contact. When looking at the accuracy of the initial system design, an important note to self is, the more accurate and detailed the quote for the system design is, the fewer the unexpected changes you will have to deal with during installation stage and thereafter.  Lastly, get a clear idea of how the developer will measure and evaluate the performance of the plant after installation. Is the developer confident enough in his installed system that he is willing to sign a Performance Ratio/ Generation guarantee with a penalty clause for non-achievement?

With thousands of dollars of investment on the system, taking some time to ponder these points will be useful the next time you are looking for potential solar rooftop developers.

 

 

 

 

Distributed Energy