A bit of financial creativity could overcome a conspicuous shortfall in the money flowing to clean energy investments, two recent insights from the Climate Policy Initiative suggest.
One is found in the international non-profit’s 2018 Global Landscape of Renewable Energy Finance report. It examined financial flows into green energy between 2013 and 2016 and found that “renewable energy capacity has grown at record-high levels,” even though investment slid in the last year under review. Private investors were responsible for “over 90%” of renewable financing.”
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The International Energy Agency has estimated that at least US$55 trillion in investments in renewable energy and demand management are needed to keep global warming below the 2.0°C global goal in the Paris climate accord. Much of that potential investment resides in the vast pools of money represented by institutional investors: pension funds, insurance companies, sovereign wealth funds, and others. Yet the same CPI review found those sources provided less than 5% of green financing in the study period.
Elsewhere, a member of the Initiative’s energy finance team offers a suggestion for breaking through institutional investors’ reluctance.
Writing in Medium, Matthew Huxham proposes to realign risk-bearing and revenue streams in the financing of capital-intensive but long-lived solar, wind, or other renewable energy development.
His starting point is that institutional investors have neither the appetite nor the capacity to judge the merits of individual renewable energy projects, but do have expectations of reliable returns on investment that somewhat mitigate their targets for absolute profit.
To give them what they want, Huxham proposes to break up the revenues available to renewable energy developments into three streams. The first would be the conservatively-estimated base revenue from a long-term supply contract with a utility or industrial user. “Residual” revenue earned on power produced that exceeded the guaranteed base would be packaged into a second, riskier financial product. A third product would be backed by the opportunity to sell or redevelop a project’s fixed assets—its solar farm or wind turbines—when that long-term sales contract expired.
The key piece in Huxham’s proposal, however, would be what he and colleagues call Clean Energy Investment Trusts (CEITs). The trusts would aggregate securities representing the most reliable, contract-backed revenue segments from various projects to reduce the overall risk for institutional investors.
“We aimed the design at an audience whose objectives are well-suited to investing in renewables, but whose participation has hitherto been limited because investment offerings have not been designed in a way that meets their appetite for risk,” Huxham writes. “In particular, we have in mind the teams within pension funds and insurance companies managing asset portfolios specifically designed and ring-fenced for matching predictable, long-term liabilities.”
Developers, in turn, could use the pre-sale of their projects to those trusts as security for conventional equity and debt financing for construction.
“We would anticipate the CEIT being set up as an equity investment, but with debt-like risks and returns,” Huxham speculates. “A CEIT would purchase a series of long-term contracted operational assets, and make a public offering of that closed asset pool to institutional investors. At the same time as doing this, the CEIT would de-risk the assets, including selling up front the right to receive ‘residual cash flows’ during the contracted life of the pool, and the right to receive ownership of the assets after the end of their long-term contracts.”
