The new investors in renewable energy

This article appears in the latest issue of IEA Energy: The Journal of the International Energy Agency. By Michael Waldron

As the economy stumbles along in some areas of the world, the cost and availability of financing is a growing source of uncertainty for renewable energy deployment. Global investment levels in the sector fell during the first half of 2012 versus a year earlier, market data suggested, amid an increasingly cautious macroeconomic and policy outlook, particularly in Europe and the United States. Meanwhile, two traditional sources of financing for the sector – European bank project finance and utilities – look increasingly at risk.

But emerging markets, particularly Brazil, China and India, are now driving renewable investment. Banks, institutional investors and corporations in Asia are taking larger roles in the financing of projects at home and abroad. For example, Chinese power companies, which have access to significant amounts of low-cost finance, have recently invested in renewable-linked companies and projects in Portugal and Australia. And compared with European lenders that have relatively weak capital positions, Asian banks are expected to be constrained less by Basel III, new global regulations set to take effect starting in 2013 that aim to strengthen the banking sector against economic shocks.

Development banks and export credit agencies are also taking on larger roles, often providing loans at better rates than private sources can offer. Multilateral institutions such as the European Investment Bank and country-level entities such as the Brazilian Development Bank and Germany’s KfW have significantly increased their activity in recent years. Others are emerging, including the United Kingdom’s new Green Investment Bank and its potential pool of GBP 3 billion for investments in offshore wind, energy efficiency and power generation from waste.

Institutional and non-traditional corporate investors represent another potentially large source of renewable financing. Private pension funds, with USD 28 trillion under management in 2009 (in OECD countries), seek steady, long-term returns such as those provided by renewable projects with power purchase agreements. So far, such funds have engaged carefully, needing to invest in financial instruments that minimise exposure to construction risk. But pension fund financing has already emerged for wind projects in Denmark, for example.

Sovereign wealth funds, insurance funds and non-utility corporations are also expected to play larger roles. Allianz, the biggest European insurer, already has a wind portfolio of 658 MW (roughly equivalent to the annual consumption of 400 000 OECD households). American companies, largely banks, have provided tax equity financing, using the renewable energy tax credits associated with projects to offset their own tax burdens. While there is uncertainty over this funding going forward, information technology companies are likely to provide more corporate investment to help hedge against electricity utility price increases and meet rapidly rising electricity needs for data servers and overall growth in global internet usage. Google has already invested more than USD 900 million in 1.8 GW of renewable generation capacity; in 2010, the company used 2 260 GWh of electricity for its operations worldwide.

A smaller but potentially more important development is the growth of programmes to finance new distributed capacity. For example, some American residential and commercial entities are deploying solar photovoltaic (PV) panels via third-party leasing programmes, defraying the upfront costs associated with project financing. Another emerging idea to enable financing is securitisation of small-scale solar PV – the pooling of assets to sell as financial securities on secondary markets – though to date its uptake has been slow.

Michael Waldron, a senior market analyst in the IEA Renewable Energy Division, is one of the lead authors of the Medium-Term Renewable Energy Market Report. Prior to joining the IEA, he worked as a senior energy market analyst at Lehman Brothers.

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