Renewable Energy Finance

28/11/2019
Blog

Renewable Energy Finance

The development of clean energy is all about having access to finance than science and technology. For decades now, fossil fuel firm has been greatly subsidized with government backing, and tax breaks and renewables have battled to meet up. Clean energy now seems to be a safe option for investors. It is factual that over $250 billion are spent by investors every year financing renewable energy projects and this has positioned these investors in a global market that will continue to experience double digits expansion until 2020.

Renewable energy finance offers an insider's opinion on the transactions of renewable energy and also reveals how countries like China, the United States, and India are reacting to the challenge of global energy.

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Global Project Finance - Renewable Energy Finance

 

Understanding The Landscape

Presently, language mirrors the trend of globalization all over the world; In the same vein, finance has its language. Renewable energy cannot be understood from finance if the key terms are not well defined. In short, the language of cash is English; however, finance is still commonly confused and poorly understood. Practitioners, media, and academics may likely use the same words, but various things are meant.

An investment is an act of exchanging money in order to have a benefit that an asset will generate. Investment can also come in form of equity (partial ownership), and as well as, in form of a debt (money borrowed to someone). There are many various definitions for asset (popular convention or academics).

Base on the present discussion, assets can be identified in two ways; financial or real. A financial asset is not really tangible, and there are no physical properties involved. Furthermore, financial assets can be said to be an agreement between two or more parties. It involves derivation of equity that is structured by investment bank (the highly exotic) to a deposit made at your local bank (the straight forward).

On the other hand, real assets are those that come to play in mind: heavy machinery, steel structure, and tracts of land. All economic foundations are built on real assets.

Also, worthy to note, Investors are those who buy both financial and real assets. They are the major focus; they can be the private sector or the government. Private sector investors include;

  • Retail investors (family offices, individuals)
  • Corporation (oil and gas, cleric utilities, consumer-facing industries)
  • Endowment funds (universities, foundations)
  • Investment partnerships (private equity industry, hedge funds)
  • Financial intermediaries(insurance companies, banks, pension funds)

Private sectors who have been the source of energy loan and have invested in renewables are those companies that have been existing in energy sector. They are generally known as strategic investors. Their involvement in the market often sees a strong bonding between their major ways of business and renewable energy. Strategic investors can also be a newly established firm that deals majorly with renewable energy.

Since the beginning of renewable energy sector, financial investors have always been involved in terms giving loans for project - these loans are offered by commercial banks. Private equity industry and Hedge funds are now frequently participating renewable energy finance. Also, insurance companies like endowment funds and pension funds are increasing their level of participation.

Differences Between Strategic Investors And Financial Investors

Financial investors have never been mandated by the government to invest in renewable energy; neither do they have any specific aim of investing which unlike strategic investors. Since financial investors are just renewable energy funding sources. They are prone to flee immediately the market start experiencing challenging conditions unlike strategic investors

Their choice of assets: real assets versus financial assets is another major factor that distinguishes financial investors from strategic investors. Financial investors have a record of investing in more than one asset class. When assets are grouped based on their characteristics/similar risks, it is referred to as asset class. Important asset classes are:

  • Real estate
  • Fixed income
  • Commodities
  • Equities
  • Derivatives

Investing in the sector of renewable energy has brought about diverse assets. For instance, share is bought in a renewable energy firm when publicly traded (equity), loan to clean energy projects directly (fixed income), be a partial owner in production and manufacturing industry (real estate), predict the price of outputs like emissions allowance, electricity or liquid fuel (commodities). Therefore, renewable energy is within many asset classes as a subcategory and does not stand on its own as an asset class.

Principles Of Risk And Return

This is the criteria used by investors to decide whether to invest in any specific asset class. It is the principle of risk and financial return. Many investors wait for data on risk, and financial return to be closer enough before investing while some will simply be restrained by strategic aim or some specific obligations may prevent specific types of investment. For all participants, the major question to ponder on when faced with a new investment is; will the selling price of the asset today offers a good chance for capital appreciation in the long run? This question can be answered when the best means of asset pricing is chosen by decision makers.

At Scale: Financing Renewable Energy

Strategic investors do not possess financial resources scale within reach to solve the problem of expanding investment at four to five times its present level in renewable energy. It is uncountably becoming crystal clear that renewable energy stands as a great competitor to conventional utility market plans, thus, straining the position of the known major players financially.

When financial investors increase their funding, it will be very easy to meet up with the goals of renewable energy. Investments made by energy firms should not be replaced, rather fundings made by the capital markets should be seen as complementary.

When financial investors increase their investment, it will enable funds to be redeployed into development projects that are in early-stage and also ease the burden of utility balance sheet.

Conclusion        

Due to the present concern on change of climate, renewable energy is now an essential source of energy consumption of the world. CO2 emissions can be reduced by renewable energy technology by substituting fossil fuels in transportation sector and also in power generation firms. It’s important that the demand for renewable energy and its supply technologies should be developed and promoted. Generating power using the sources of renewable energy should be promoted so as to reduce the cost of energy per unit. Several factors are responsible for energy consumption, such as energy prices, economic progress, technology, population, and weather.

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