Despite a temporary slowdown in renewables financing, this is
still a sector worth gambling on.
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Total financial investments – including asset
finance, venture finance and project finance – in clean energy
halved globally between Q108 and Q109 to total $13.3 billion (€10.1
billion), according to recent findings from New Energy Finance
(NEF). Considering they also declined by 44 percent between the
last quarter of 2008 and the end of March this year, there are few
signs at present of there being a reversal in fortunes.
Asset finance alone – which, according to the
UK-based research firm, makes up $11.5 billion of this $13.3
billion total in clean energy investments – halved in new business
volumes over the past year.
NEF, which provides data on clean energy and
low carbon technologies, said that the unprecedented fall in
recorded investments was caused by a sharp drop in underlying
activity, as well as the fact that deals are taking longer to
complete.
Its head of research, Angus McCrone, said:
“Renewable energy projects are typically financed 80 percent by
debt and 20 percent by equity. The main problem is that project
developers and utilities are finding it very difficult to get hold
of the debt finance they need.”
As a consequence, according to McCrone, some
developers and utilities have slowed down their investment
plans.
For instance, Shell has said it will not
invest in any new wind and solar power projects – although it will
continue to concentrate on biofuels – while London-headquartered BP
has signalled a step back from renewable energy projects
internationally.
Potential for growth
Despite the fall, however, it is
believed that renewable energy asset finance could still be a
growth area for many funders.
Leasing companies can benefit, however, from
being able to fund all types of renewable energy assets, from wind
turbines and sea pumps to solar-thermal panels and smart metering.
Historically lessors have done so using a mix of leasing and
project financing.
According to McCrone, this clearly gives
“scope for leasing to play a bigger role” in the future. Asset
finance, for instance, can be a solution for wind project
developers leasing turbines rather than buying them outright, and
“using this as a way of financing projects without having to take
on so much non-recourse debt”, he said.
According to Steve Moore, relationship manager
for the UK branch of the Dutch ethical bank Triodos: “There is
definitely a gap in the finance market for projects costing between
£5,000 (€5,649) and £100,000, where there is very limited finance
available at the moment. Basically, what is being built is being
financed by the wider business activities of the organisation that
is developing it, so I see an opportunity to step into that
market.”
Triodos first started financing renewable
energy projects a quarter of a century ago when it provided
financial support to farmers looking to diversify into wind
farms.
Currently it has over 200 projects across
Europe on its books, including 25 wind farms in the UK, as well as
solar projects in Spain and biomass plants in several European
countries.
Moore said that project finance is ideal for
larger transactions worth over £1 million while leasing is best
suited to smaller projects.
“There is a gap in the market, and I think
this is because well-established asset finance companies have taken
the view that the volumes are not sufficient enough to justify
their moving into that market,” he said.
“Also, the technology possibly is not known
well enough to them, including what the secondary values would be
and that sort of stuff, whereas companies like us are more
comfortable with that technology,” he added.
Improving ‘green’ credentials
Another company that seems to have
found its place in this sector is Quartz Finance.
The leasing broker has built up a substantial
portfolio in renewable energy in the public sector – including
schools, police forces and local authorities – as well as private
companies, including hotels and retailers. It also targets those
companies which are keen to enhance – or establish – their green
credentials.
With years of experience in this sector behind
it, Graham Wall, Quartz’s director, reckons his company has a
competitive edge over its competitors, many of whom are now anxious
to break into the renewable sector.
Meanwhile, Wall said, his sector has been hit
hard by the recession and, as a result, investments have slowed
down.
“Companies probably prefer not to spend the
reduced amount of money they have on renewables,” he said.
To get things back on track, government
incentives are urgently needed to boost renewable energy
investments. Anomalies, for instance, exist in the value-added tax
(VAT) system, such as the imposition of 17.5 percent VAT on
renewable energy equipment while domestic energy is taxed at only 5
percent.
“What has been done until now is not enough
and the government is not consistent in what it does. The VAT on
renewable energy systems is still too high, the grants come and go.
They say a lot of things but don’t always do what they are supposed
to,” he said.
Moreover, Wall said, in public sector
buildings a certain percentage of energy could be generated by
renewable means. Doing so, of course, would provide easy financing
opportunities for lessors.
Julian Rose, head of asset finance at the
Finance & Leasing Association, said that one area that the
government should focus on is providing some form of enhanced
capital allowances for micropower assets – those used in the
production of energy on smaller scale projects, such as individual
residential buildings.
Assets in microgeneration usually are split in
two solar-powered categories – photovoltaic systems to produce
electricity, and solar thermal systems to provide hot water and
space heating.
“Leasing could play an important part in
supporting increased use of renewable energy technology, but the
tax incentives that are already available for energy saving need to
be extended to microgeneration assets,” he said.
He added: “Too often, microgeneration is seen
as a high-cost asset with a long pay-back that is not attractive to
homeowners and businesses. Wider use of leasing contracts for
microgeneration, with appropriate tax treatment, would make the
technology more accessible for millions of consumers and
businesses.”
It is a long way off before renewable energy
financing becomes a core part of lessors’ business.
But with strong short-term opportunities
arising from leasing investment in this sector, such as high
margins and profitability, as well as the long-term benefits, not
least being at the heart of a sector that over the year ahead can
only grow, this is a sector few lessors can afford not to be at the
heart of.
Antonio Fabrizio
