Renewable Energy Investments
Understanding Renewable Energy Investments
Investors face several challenges when seeking to participate in renewable energy infrastructure, including: identifying quality projects, maximizing the value of project tax attributes, minimizing capital expenses and execution risk. CEA has the experience and processes in place to address each of these critical issues. Our investor focused philosophy and well-defined due-diligence methodology allows us to efficiently screen projects and acquire only those meeting strict risk vs. reward parameters. In order to realize the full value of the tax incentives available to solar projects we employ a pass-through model that generates a tax free income stream for our investors. Aggregation of projects into larger portfolios creates economies of scale resulting in lower installation costs. This is further enhanced by our business model which provides a lower cost of capital. Finally, by focusing on smaller utility scale projects (<5MW) with interconnection and power purchase agreements already in hand, we minimize execution risk and turn investor capital into income producing assets very quickly.
Listed securities in renewable energy companies are traded every day on the world’s major stock and bond markets. Most listed companies are either equipment manufacturers (i.e. SunPower) or large installation and service companies (i.e. SolarCity). Recent declines in solar equipment pricing have constricted the margins of solar equipment manufacturers creating a difficult environment for most of them. We believe that investors in these companies should focus only on the top-tier manufacturers as evidenced by market share and product quality. Solar service providers offer the investor a way to participate in the complete development cycle of renewable energy projects. This includes additional revenue streams from operation, maintenance, and financing agreements. The primary advantage of investing in listed companies or registered debt is liquidity. While overall returns may be lower than available with direct investment, publicly traded securities allow for ease of transfer and can be an important part of a well-diversified portfolio.
Direct investments in renewable energy projects are a non-correlated asset class and can make a great addition to the portfolio of qualified investors. Most direct investments in renewable energy projects have, until recently, been made by financial institutions, companies with large amounts of cash on their balance sheets, private equity funds and tax equity investors. While these organizations continue to fund a large percentage of the projects currently in development, investors have demanded, and the market is now providing, mechanisms by which a larger group of investors can participate.
Direct investment opportunities are available in a number of forms including individual project ownership, limited partnership units, and real estate investment trusts (REITs). Of these, individual project ownership represents the greatest risk for the renewable energy investor. To help reduce this risk the prudent investor should look for a professionally managed portfolio of renewable energy projects available in limited partnership or REIT structure. Professional managers have both the experience and resources needed to perform critical due diligence on multiple projects, only selecting those that prove to be financially sound. Additionally, an experienced manager can properly diversify the portfolio. Diversification plays an important role in managing risk. It is always best to invest in a group of projects rather than in one or two. By spreading the investment out across different geographic areas and project types, the portfolio manager can achieve the desired risk/reward ratio.
Bigger is usually better with solar energy projects. Larger projects (or groups of smaller projects placed in a single portfolio) are able to achieve better economies of scale and lower Balance of System (BOS) expenses. BOS expenses include all project costs not related to the solar PV equipment. As mentioned earlier, BOS expenses can represent as much as two-thirds of total installed cost for solar energy projects. Minimizing client acquisition, engineering, interconnection, permitting, legal, regulatory, financial, construction, and other BOS expenses can have an enormous effect on project profitability and investor return. Investors in renewable energy should look for portfolio managers with experience in both project finance and development. Mangers who understand and can align the objectives of the developer and investor will achieve higher investment returns.
Renewable energy investments can provide investors with excellent tax benefits. Federal, state, and local tax incentives are often available for renewable energy project owners. Additional deductions such as accelerated depreciation may also be available to renewable energy investors. By either monetizing the tax benefits or passing them through to investors, real rates of return can be greatly enhanced. Renewable energy limited partnerships, for example, can provide high yield with minimal tax consequences. Depending on the investor’s tax situation, income from partnership earnings may be offset by the tax attributes available to the project creating a stream of effectively “tax-free” payments. Project owners can also take advantage of incentives available in many jurisdictions that reduce property and sales tax for solar energy facilities. These incentives help to keep operating costs low resulting in higher investor returns.