How to invest in sustainable energy?
Value propositions for wind and solar technology have reached a maturity level enabling sustainable energy to compete successfully with fossil and nuclear energy resources. In 2016, approximately 300 billion euro was invested in sustainable energy. This level of investment is expected to grow each year by double digit figures. Sopra Banking Software is ready to manage the various structured finance products for the sustainable energy sector.
Investing in green energy requires a match between the risk appetite of the investor and the stage of the sustainable energy project. The risk of investing in the development stage are much higher than the risk of investing in the exploitation stage. Since the investment for a new plant is high, it is common that the operator of a sustainable energy plant must finance more than 80% of the required capital.
Who is financing sustainable energy? How are green energy financing products structured?
The drivers behind sustainable energy financing include multilateral and specialised lenders, cooperative financing corporations, commercial banks and capital markets for fixed income.
The investment in high-risk and long-term development projects is the domain of multilateral lenders, also known as development banks. These lenders, including the European Investment Bank join the funds and guarantees of multiple countries to finance high-risk loans with a very long maturity. Funding from multiple countries finances loans to one or more country in one or many currencies. To make the risk of lending predictable and manageable, all instruments of structured finance are needed for hedging currency, interest, and credit risks.
Another type of sustainable energy investor is the specialised lender. These lenders attract funds from the market to invest in green energy projects. They have experience in finding and selecting the projects that will deliver the required yield. For example, the lender may invest as the senior lender on an energy project (lower yield and risk) and may also have investments in SPV (special purpose vehicles) to manage the risk, tradability, and cash flow of investors.
The inverse of this is the creation of a cooperative lender that attracts lending for its members, the (sustainable) energy operators. Due to the cooperative structure, investors spread their risk, investing in multiple opportunities instead of a single opportunity.
Investing in sustainable energy is also in the domain of commercial banks. Due to the risk profile of green energy projects, a club of banks or syndicate can be formed to finance the senior debt. A senior lender is the first one to get paid in contrast with a junior or mezzanine lender who gets a higher yield but only gets paid when the plant generates sufficient cash. The junior debt and construction risk are, in most cases, held by the energy plant operator and supplier of the green energy plant.
Lending in sustainable energy is highly structured and requires an IT system that can manage multiple participants with different risk appetites and cash flow requirements.
In the coming years, the capital demand for financing green projects will grow. Based on the experience of financing existing plants, the cash flow generated in the exploitation stage can be forecasted. It is expected that asset backed securities will be created for plants in this stage. The bonds are a good investment for funds and individuals looking for a better yield. This will allow initial investors, such as operators and banks to invest in the construction of new plants.
Sopra Banking Software is investing in this sector too, by delivering commercial finance software that meets the demanding requirements of our sustainable energy lending clients. Sopra Banking Software’s Cassiopae financing product is helping all types of energy investors manage the complexities of highly structured, green-energy lending products.
Michiel Waardenburg – Product Strategist