Print
	Email
	Text size
	Comment

Richard Branson may have put renewable energy in the headlines, but savvy businesses and investors have long known about the sector’s potential.

Sir Richard Branson’s recent announcement that he was planning to plough $3 billion (£1.6 billion) into renewable energy in the next 10 years may have been born of a desire to save the world from global warming, but the move was underpinned by an underlying business opportunity.

Branson’s recently launched investment vehicle Virgin Fuels is dedicated to backing companies which produce energy and fuel from renewable sources such as wind, wave, crops or biomass.

Virgin Energy has already invested in US-based bio-ethanol fuel producer Cilion Inc and is planning more in the coming months.

But Branson is merely jumping on a bandwagon that has been quietly gathering pace for some time. Increasing numbers of companies and investment firms are entering the market seeking to make big bucks from the drive to combat global warming.

It is understandable why. With the government setting a target of 20% of energy to come from renewable sources by 2020 – it is currently about 5% - the market is guaranteed growth for years to come.

This is underpinned by legislation such as the 2002 Renewables Obligation, which stipulates that electricity suppliers have to produce evidence they have sourced a specified proportion of their supplies from renewable sources that do not produce the amount of greenhouse gases such as carbon dioxide that traditional fossil-based fuels do.

Not only this, but according to Tom Murley, head of the renewable energy team at private equity firm HgCapital, general electricity usage will continue to increase in Western Europe at between 1% and 2% per year. “Which doesn’t sound like much but just to meet that increased demand alone requires something on the order of a minimum of euro7 billion – euro8 billion [£4.7 billion - £5.38 billion] per year of capital investment,” he said.

Renewable energy is also attractive to investors because it is perceived as less risky than traditional energy sources such as oil. With oil production often dependent on countries in politically unstable areas such as the Middle East, prices can fluctuate markedly - as seen in the UK earlier this year - which has a knock-on effect for energy retailers and consumers.

Renewable energy can avoid these problems. “Renewable resources are indigenous, so to an extent you can rely on those - you avoid an issue of having to import fuels and being reliant on foreign governments,” Murley said. “It can reduce some of the volatility and provide certainty in energy pricing and large industrial customers tend to want more certainty.”

But while more investors are coming into the sector, venture capitalists are conspicuous by their absence. “We are seeing some increased competition [from investment firms] but not really from the venture capital funds, because… [in] owning renewable energy assets, you’re really in the electric utility business and owning a power generation facility doesn’t provide the 20% - 30% returns venture capital or buy-out firms are looking for,” Murley said.

Venture capitalists are also arguably put off the sector by the long-term nature of investments. Murley said HgCapital evaluates its targets on a 20-year plus basis, rather than the three to seven years of conventional VC investments.

The gap left by the VCs is filled by infrastructure investors such as Macquarie or Babcock & Brown, which take a more long-term view of investing, Murley said.

They are attracted because most renewable energy assets will have a regular cash flow within two years of an investment – many investors only put money into projects that have a defined revenue stream - which provide steady returns over the life of the asset. “That dividend stream will generally continue and trend upwards over the 20 to 30 year life of the asset,” Murley said. “If you hold it for that length of time, the investment will pay itself back with a return.”

Power up

M&A activity is also increasing in the sector as existing players seek to expand their market share. For example, BP acquired Greenlight Energy Inc, a US developer of wind power generation projects, for £51.6 million in September and Novera Energy Ltd bought six UK wind farm projects from Renewable Energy Development for an undisclosed sum in July.

David Fitzsimmons, CEO of Novera, expects consolidation in the industry to accelerate, which could be driven by companies seeking to divest interests. “You’ve got a lot of [renewables] divisions of big companies, for whom in some cases it may not be core and then you’ve got a lot of very small developers, not all of whom may be able to take a portfolio of projects right the way through to completion,” he said.

This will provide acquisition opportunities to medium-sized players that have the capacity to take on these projects, according to Fitzsimmons.

It will also provide opportunities for businesses geared towards making acquisitions because they do not develop their own technology or energy plants.

Fitzsimmons said this makes the market for existing assets very competitive, and as a result he believes many smaller renewable energy technology specialists will focus more on developing projects from the early stages rather than buying assets nearing or ready for production.

With competition for acquisitions and investments increasing, Fitzsimmons is unsurprisingly bullish about the sector’s prospects. “[The] sector… is attracting a lot of attention and for good reason; it is growing in response to government policy, climate change, energy security concerns, energy price concerns,” he said.

He anticipates that the coming years will see the sector mature, with a resulting increase in deal making at all levels as players become established. “Like any sector it is all going to be about winners and losers, it is about the people who’ve got better projects and better ability to get them through planning,” he said.

Comments [0]