Investing in renewables, yes. But how?

The most attractive today are wind and photovoltaic technologies

Electricity generation technologies from renewable sources in Spain are a very different reality from what they were 15 years ago, not only because of technological evolution and cost reduction, but also because of the regulatory framework and market situation in which we find ourselves. Currently investment in renewable energy projects is presented as a very attractive opportunity for different reasons.

21/06/2019

Cincodias.elpais.com

-The energy transition policies and the European Union’s objectives in the field of renewables provide an important boost to investment in this sector.

-The maturity of the technologies, both technological and cost, has improved substantially. Investment costs have been drastically reduced and are still falling, and the guarantee of the useful life of the installations is being prolonged, so the comparative profitability of renewable technologies is solid in the medium and long term.

-There is great potential for growth in the short and long term, through policies of substitution of conventional energy sources by renewables.

-Although intermittency is still a problem for the operation of electricity systems, the development of complementary technologies (storage) is progressing well and costs are substantially reduced, so that the share of renewable generation can continue to increase.

This means that renewable energies have become, after years of uncertainty, a real alternative to obtain a good balance between profitability and risk. For this reason, in recent months there has been a strong resurgence of investor interest, with the investment of insurance companies, pension funds, specialised private equity funds, utilities and marketing companies being particularly noteworthy.

For years we have been analysing and closely following the evolution of the sector and evaluating different strategies for our clients. In recent years, we have preferred not to participate in projects that depend on a premium remuneration system. However, in the current context and thanks to the situation previously described, we consider that there are very attractive investment opportunities that can be accessed through specialized investment vehicles that are capable of adding value thanks to a management team with a deep knowledge of the market and under an appropriate strategy according to the investor profile.

It is important to understand the different strategies and risk levels when investing in renewable energy projects: investment in the development phase, where returns may be very high but there is a binary risk in each project (due to impediments when obtaining licenses, permits that may make the project unviable); ready to build purchase strategies where development risk is eliminated but projects must be built, optimised and set in motion, and operational projects that offer greater visibility and lower risk, but also lower profitability.

Investment decisions in this type of project require in-depth knowledge of the sector and the typology of the target projects, as well as their financial and technological aspects. Investment funds have undoubted advantages in both directions thanks to their volume, knowledge and negotiating power. The ability to optimize and operate projects properly, as well as the disinvestment strategy, are key aspects for the profitability of these investments where scale plays an important role. The same happens when closing private agreements for the sale of energy or PPA (power purchase agreement) where the negotiating capacity is essential to ensure prices and provide stability to the projects. Thus, the funds will continue to be the protagonists of the energy sector and the main alternative for investors who want to have exposure to this sector.

The keys to success in capturing the opportunity currently offered by the Spanish market are: knowledge of the electricity market and energy regulation, experience in the development, construction and operation of projects of this type and access to quality assets. All this can be achieved through an alliance with a management team with experience and access to projects from the development phase. Although there are a variety of renewable generation technologies, not all are alike in terms of investment time, unit cost of investment and risks. The most attractive today are wind and photovoltaic technologies.

We believe that the best way to channel individual investment in this sector is through investment in specialized investment vehicles or funds, which allow a greater volume of investment needed to achieve the advantages of scale and diversification in different projects by the hand of a professional team with high knowledge of a complex and sophisticated market.