The sector is being driven forward by a series of interrelated factors – rising global GDP will need to be satisfied by increasing the energy supply, in spite of constraints on fossil fuel supply, which means securing a country’s energy supplies is more important than ever. As a result, national and international legislation is being formulated to encourage carbon reduction.
However, with the UK’s target of 15% of energy consumption from renewable energy sources by 2020 looking increasingly unlikely, a premium is being placed on the sector. This should enable it to emerge from the global recession with exciting growth prospects, backed by regulatory drivers, financial incentives and widespread cultural shifts.
The ability of the sector to capitalise on this opportunity depends on projects being able to secure adequate financing. Investors need to balance their level of required return against their appetite for technological and regulatory uncertainty. The complexities of projects and the difficulties involved in assessing an accurate risk profile have been a major drag on the availability of finance in recent years, despite the potential for profit.
Clean tech businesses – which develop products that improve the generation or usage of energy – are the most obvious targets for investments. They are able to target the low-hanging fruit in organisations where every penny must be accounted for.
Reducing utility or electricity bills can achieve payback in 9 to 18 months, and eliminating or reducing the new taxes implemented by the Carbon Reduction Commitment can have an immediate impact. Such businesses often find themselves the target of private equity and venture capital investors, due to the clear appetite for their offering.
The large-scale, capital consumptive nature of the renewables sector make debt and equity more closely aligned, and as long-term assets they are able to offer stable cashflows. For these, it is vital that businesses can demonstrate security of supply – sun and wind, for example, are easy to harness but intermittent, while biomass or energy from waste allow for continuous production but need long-term contracts. If you can finance a project under power purchase agreements over a period of time, it is possible to pay down the debt and create a valuable asset with stable investor returns.
Whatever the area of business, banks and private investors want to see certainty of revenue before making a financial commitment, and central to this will be a well thought-out and realistic business plan. Funders need to be confident that you have proven technology, a demonstrable track record, a strong management team, security of revenue, security of supply, cashflows that match the debt terms – and, of course, a clear demand for your product.
Ultimately, if a project is bankable, the equity will follow – and green business is better placed than most to take advantage of the current funding market.
Adrian Reed is UK head of cleantech and renewables at Altium