Publications

- March 1, 2017: Vol. 10, Number 3

Closing the stable door: President Trump’s hostility toward renewables flies in the face of global market trends and investor appetite

by John McKenna

Europe has long been familiar with President Donald Trump’s attitude toward renewable energy.

For the past 10 years developers of the proposed European Offshore Wind Deployment Centre (EOWDC) have been engaged in a legal battle with the billionaire over their planned 100MW wind farm, which would be situated off the coast near Trump’s golf course in Aberdeen, Scotland.

However, despite the Trump Organization’s best efforts, the project looks likely to go ahead following a ruling by the British Supreme Court in favor of the developers. Construction of EOWDC — which will act as a testing ground for new types of offshore wind technology — is scheduled to begin in October after Swedish utility Vattenfall confirmed its $375 million investment in the scheme, and awarded the foundations contract in January.

Trump’s defeat in Scotland may yet prove prophetic of what could happen if he chooses to pick a fight with renewable energy while U.S. president.

“Trump may slow down the transition to renewables but he will not reverse it,” says Chadbourne partner Keith Martin. “If you look at new capacity additions, they have been almost entirely renewables, with some merchant gas. Going forward, renewables will continue to dominate, even with Trump. During the George W. Bush years the action shifted to the states. Renewable Portfolio Standards have been a driver for growth, and will continue to be.”

Renewable Portfolio Standards (RPS) are held by 29 states, and set targets for the amount of electricity generated by renewable energy. California and New York, for example, have both targeted 50 percent renewable electricity generation by 2030.

These RPS targets are unlikely to be dropped even if President Trump scraps his predecessor Barack Obama’s Climate Action Plan.

More damaging could be the Republican Congress’ review of the U.S. tax system, and Martin says the flow of new renewables schemes could slow as investors consider the implications for the production tax credit (PTC) and investment tax credit (ITC), which benefit wind and solar power respectively.

Equally, proposed “border adjustment” rules could have an impact on imported technology like wind turbines and photovoltaic solar panels.

Under the proposed border adjustment rules, Congress wants to deny cost recovery for imported services and equipment. No cost recovery will make projects using those less economic. However, border adjustment is controversial, even among Republicans. Retailers and the oil industry are lobbying against it.

Parity power

While cheap natural gas prices driven by the shale gas boom mean that politics can still have an impact on renewables in the United States, the main story globally is of renewable energy’s dwindling reliance on subsidies.

In many countries, renewables can already compete with fossil fuels in their own right, says Quinbrook Infrastructure Partners’ managing partner David Scaysbrook.

“It isn’t about subsidies any more, particularly in markets that have more expensive gas,” says Scaysbrook. “In Australia, wind and very soon also solar PV, especially, are price competitive with the costs of a new coal plant, especially if it needs to meet new emissions standards. In emerging markets with high solar irradiation like the Emirates, projects are clearing at half the cost of prevailing grid-based electricity from gas. In Hawaii, its nearing one-third of the average utility price of a few years back based mainly on the use of diesel oil. It’s a similar story in Mexico.”

Indeed, in 2015 a global tipping point was reached as more was invested in renewable electricity generation than new fossil fuel–based power plants. A study by the Frankfurt School of Finance and Management for the UN Environment Program found that the $286 billion invested in renewables in 2015 was more than twice that invested in gas and coal-fired plants.

This tipping point has come about due to falling capital costs and increasing efficiency of technology, says Scaysbrook, combined with an increasing acceptance among investors in renewables projects that they are an important part of a core infrastructure portfolio.

The days where investors might be put off by political risks such as retroactive tariff cuts — including those seen in Spain and Italy — appear to be long gone, according to First Avenue Partners’ Tavneet Bakshi.

“Particularly in the developed markets, we now have a more established tariff and subsidy framework with most governments firmly opting to ‘grandfather’ rather than destabilize through retroactive cuts, as seen in Spain and Italy,” Bakshi says. “For us, institutional investor appetite is increasing for renewables. Five years ago there was still a question mark regarding adverse political interference. However, with the trend to cost parity, for investors it’s less a question of whether or not to allocate to renewables per se; it’s more a question of whether you prefer higher risk/higher return renewables investments, or prefer to allocate to lower yielding renewables assets that are already operational, for example.”

Risk rewards

As more and more money chases a small number of traditional infrastructure projects such as toll roads, and “safe” renewables such as operational onshore wind and solar, more and more investors are prepared to chase higher returns from “riskier” renewables such as offshore wind, or by investing at the construction phase.

“Over the last few years, we have seen increased institution appetite in areas that investors may not previously have been comfortable with such as offshore wind, waste-to-energy and biomass,” says Macquarie Capital managing director Chris Archer. “For example, many investors are comfortable with offshore wind construction now that the technology has improved. At first, ships converted from the offshore oil and gas industry were used for foundation installation, but now there are dedicated offshore vessels that can install foundations at a much faster rate. There has been a genuine de-risking in the delivery of projects, but there are still better returns in offshore construction risk than other infrastructure investments.”

Another key trend in renewable energy investment has come at the opposite end of the scale. While offshore wind offers utility scale projects with the investment ticket sizes that larger institutional investors look for, there is growing interest among investors in smaller scale, distributed energy schemes such as commercial-scale solar parks, says Scaysbrook.

“When solar is located close to its consumption, for example, a factory using solar on site, it is extremely efficient, even in a country like Germany that is not blessed with abundant solar irradiation,” he says. “These projects can avoid high distribution network charges. Generation costs make up less than half of the retail price of power to the end-customer. Increasingly we are distinguishing between grid-based renewables and more distributed schemes, as those projects are significantly more price competitive to the customer.”

While distributed schemes such as rooftop solar may be highly price competitive — even in Germany it has reached parity with the retail price of electricity — Archer says that investing in such schemes is not without its challenges, most notably rolling together a sufficient number of assets to achieve the scale necessary for institutional investors.

“Rooftop solar makes a lot of sense because you avoid the grid and transmission costs,” says Archer. “Once you generate larger portfolios, it is attractive to institutional investors, but it is hard work to get to scale. It also brings the challenge of due diligence on thousands of individual solar panels; although for some investors they quite like the diversification benefit of having 10,000 assets.”

Corporate champions

Investment in renewables by big business is another driver that is likely to keep projects flowing in the United States despite President Trump’s seeming opposition.

Google’s goal to source 100 percent of its electricity from renewables has so far seen the company sign power purchase agreements (PPAs), mostly with windfarms, totaling 2.6GW.

Many well-known U.S. businesses are following suit. Walmart, for example, is aiming to source half of all its electricity from renewables by 2025, while companies such as Amazon, Microsoft, Facebook and Dow Chemical are responsible for more than 2GW of signed PPAs.

“Last year there were 3,000MW of corporate PPAs signed, and this trend will continue as another driver of renewables projects,” says Martin.

For both corporate and institutional investors, renewable energy assets are attractive because they have the added value of both making financial sense, and meeting Environmental, Social and Corporate Governance (ESG) goals.

“We are not just transferring money buying existing assets, we are creating jobs, creating community benefits, and environmental benefits,” says Scaysbrook. “New-build renewables really fit with what investors are looking for, and they don’t have to take a return penalty to do ESG investing. If they are prepared to be at the riskier end, they can get a better return and that’s the penny that’s dropped for many.”

Making an impact

Renewables’ benefits also sit right in the middle of a wider investment trend that Bakshi describes as a “revolution” — the growing popularity of impact investing.

Impact investing is a growing sector responsible for more than $36 billion of assets under fund management in 2015, according to the Global Impact Investor Network. These assets range from equity stakes in real assets such as renewable energy power plants to loans for emerging market businesses, as well as investments in social enterprises in developed economies.

“Socially responsible investment allocations have been increasing and increasing,” says Bakshi. “It’s a revolution in terms of how institutional asset allocators consider their portfolios, but the key thing is that renewable energy in its own right attracts investment, and it’s not just box-ticking.”

Whether it is core infrastructure such as onshore wind and solar, or the perceived higher risk of construction-phase offshore wind, the attraction means institutional investor allocations are only likely to increase.

President Trump may want to deny climate change, but he cannot deny which way the money is flowing. He may try to close the stable door, but the renewable energy horse has already bolted.

 

John McKenna is a freelance writer based in Tring, Hertfordshire, United Kingdom.

 

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