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Clean Energy Investment Trust: financial innovation for pension funds & insurers

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Published: August, 2017

This week we launch our design for an investment-grade financing vehicle targeted at institutional investors that reduces the cost of energy from renewables by 17%.

Large-scale wind and solar energy projects are com­pletely different businesses from coal- or gas-fired generation. There are no fuel costs, operating costs are lower and more predictable, the initial investment rep­resents a far larger share of the total cost of the energy, and prices for output are often fixed for much of a proj­ect’s life. In recent years, close to half of all new elec­tricity generation investment has gone into renewable energy in many electricity markets. Gradually, financial markets have started to adapt their approaches to the differences between renewable energy and conven­tional generation.

However, these adjustments have mainly been incre­mental based on the common investor-owned utility (IOU), independent power producer (IPP) and project finance models that have served the conventional gen­eration businesses so well. As discussed in a compan­ion paper, Beyond YieldCos, the creation – often by the IOUs or IPPs themselves – of so-called YieldCos has turned out to be neither as novel or successful as once thought.

Climate Policy Initiative (CPI), with the support of the Rockefeller Foundation, has taken a different approach. Starting with the investment fundamentals, and working with a wide range of financial investors CPI has sought to develop new finance and business models with the aim of reducing finance costs and, therefore, the cost of energy from wind or solar. The model we present here, based on those fundamentals, could reduce the cost of renewable energy 15-17% from existing practices.

The fundamentals

Wind and solar projects have four distinct cashflows:

  1. Asset development and construction – Develop­ers and investors spend time and cash developing, building and commissioning the renewable energy project.
  2. Predictable cashflows during operation under a fixed-price regime – The projects generate predict­able cashflows when operating under a long-term, fixed-price tariff or contract.
  3. Less predictable “surplus” cashflows during a fixed-price regime – The projects also generate less predictable cashflows, even when the energy price is fixed. These occur if, for instance, there is more wind or sunshine than investors deem “predictable”, or if plant performance is higher or costs lower than expected.
  4. Tail-end cashflows after the fixed-price regime expires – When the fixed-price period expires the projects can continue to generate electricity but revenues are less certain because prices may depend on volatile wholesale energy prices or regulation that is 20 years in the future. Operating costs are likely to rise and become less predictable after the original contracting period is finished.

Beyond YieldCos, Mobilising Low-Cost Institutional Investment in Renewable Energy: Major barriers and the solutions to overcome them and Structuring the Clean Energy Investment Trust have been supported by the Rockefeller Foundation’s Zero Gap programme.

Clean Energy Investment Trust: financial innovation for pension funds & insurers
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Keywords
  • energy finance
  • energy transition
  • financial innovation
  • institutional investors
  • project finance
  • renewable energy
  • renewable energy investment
  • solar
  • utilities
  • wind