Renewable Energy Funds

By Bridging Loan Directory -

With oil stocks dwindling, there is a growing awareness of the need to shift towards renewable energy sources – a necessary transition that has been brought to the forefront of the public’s minds by the recent tragedy off the Gulf of Mexico. Certainly, the reliance on coal and oil is unable to continue indefinitely, placing a growing importance on the renewable energy industry and presenting an exciting investment opportunity, especially as total energy needs will no doubt continue to rise even in the face of falling fossil fuel availability. Consumer and government pressure on energy producers for renewable energy sources means that the shift has already started and there’s no doubt that the part that renewable energy plays in the UK will continue to grow and, with it, so will the commercial opportunities available in the industry.

At present, renewable energy makes up only a very small percentage of total UK energy production. According to the National Audit Office (NAO) data for 2008 (the most recent available data) showed that only 2.3% of the UK’s energy came from renewable sources, making it almost certain that the Labour government’s goal of 10% by the end of 2010 will fail. As this was merely a domestic goal, the only consequence is political and the party responsible for this overly high goal setting and under-achieving has duly been voted out. However, the government does have a legally-binding obligation to increase renewable energy production as a proportion of total energy production to 15% by 2020 under the EU Renewable Energy Directive 2009. Assuming this is indeed achieved, we will witness a seven-fold increase in the amount of renewable energy produced. In absolute terms, the increases will be even greater as total energy needs will, no doubt, continue to grow and the increase to a proportion of 15% represents a larger slice from a larger pie. There is no pretence that the shift towards renewable energy will stop there – the government, along with consumer lobby groups, no doubt has even higher long-term goals in mind. Not only will we see a change in the size of the renewable energy sector but we will also see a change in its composition, namely an increase in the proportion of renewable energy produced by wind. The UK has recently achieved the milestone of successfully installing one gigawatt (GW) of offshore wind farms – enough to power 700,000 homes – and this is set to increase hugely with another 40GW in various stages of planning.

This shift in energy production from traditional methods such as oil and gas towards renewable sources provides a massive investment opportunity into an industry that is effectively guaranteed to grow in the near future. Even if the UK does not completely fulfil its obligations and falls slightly short of the 15% renewable energy goal by 2020, one can be sure that the UK will attempt to do so – rather than face the repercussions of the EU. However, even though the industry is guaranteed to grow hugely, investment is not without risk. As developers continually propose new technologies to meet this need for renewable energy, it is certain that some of these will boom while others bust. The industry is highly volatile as new ideas are being developed for previously untested markets. This gives investors a huge opportunity to capitalise on the inevitable shift in energy production.

It is unlikely that investors will be overly willing to invest completely in any one single technology except for, perhaps, wind as such huge growth is expected in the number of wind farms in the near future as energy from wind goes from 1GW to 40GW. It is more likely that a significant proportion of investors will be looking to spread their investment over several ventures investing in a number of different renewable energy technologies rather than focussing on any single one in particular. Collective investment schemes are an effective way to spread the risk over these different investment opportunities.

For there to be a profit opportunity, investors need to be persuaded into investing in renewable energy in the first place which, although the industry does present the possibility of high returns, there are also high levels of risk involved. Often, the firms developing new technology in the renewable energy industry will be small and, for those successful companies, the high growth may follow a period of dormancy as the project is analysed and tested to see whether or not it is indeed viable on a large scale. Because of this, funds in these areas may only be suitable for those who have a long time horizon and are willing to tolerate a high degree of risk. For investors whose fund managers do successfully direct funds into projects that take-off, the bearing of this high risk should be rewarded with commensurately high returns.

The government appreciates the potential reluctance investors may have due to the risky nature of such investments and realise the need to entice investors into renewable energy and away from fossil fuels through a combination of investment incentives and tax penalties. A recent example of this is the introduction of feed in tariffs (FiT) which provide financial incentives to those generating at least some of the own electricity using renewable sources. The government estimates that a typical household could earn up to £960 annually through using solar panels and, under the scheme, households and businesses have the choice to either use the electricity they produce or feed it back to the national grid. The introduction of the FiT has indeed had a very real impact as evidenced by power company npower reporting an 80% increase in solar panel inquiries for the month following the introduction of the tariff on April 1st this year. Buoyed by the success of the FiT, it is likely that the government will soon introduce additional incentives to further entice households and firms alike to use renewable energy. A huge boom in the industry in the near future is a very real possibility.

Opportunities exist for managers looking to launch funds to invest in renewable energy now. The rapid growth that is likely to be seen in the renewable energy sector will mean that even already established fund managers are going to be entering into unexplored territory – as never before seen technologies are continually developed – meaning new investment managers should not face a significant disadvantage relative to these firms. Fund managers who develop a sound reputation for fund management with regards to renewable energy will have a significant advantage over others, an advantage which could become larger and larger as renewable energy becomes increasingly important – there has already been talk about increasing the EU’s goal of 20% renewable energy subject to other major non-EU countries, such as the US, agreeing to similarly challenging goals. Thus a head start today could result in long term benefits. In the current climate, with firms in heated competition to pick up new investors as the economy returns slowly to what it was pre-financial crisis, letting this one slip would be a huge mistake.