Over the past 15 years, as utilities, companies, and consumers have answered the call to transition to non-emitting forms of energy, costs for implementation have fallen dramatically, especially for wind and solar energy. This is a profoundly positive development. Concurrently, the PPA (power purchase agreement) rates that underpin the financing and construction of many projects, have also fallen dramatically, from $.10/kwh or more, to as low as .023/kwh for new utility-scale solar (plus storage!) in the southern US today. This makes renewable energy very competitive with traditional fossil fuels, resulting in major shocks across the coal power sector especially.
However, to have the financial weight to develop, construct, and operate projects at these much lower long-term rates, larger and larger companies have come to dominate the renewable energy market. Mergers and acquisitions are commonplace, as smaller companies find themselves unable to attract the interests of high finance, and instead are forced to sell their projects to the bigger players.
Now in 2018, offering more flexible solutions in financing for the “small cap” renewable energy industry is suddenly becoming a very attractive sector, for where there is need there is opportunity. And indeed, a range of options to raise money to build or acquire renewable energy projects already exist, outside the Wall St and Bay St bastions. We’ll take a look at five: PACE, Crowd-funding, Alternative Financing, Green Bonds and Royalty financing.
PACE (property assessed clean energy) has been used with huge success in the US, to massively increase the adoption of residential and commercial-scale solar, where customers own the building. Essentially the municipality, working in alignment with the local utility, will finance the installation of the solar system, which is then repaid through a modest increase in the customer’s annual property taxes. This loan is tied to the property’s address, not the customer, so if they sell the property, its inherited by the new owner. PACE is now coming to Alberta, which will allow this Canadian province to continue to level-up its solar and energy efficiency leadership.
The exploding Crowd-funding space has recently leveled up too, allowing companies to exchange shares in the company for cash, instead of simply products or philanthropic causes. Platforms such as FrontFundr, SeedUps, SVX and others may be registered EMDs (Exempt Market Dealers), legally compliant to explicitly promote investment opportunities. These can be an excellent way for a new company to get started, attracting a stream of smaller investors, while building their brand.
Alternative Lending is generally understood to mean higher interest loans. This may include bridge loans against future revenues, Mezzanine debt, or similar. This is generally viewed as less desirable, as the funds come bearing higher interest and fixed repayment terms. However it can offer benefits such as the ability to write-off interest against taxes over time, or to fold interest payable back into the principal loan.
Green Bonds have a pretty long history, but have generally been limited to larger institutions like countries or the World Bank. Recently retail-focused entities like Canada’s CoPower have made a real impact on financing smaller, commercial-grade projects, and packaging those assets into bonds available to individual investors. This is also an excellent tool for getting projects built in the developing world, as Norway’s Empower New Energy is doing in Africa. Of interest, the Canadian Pension Plan recently made history by being the first pension fund to release a green bond offering, at $1.5BCAD.
Sometimes a simpler method, based on the time-tested principles of partnership and profit-sharing, makes the most sense. Royalty financing, a tool with a long history of success in numerous industries from mining to music, is now available to the renewable energy industry as well. Vancouver, BC’s RE Royalties is taking a leadership role by being the first to offer up-front financing, in exchange for a a modest long-term revenue share. This allows developers to retain ownership over their company and projects, while leveraging the production from their new or existing operational power generation assets. Again, the all-important PPA is usually required to derisk the deal and establish a long-term basis for cooperation. The company currently has 11 active royalties on solar, wind, and micro-hydro projects, in Europe and North America.
Individual investors now have the opportunity to invest in RE Royalties, which helps more small-to-medium scale renewable energy get built worldwide. Currently open to accredited investors, RE Royalties will be trading on the TSX-Venture exchange this Summer, making it possible for anyone with an online trading account to participate directly in the booming global renewable energy sector, at an affordable price-per-share.
One of the great promises of renewable energy has always been the “democratization of energy”. As ways of funding and monetizing renewable energy projects become more democratic and widely adopted, this goal take a big step closer to reality.
(Disclosure, Renewable Randolph is consulting on behalf of RE Royalties Ltd).