$1 trillion solar, wind finance to outstrip oil and gas industry

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Renewable energy finance vehicles, YieldCos, likely to rapidly outpace their fossil fuel rivals, and represent more than $1 trillion of investment in coming years. Another sign of the global investment shift to wind and solar, a trend that could bypass Abbott’s Australia.

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Listed finance vehicles for large-scale wind and solar projects are likely to rapidly overtake the oil and gas industry in the US, but may bypass Australia altogether if the Abbott government continues to send the wrong signals to investors.

Deutsche Bank last week released a report which said the renewable energy finance vehicles – known as “YieldCos” – were likely to rapidly outgrow their oil and gas industry equivalents, and become and order of magnitude bigger than their fossil fuel rivals.

YieldCos – listed vehicles that offer a high rate of return for investment in large-scale solar farms and wind farms, in much the same way as real estate investment trusts and the oil and gas industry’s mutual limited partnerships – currently account for less than one per cent of renewable energy financing.

Ger_combined_solar_wind_Fotomontage_Tom_Baerwald_Solarpraxis_bac419c257

But Deutsche Bank expects this to change rapidly, growing from more than $30 billion in market cap now to more than $1 trillion. In doing so, it will further reduce the cost of finance for renewable energy projects, and highlight the massive shift in global investment trends, from the floundering fossil fuel industry to the clean energy sector.

“We expect YieldCos to not only increase the availability of capital, but also provide significantly lower cost of capital to the renewables sector,” the Deutsche Bank analysts write.

“Just like the MLPs acted as a key growth enabler of the oil & gas sector in the US, we expect YieldCos to be a significant growth enabler of the renewables sector. “

MLPs in the US underpinned the massive growth in the US oil and gas industry because they offered investors significant opportunities for wealth creation. They now have a cumulative market capitalisation of more than $US700 billion, after showing compound annual growth rates of 27 per cent over the last 24 years.

But Deutsche says those opportunities in renewable energy YieldCos will be even greater, because “the YieldCo phenomenon is global, growth rates are likely to be much faster than MLPs and the size of the market is likely to be much larger than the oil and gas sector.”

It says YieldCos currently account for less than 1 per cent of financing of the global renewables market and have a market cap of around $US30 billion. “We expect the market cap of YieldCos to grow at an ever faster rate as a greater percentage of renewables financing gets done by YieldCos over the next 10 years.”

In turn, this is expected to rapidly expand the opportunities for large-scale renewable energy projects, buoyed by a huge flows of capital that can provide low-cost financing. Investors are getting returns of 15 per cent or more per annum.

The market is underpinned by the huge growth expected in renewable energy. Deutsche says the number of markets where wind and solar are at “grid parity” is growing rapidly, and the global solar market alone is expected to grow by an annual rate of more than 30 per cent.

Three of the biggest US renewable energy companies have already created YieldCos to underpin their large-scale project development. SunEdison has emerged as the largest renewable energy developer in the world with the creation of Terraform and its purchase of First Wind, and is now offering this to private investors, while SunPower and First Solar have combined to create another YieldCo vehicle known as 8point3 (the amount of time it takes in minutes for sunlight to reach the Earth).

solar cost of equity

The above graph, from First Solar, highlights how quickly the cost of equity in the US has fallen in the past five years, from above 20 per cent in 2010 to below 10 per cent in 2010.

The next graph shows that the comparative cost of finance in key countries.

solar debt costJack Curtis, the head of operations in Australia for First Solar, says that the cost of finance is the biggest component of any project cost.

solar project financingCurtis says the ability to bring those costs down will be critical in narrowing the difference between US and Australia, where the cost of large-scale solar is more than double.

That’s because, in Australia, there remains a “high perception of value risk”. That has pushed up the cost of equity and the cost of finance in Australia compared to other countries, particularly the US.

The ability of Australia to address these issues, however is uncertain, because of the lingering uncertainty around the financing market, and renewable energy policy, under the Coalition government.

Even though the Clean Energy Finance Corporation and the Australian Renewable Energy Agency are actively supporting large-scale solar, the federal government has repeatedly said it will dismantle both institutions if it can. It is probably only one Senate vote short of being able to do so.

Also, the Abbott government’s campaign against wind energy is making it nearly impossible for wind energy projects to gain finance, unless they are supported by long-term contracts such as that made by the ACT government. This is having a spill-over effect into solar.

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8 Comments
  1. RobS 4 years ago

    Finally some balanced reporting of the factors that will mean that the renewable industry will thrive despite the best efforts of the Abbott government. Was starting to get sick of the constant sky is falling posts that only reinforce the propaganda that without government support the renewable industry has no future.

    • John McKeon 4 years ago

      Good point, RobS. Still, I think we should maintain the rage against our taxes – and foregone tax revenues – going to feather the nests of multinational coal mining companies, e.g. Diesel fuel rebate. Not to mention destruction of good farm land and precious acquifers to coal and gas pirates.

      • RobS 4 years ago

        Oh I have no problems with smashing perks to coal companies. It was the constant obituaries of the renewable industry that only reinforced the idea that wind and solar is fully reliant on subisidies for a future.

        • John Bromhead 4 years ago

          I thought the article was about the Australian electricity market, not about coal exports. I suggest the “subsidy” you talk about is not a subsidy at all. If liquid fuel users are being taxed it is to pay for the costs of roads. Absence of a tax is not a subsidy. I doubt that the coal fired electricity generators use all that much diesel fuel mining the coal or bringing it to the generator. There is no evidence that land used for mining cannot be rehabilitated once the mine has closed.

          • digicle 4 years ago

            Firstly, governments using your and my taxes to thoughtlessly build coal ports and rail upgrades sounds a little subsidisie to me.

            Secondly there would seem to be a huge difference between a 3billion year old aquiferial system supporting tens of thousands of food consumers – and a mound of ‘rehabilitated’ mine tailings with a few saplings.

            Feel free to tell me I’m wrong or thinking too long term.

    • JonathanMaddox 4 years ago

      The renewable energy industry *is* the future of human use of energy. We are already switching and will continue to switch, eventually retiring fossil fuels altogether.

      The question of ongoing policy support for that switch in 2015 is not about whether it will happen at all, but whether it will happen fast enough to avoid the worst consequences of climate change caused by emissions from fossil fuel burning.

  2. Ian 4 years ago

    The size and hunger of potential renewable investment is scary to say the least. The fossil fuel lobby must be passing little brown coal deposits with this one!

  3. JustThink4Once 4 years ago

    Australia’s government is the typewriter manufacturer insisting that those big ugly word processors will never be efficient, affordable or catch on.

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