the clean generation

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26 | Baker & McKenzie Global Private Equity – Insights 2014

THE CLEANGENERATIONL. Warren Pimm of Sustainable

Development Capital provides an

overview of the renewables sector.




Baker & McKenzie Global Private Equity – Insights 2014 | 27

What is your outlook generally for the renewable

energy sector?

Globally the outlook for the renewable energy sectorremains constructive. The renewable energy sectorhas passed a key milestone over the past few years inthat renewable energy is no longer considered to be“alternative”. The sector has successfully completedits transition and is now an integral part of the mix ofgeneral energy infrastructure in most countries.

The path of development and context for renewableenergy is different across developed and developingmarkets. In developing markets renewable energyis being drawn into energy infrastructure systemsalongside existing and new conventional energy in asomewhat more managed approach relative to developedmarkets, principally given that the majority of renewableenergy and/or conventional energy being installed indeveloping countries is in support of natural and robusteconomic growth. The displacement effect of renewableenergy in developing markets is less than is beingexperienced in developed markets.

Across developed energy markets, the impact of atransition to a low carbon energy market is quicklybecoming acute. We see this in Europe, as an increasingnumber of recently built conventional power plants– mostly high-efficiency combined cycle gas turbine(CCGT) power plants - are being either mothballedor prematurely closed, as profits from gas powergeneration are eroded, given decreased electricitydemand through the financial crisis, changing fuel

prices, and depressed carbon prices. As an example, itis estimated that over the course of 2012-13 ten majorEU utilities announced the mothballing or closure of over22GW of CCGT capacity in response to persistently lowor negative clean spark spreads. These decisions weremotivated by different market and policy factors affectingelectricity, coal, gas and carbon prices, however theon-going transition of energy generation to a low carbonsystem is significantly affecting the traditional businessmodel of utilities.


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The renewableenergy sectoris no longerconsidered to be“alternative”.




Given a broadly supportive political environment globallyfor renewable energy, a growing experience base among

institutional investors, and the continued falling costs ofmany renewable technologies, there remains continuedand significant institutional investor interest in therenewable energy sector from both private equity andinfrastructure investors, with new capital continuing tobe raised and committed.

In what countries or regions do you believe most

activity will be?

The ‘investability’ of a market is determined in part bythe local regulatory policies, but equally or even moreso by the local economic conditions, and critically onthe availability of local institutional investment capital.It remains true that most investment managers tend tomake investments in the same country or type of marketwhere their capital is sourced.

Europe: We see most institutional investment activitylikely to be focused on the UK, French, German,Dutch, and Nordic markets where the combination ofconstructive renewable energy policy, stable economic

conditions, and importantly the availability of institutionalcapital is well established. We see investment appetiteacross renewable energy technologies including solarPV, biomass, waste-to-energy, onshore wind, andoffshore wind continuing to be supportive across theNorthern European countries.

Southern Europe and the CEE region are likely to seemore limited activity, apart from secondary markettransactions in Italy and some developments in

Poland – principally given smaller local institutionalpools of capital to draw on, and continued concernover regulatory and economic uncertainties acrossthose markets.

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‘Investability’is determinedby localregulatorypolicies, local

economicconditions andthe availabilityof localinstitutionalcapital.




North America: We see the North American renewableenergy markets remaining an active market for

institutional investment given the deep pools ofinstitutional capital available, the relatively stableeconomic environment, and the continuing supportacross sub-regions in the US and Canada for renewableenergy technologies. In the US a number of utility scalesolar PV projects are scheduled to come online in 2014-15, which will be available for institutional investment.

Emerging Markets: Across the emerging markets ofAsia and MENA, specialist PE/Infra funds are beingestablished that are taking investment in renewableenergy projects - however, the scale of capital investmentinto these markets will remain constrained by the limitedavailability of local institutional investment capital, andthe smaller commitments of capital for international/emerging markets made by large asset owners indeveloped countries.

In which technologies do you see the most activity?

Solar PV, onshore wind, and offshore wind in that order.

Solar PV: Institutional investors have a high degreeof experience and confidence in solar PV powerinstallations. The risks are well understood,development times relatively short, capital costs havecome down over the past few years and continue to fall,and construction times are within months. The challengehas been, and continues to be in the ability of largeasset owners to invest capital at scale into solar. From atechnology standpoint, institutional investors see solarPV as the least risky renewable asset class.

Onshore Wind: Onshore wind is more complex than solarPV, with increased development risk given developmenttimelines, particularly in countries with complexplanning processes such as the UK. Capital costs arehigher and construction times are longer than for solarPV, with more completion risk involved. Institutionalinvestors have generally got comfortable with theserisks and are making large and long term investmentallocations to onshore wind across markets.

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Institutionalinvestors seesolar PV asthe least riskyrenewable assetclass.




With onshore wind there is an ability to deploy capitalat scale, which meets a key requirement of large asset

owners.We see institutional investor appetite for onshore windcontinuing to hold through 2014 – 15, with a number ofinteresting tie-ups and framework partnerships takingshape between financial investors and utility partnerswho have a need to manage an asset rotation strategy– a trend that has been developing over the past 12 – 24months.

Offshore Wind: Offshore wind is a high-profile

technology. However, it is quite different from solar PVand onshore wind in terms of maturity and risk profile.Offshore wind projects are industrial scale: developmentand construction capital costs are multiples higher,running into billions of pounds rather than millions.Development, permitting, and consenting timeframescan take many years for offshore wind projects, andthere remains significant uncertainties around the longterm operation and maintenance costs due to the lack oflong term experience had with fully operational offshore

wind projects.

From an institutional investor’s perspective, thehighest interest point for offshore wind is in the abilityto deploy significant capital at proper institutionalinvestor scale. The ability to invest £200m+ into a singleproject is appealing for larger asset owners and globalinfrastructure investors.

Construction risk is frequently raised as a barrier

to financial investment in infrastructure, including

renewables. Do you see this changing?

As with regulatory risk, construction risk can be priced.This means that construction risk is not a barrier per se,but is a risk that can be taken by some investors and notothers, having regard to their return requirements andrisk appetites. As the volume of successful projects hasincreased, so has the level of expertise of most institutionalinvestors, which goes back to the question of whichtechnologies are the ones that will see the most growth.

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There areenough banksin the marketto enableprojects to be

successfullyfinanced.




Most investors are now comfortable with theconstruction risk associated with solar PV installations,

less so with onshore wind, and rarely with offshore windconstruction risk.

Do you see more debt financing being raised for the

development of offshore wind in Europe?

Yes. Some banks continue to be constrained in theirability to provide project financing, however there areenough banks in the market that are not constrainedto enable projects to be successfully project financed.As with the equity investor community, the banks thatare able to lend have completed the recent projects,and so have developed a deeper understanding of thesector. This begins with the banking teams, then thecredit committees, and finally includes the internalmanagement of the banks involved. Amongst the banksthat understand the offshore wind power sector, wewould see the Japanese banks being particularly active,however they are by no means the only ones.

We also see infrastructure debt funds beginning to enterthe market, such as IFM and shortly Blackrock. Other

developments on the debt side include the InfrastructureUK’s loan guarantee programme, which we believe haspotential to unlock additional project finance for offshorewind.

We see the development finance institutions, exportcredit agencies, and state-backed loan guaranteeproviders as remaining essential in financing Europe’soffshore wind sector simply given the size of investmentrequired for offshore wind projects. Their role would have

been required irrespective of the impact of the globalfinancial crisis and capital adequacy regulations on longterm bank lending.

Warren joined SDCL with afocus on financial advisoryand capital markets. Priorto SDCL, he worked withthe corporate financegroup of Canaccord AdamsLimited (UK) in London.He is a former principaland co-founder of theCanadian investment bank,Berkshire Securities, wherehe established and ledits capital markets groupand was responsible for

leading the developmentof Berkshire Securitasinto a leading independentCanadian financialservices firm, growingthe organization froma start-up to over 2,200professionals and $12.5billion in client assetsacross 200 offices. Warrenhas completed on over80 separate underwritingtransactions collectivelyraising over $10.5 billion intotal equity capital.

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