“With so many renewable projects out there, you’ve got to apply some pretty strict criteria to separate out the best opportunities from the riskier ones. That’s our challenge…”
This week I managed to pin down our busy Business Development Director, Bill Goldie to get a run down of the 350 projects we’re engaged with. In between trips to China, India and Mexico, he explained his number one priority for selecting a renewable energy projects:
“Generally, the projects we work on are exceptionally high quality in terms of their development potential, and based in countries that are transitioning from developing to developed world status. Projects with exceptional natural renewable energy resources that are not reliant on government subsidies to make them commerically attractive. The last thing we want to be involved in – and something that we have so far avoided – is an over-reliance on excessive government subsidies which are then cut, repealed or retrospectively changed. If you look at the recent upheaval in UK renewables, this is exactly what we seek to avoid.
Our projects generally have power purchase agreements with investment grade counterparties, are in jurisdictions with reliable legal systems in rapidly growing economies with strong electricity prices backed-up by PPAs, or increasing aggregate demand for power that supports merchant prices.”
So here’s the project line up that reflects Bill’s de-risked, long term approach… and 2016 is looking like a very busy year already:
Deal Stream 1: These projects fall into the category of projects where 350 acts as a broker and executive developer: analysing, presenting and subsequently placing the projects with buyers in the event of completed assets (and in additional to the above supervising the construction and operation of the projects in the event of “shovel ready” assets). Our Deal Stream 1 clients are 2 major infrastructure funds which are highly risk adverse.
- Project #1: A major Infrastructure Fund ($28 bn AUM) has tasked Bill’s team to identify $5bn of renewable projects worldwide. After a very good series of meetings in India we have completed our pre-qualification tests on three solar projects, which are now commencing formal due diligence. They consist of 2 x 35 MW projects in Gujarat & a 25MW project in Bangalore. They’re operational assets, the off-takers (the people buying the power) are reliable counterparties with enforceable long term power purchase agreements (PPAs).
- Project #2: Meanwhile, on the other side of the world we’ve got a 500MW and 3 x 250MW Hydro projects. The assets aren’t completed; the 500 MW is almost complete, and the other three smaller ones are at shovel ready stage. It’s an unusual situation in Peru, because the risks in hydro elsewhere can be quite significant because of the political problems of damming a river that runs through multiple countries (like in sub-Saharan Africa). But in Peru there’s a government-backed PPA and their hydro projects are based on river systems that run from very high altitudes within the borders of Peru. I.e. There’s no risk of a neighbouring country building upstream and reducing the power output from their hydro plants, making them the lowest risk hydro assets in the world.
- Project 3: We’re working with a Canadian solar EPC (builder/developer) who are a NASQAQ listed solar company we met through our Chinese partners. They’ve got multiple projects based on school roofs in and around Ontario, Canada. Collectively the projects mean 40MW of generational capacity and while Canada isn’t the sunniest place on the planet, the project dynamics work well. The project is moving quickly, with a 4MW launch on rooftops planned for March. Rooftop solar is well supported and set to become a key trend in solar development. We’re creating a special purpose vehicle (SPV) for the project that is licensing school rooftops for 20 years, the PPA is with the local government… with a strong electricity price. Additionally, this project should be relatively easy to scale.
Deal stream 2: Deal Stream 2 projects see our role as the central party that identifies shovel-ready renewable projects for investors and partner companies, creating SPV companies to develop each asset to completion. These projects are typically financed through a mix of equity and debt, with 350 exchanging debt for equity to result in approximately 50% ownership of the completed asset…
- Project #4: This project is in Mexico, focused primarily 150MW of shovel ready sites. We’re in the first stages of structuring these transactions and agreeing commercial terms. The green field to shovel ready developer is very capable and the projects are very high quality. We are having difficulty with hedging out the currency risk further than three years down the line, due to the amount of dollars the US has lent to Mexican projects over the years and as such need to find a solution for this to proceed down Deal Stream 1. However, matching the Chinese Solar Conglomerates with local debt in peso (base rates at 3%) and an earn-in for 350 on the equity, these projects are very attractive for all concerned.
Of course, our cash flows will be un-hedged in pesos, but as our financial contribution is negligible and the margins are extensive, whether it is a fist full of pesos or a fist full of dollars, it’s a sound investment. Having completed our pre-qualification checks, we’re pleased to report that for both projects PPAs have been signed. Typically (and very aptly) we are currently in a Mexican stand-off with the developers over pricing ($150k per MW shovel ready). However, hurrying along the seller isn’t good practice, it will just lead to higher prices in the long term.
Deal Stream 3: These projects are typically greenfield/brownfield developments in areas that offer the lowest risk opportunities for early stage projects. The challenge with taking sites to shovel ready is the risks associated with getting environmental impact sign-off, permits for grid connection, power purchase agreements and demand for the finished asset / access to finance. In many locations, these risks would rule out Greenfield project development, but our focus is on Mexico where the opportunities are very different (see our article here on the Mexican shovel-ready considerations).
- Project #5: We’ve selected a Mexican partner company with detailed plans for developing 60 MW of solar on Greenfield / brownfield sites. Whereas a buyer can expect to pay upwards of $150,000 per MW on shovel ready sites in Mexico, the opportunity to start with greenfield sites and develop them to shovel ready/ready to build can be achieved for around £8000 per MW. The plan is to develop 4 projects, with a strategy to sell two of these projects at shovel ready while structuring the finance to construct and operate the other two sites. This is a long term commitment to build a portfolio of assets, operational and shovel ready, through a local division Solar 350 Mexico, owned 100% by Solar 350. Heading the operation is our Head of Project Origination (and LATAM renewable expert) Axel Schmidt, using local developers to reduce the risks. We’ve looked at 4 local partners, assessed their suitability on the process and their past performance and will be moving to heads of terms with the most suitable candidate soon.
“Assets that offer the best carbon reductions will be the best investments long term.”
The last word… “Carbon”
Bill Goldie’s view is it’s better to define 5 high quality projects than rush into 30 on the hope that the ones that complete will outweigh the losses on the projects that run into difficulties. He cites the shift in the way governments are talking about climate change policy means the renewable gold rush is over and we all need to consider projects with more focus on their carbon reduction potential. All the indicators show carbon markets will make a return to prominence, suggesting assets that offset the most carbon will become the most valuable in the long term. He views the forthcoming COP21 climate summit as critical to this:
“There has to be a great meeting at Cop21. Countries need the courage to put strategies in place to reduce pollution and bring back the carbon markets. China has picked up that baton, to everyone’s surprise. Back in the Kyoto days China’s emissions were America’s excuse for holding back on reducing their own on grounds of fair competition. But now, China is leading the industrialised world in reducing emissions through carbon trading, so the rest of the world has to follow suit.
Renewable Energy spend needs to increase from $274B USD in 2014 to over 1 trillion and this means that mechanisms need to be put in place to incentivise growth in low carbon energy, energy efficency and carbon abatement. As the moment, we choose the best of the best, but soon we expect to see additional scale in the market. I think we have made the right decisions so far avoiding the highly subsidised markets, built on unsustainable government subsidies. We’re going for naturally occurring renewables that offer highly commerical projects. As the UNFCC and Cop21 adds scale, we are ideally positioned to capitalise on the likely trend towards emissions reducing projects of this nature.”