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Structuring renewable energy projects: local development

There’s an inherent commercial tension within the way companies approach structuring renewable energy projects. In any new area, there’s naturally an element of trial and error that’s characterised renewables for both technology providers, developers and investors (as technologies evolve, as legislative frameworks and policy develops and so on). It comes with the territory in emerging industries. However something that’s often overlooked is the way deal-structuring goes through the same kind of trial and error.

In many respects, this area is more critical to the delivery of low-carbon solutions than even the technology itself. To explain the issue simply, most developers face a strategic business decision that, broadly speaking, could be described as defining your business by technology or geography. And there’s a definite trend towards the latter way of thinking.

Technology driven development carries systemic risks…

In the last decade the renewable scene was driven by a technological business focus, I.e. “We develop solar” or “We develop wind”. Much of the UK’s commercial solar and wind power projects came from that kind of focus. Ten years ago, those technologies were favoured by government policy, the commercial side of wind and solar development (both for investors and developers) made strong commercial sense in the era of green tax breaks, subsidies and feed-in-tariffs. But as that legislation driven environment has changed, we see wind and solar developers finding it harder to raise investment and deploy new projects. In the passing of a decade, the technology has gone from highly profitable to facing tough commercial times, despite the obviousness of the fact that their raison d’être, lower carbon emissions, is as high on the political agenda as it ever was.

So if you’re a solar or wind developer and the UK market isn’t prospering, where do you go? Into the developing world. But in the developing world it’s harder to raise investment (because of political and financial risk) and emerging economies’ often lack the fiscal means to incentivise renewables with subsidies or tax incentives (unlike Europe and the USA). Developing economies are, in many respects, better commercial prospects for cheap fossil fuel burners than renewable developers. Plus, of course, high-tech renewables won’t integrate effectively with developing grid infrastructures in poorer economies (they don’t integrate well in the developed world either for that matter). If you have committed to a specific technology the risk is you’re woefully uncompetitive against coal power in all but the richest countries.

The upshot is, if you are committed to a specific kind of technology, sooner or later you’ll be faced with trying to construct a renewable power deal that can’t work because of commercial issues that affect the locality where you want to deliver it. And that’s a major problem if your company’s mission is to replace high polluting power stations with a lower carbon alternative. If carbon reductions continue to influence government energy policies around the world, there remains commercial opportunity but in order to access it, you can’t be married to a technology, you need a way to structure deals that can adapt to the wide variations in local markets.

Technology agnostic development…

If you take the technology out of the equation, renewable power generation takes on a wholly different dimension. Suddenly you’re not trying to create value from the technology, you’re creating value for the partners you bring on board with the tech that makes sense to them. The aim is to take the project from greenfield / brownfield potential to shovel ready, build and operations. In terms of business development, the process is always the same at the core – it’s building a business and operations network in each local territory. But the hardware you need to ship, and the skills you need to deploy it can be tailored to each individual case.

Making the approach work requires creating commercial joint venture partnerships in the place where the renewable power is going to be built. This works well because it offers local partners a share in a joint venture company that will (eventually) list on a major overseas stock exchange. For developing economies this provides much needed access to foreign investment and tax relief schemes. In areas like sub-Saharan Africa where overseas investment is difficult to attract, this is a powerful commercial incentive. For investors and the overseas partner in the joint venture, there’s lower risk with this kind of approach, because the local partner has a better connection with local governance structures, labour and suppliers. For investors and companies planning to pursue projects in the developing world, strong local representation is essential.

But where this approach really delivers is the ability for a renewable project originator to control the choice of technology to gain the maximum carbon reductions. It means opportunities to install renewables become extremely widespread, from biomass boilers in Malawi to wind power in Scotland and hydro power in Peru. In each case, creating a localised JV company rather than operating one single development company. The differences between the tech you develop in the differing geographies means there’s optimal carbon reductions for each project. The downside is a more complex corporate structure. However, compare that administrative downside with the challenge of delivering solar in each area: In Malawi it doesn’t work with the grid, in Scotland the solar power yield is 5% of the installed capacity and in Peru the electricity price makes solar 75% less profitable than Hyrdo power. The developer that’s committed to solar can’t compete in those markets as effectively as a local, tech agnostic JV, and they’ll save less carbon and create less valuable assets at the end of it.

The localised JV structure that chooses a technology best suited to the specific demand of the location is the better bet…

The renewables industry is seeing the emergence of business logic that underpins our mission at 350, which is to reduce atmospheric carbon emissions by selecting the right technology for the right geography and climate. But that doesn’t just mean geography in the traditional sense, it also means the economic geography and political climate. Ironically this means the tech, in many respects, is the least important part of a successful renewable energy project. What counts is how locally relevant a renewable energy investment can be if you structure the commercial operations in a cooperative, local partnership. Sharing ownership with a local partner also builds the local economy, which means power demands and investment potential within the local area grows. It’s a socially responsible and commercially sensible way to structure renewable energy development, and it offers the best, practical carbon reductions… even if the local solution is a low-carbon biomass project rather than a zero emissions solar plant.

As a family of companies with a dedicated solar specialist, carbon consulting firm and a number of new R&D based technologies in development, we’re increasingly aware of the need to put the local deal considerations first and adapt our technical strategy to each new location. Which is why we’re planning to launch 350 Power, a consulting wing to bring the best practice operational know-how and consulting talent from our 350 companies under one brand. Watch this space…