Renewable energy asset class
One of the biggest problems for institutional investors is allocating significant sums of money and managing rising liability obligations.
Fighting climate change, its effects on the economy, and more widely with what it already entails in terms of adaptability for everyone and everything, is at the same time one of the largest challenges for the entire planet.
Although they initially appeared to be unrelated, these two issues have come together to the point where they work in unison. For example, the infrastructure for the production of renewable energy has now matured and provides investment opportunities with a favorable risk/return ratio while also contributing to the reduction of carbon emissions.
Infrastructure for renewable energy has therefore become recognized by investors as a distinct asset class.
What can green energy offer as an asset class?
The revenue characteristics of green solutions should be viewed by investors from all points of view.
The power of the resource, the upfront expenses of new projects, their availability throughout operation, and the present and projected market pricing of energy in the region all play a major role in determining the profitability of renewable energy projects.
However, there are other benefits worth mentioning when it comes to renewable energy as an asset.
Freedom of contracts and no special insolvency procedures
There is no special bankruptcy system for renewable energy production projects. Instead, the standard corporate insolvency procedures, laws, and standards apply.
Renewable energy assets have a different risk-return profile depending on their investment stage:
- the development stage;
- the construction stage;
- the operational stage.
The project’s failure to go forward is the biggest risk throughout the development stage, which also involves technical project planning, obtaining permits, and signing financial and industrial contracts.
The construction stage essentially refers to the completion of the different contracts and construction. Nevertheless, there are still certain risks present, especially when it comes to building, which might cause delays or result in extra expenses that are not included in the contracts.
The operational stage has the lowest risk/return profile. Future profits are more dependable and predictable after the unit has been constructed and has been running for a few years.
The contract can be signed at any stage.
The agreements that the renewable energy firms have to supply power are essentially where the earnings from this asset class originate from. The agreements often involve reputable counterparties, such as governments. The parties make a predetermined set of installments that are in most cases linked to inflation levels.
As long as electricity is available, payments are frequently made regardless of how much is consumed. This results in excellent cash flow visibility and reduced reliance on energy consumption. In this approach, infrastructure may be less subject to economic fluctuations and may offer beneficial diversification against popular stocks.
The cashflow return and perhaps a modest amount of capital appreciation are the primary components of the overall projected return for renewable infrastructure listed on established markets. Therefore, renewable infrastructure might be a useful asset for investors who need a steady stream of revenue.
No asset class restrictions
There is no clear regulation on which investment tools are available to a certain category of green investors. With that in mind, you can invest in green bonds, renewable energy funds, or partner with other funds associated with this asset class.
As an investor, you can choose the best way to invest in renewable energy:
- You can directly invest in a green power plant.
- You can co-invest in renewable energy projects at any stage of their development or operation.
Thales Capital Luxembourg experts can help you diversify your portfolio with stable and promising renewable energy investment assets.