What is Renewable Energy?
Renewable Energy is energy derived from resources that are continuously replenished by nature. Types of Renewable Energy resources include wind, solar and water that all harness energy from inexhaustible fuel sources to produce non-polluting, carbon free power.
What are the benefits of Renewable Energy?
Unlike fossil fuels that form over millions of years and release carbon dioxide and other harmful pollutants into the atmosphere when burnt, Renewable Energy is a clean source of energy that can be harnessed with a minimal impact on the environment.
What targets does the UK have for Renewable Energy?
In Britain, we consume energy for three main uses: heating, electricity and transport. Over 90% of this energy still comes from fossil fuels. UK Government has legislated that 15% of total energy consumption should come from renewable sources by 2020.
Why invest in Renewable Energy assets?
Renewable Energy is now a mainstream investment and a proven asset class as some sites have been operating for over 20 years. Investments in Renewable Energy assets are socially responsible and provide long term cash flows which are partially linked to inflation.
Once a Renewable Energy asset becomes operational, the operating costs required to produce electricity are circa 25% of the revenues, and are largely fixed and predictable.
FIM has a dedicated Renewable Energy Team with significant experience of acquiring and maximising the returns from Renewable Energy assets, in particular onshore wind and solar.
What subsidies do Renewable Energy assets receive?
Operational wind and solar assets (subject to size) receive substantial government subsidies, either through the ‘Renewable Obligation’, ‘Feed in Tariff’ or more recently the ‘Contract for Difference’ scheme. These provide a substantial element of the total revenue, typically >50%. Subsidies are provided under legislation for 15, 20 or 25 years depending on the scheme, and are index-linked to increase annually with inflation.
Is there a risk that subsidies will be reviewed for existing operational UK Renewable Energy generating assets?
In our opinion, it is highly unlikely that the UK Government will review its strategy towards operational assets or retrospectively change its support for existing Renewable Energy assets. Any retrospective changes to the subsidy regime could be subject to legal challenge and undermine investor confidence, at a time when there is much investment needed in infrastructure. To date, the UK Government has been careful not to undermine investor confidence.
Is now a good time to invest in Renewable Energy?
Yes, we believe so. Electricity prices are historically low and are forecast by industry experts to rise by circa 2% in real terms over the next 20 years. Buying an asset with 20 to 25 years life now, will allow investors to benefit from index-linked cash flows whilst being in a position to benefit from an expected increase in power prices as supply becomes more constrained as old coal and nuclear are phased out.
How is the electricity sold?
There is a competitive market for trading renewable electricity, which is growing steadily, resulting in increased choice and improved terms. The most common route to market is through a ‘Power Purchase Agreement’ (PPA), which is a contract to sell power and Renewable Obligation Certificates (ROCs) on pre-agreed terms, under a contract that ranges from six months to 15 years. This long term contract ensures investors have a route to market that meets their desired risk return profile with minimal cost and effort.
What is the potential for income growth?
There are opportunities for enhanced returns from Renewable Energy investments through increased demand for electricity and an increasing shortage of UK generating capacity putting upward pressure on power prices.
As well as the subsidy (typically 50% of the revenue) being index linked, wholesale electricity prices are forecast to increase in real terms by circa 2% annually according to one leading industry consultant, as old power generating capacity becomes redundant, putting increased pressure on the future supplies.
Are there any tax benefits?
Renewable investments can offer attractive and efficient tax benefits dependent on the investors' specific tax status and the investment structure.
Certain structures allow distributions to typically be tax-free for up to seven years as investors benefit directly from capital allowances offsetting taxable profits. In certain circumstances, investments may also qualify for 100% inheritance tax relief (once held for 2 years).
Note: FIM does not provide taxation advice and the guidance above is based on FIM’s current understanding of UK tax laws. You are advised to consult your own professional advisers in relation to such matters.
What is the minimum investment?
FIM acts for both private and institutional investors with an interest in direct ownership of consented or operational Renewable Energy assets.
The typical investment in operational assets for Institutional investors or High Net Worth Individuals is greater the £1 million. Other investment structures are available for smaller investors.
How are the assets managed?
FIM has a dedicated Asset Management team for its Renewable Energy investments, that has a long track record of maximising returns through active asset management.
FIM can provide a range of Asset Management services including: full accounting and VAT services, regular in-depth reporting and analysis, control of expenditure and debt service, power price hedging, taxation management, market intelligence and investment vehicle management. FIM is focussed on maximising plant availability, output, power price and on strong financial control.
How are Renewable Energy assets valued?
Renewable Energy asset valuations take into account a wide range of factors including annual energy yield, power prices, level of subsidy, age of project and operational costs. Using our specialised industry experience and market knowledge, we are able to forecast the anticipated cash flows from a Renewable Energy asset, which derive a valuation based on a discounted cash flow model.
FIM’s annual internal valuations are supported by regular independent external valuations.
Is there a difference between Solar and Wind returns?
Returns on solar assets will typically be lower due to the generation being more predictable than that from wind. Solar assets also have fewer moving parts so tend to be cheaper to maintain and lower risk. Returns also depend on levels of gearing which vary between asset classes, with wind assets having typically 40 to 60% gearing and solar assets often ungeared, or < 30% gearing in many cases.
Both asset classes offer attractive cash yields in the current low interest environment. For more detail on current rates of return please contact firstname.lastname@example.org.
What are the main risks to an investment in Renewable Energy assets?
The main risks are from wholesale power prices, wind-speeds/hours of sunshine and therefore energy output. Power prices are currently at historically low levels with industry forecasters expecting power prices to rise over the long term. Low energy yields from adverse weather conditions (low wind, poor sun) can affect short-term distributions, however these are expected to be balanced out over the longer term.
What are the environmental benefits of owning Renewable Energy assets?
Energy generated from renewable sources offset the need to generate electricity from coal and gas, which, according to the DEFRA reporting guidelines produce 430g CO2/kWh. Using these figures gives the following Carbon Dioxide emission reductions:
- A 10MW Wind Farm saves c.11,300 tonnes of carbon dioxide emissions per year.
- A 10MW Solar Park saves c.4,100 tonnes of carbon dioxide emissions per year.
Renewables UK assumes a standard home uses 4,222kWh of electricity per year, so a typical 10MW wind farm supplies more than 7,000 homes per year and a 10MW solar park supplies more than 2,220 homes per year.
FIM recently managed the acquisition and construction of Harburnhead Wind Farm near Edinburgh. This 51.7MW wind farm will generate enough power to supply the equivalent of 33,000 homes. It is expected to contribute over £3 million to the local community and will save almost 60,000 tonnes of carbon dioxide emissions every year.