Renewable energy investment could hit the trillion-dollar level in less than a decade, one of the most influential voices in institutional investing has told Solarplaza.
Following climate talks last year, “many more pension funds now have the green light to move ahead [with renewables investment],” said Mike Eckhart, managing director and global head of environmental finance and sustainability at Citigroup.
“I’m 100% confident this is going to continue to boom. By 2025 we’ll be at USD$1 trillion a year, and at that point things might begin to slow,” as renewable energy begins to reach saturation level in some markets, he said.
Capital markets, which wield a total investment potential of $130 trillion a year, have experienced growing confidence in renewable energy 2013, Eckhart noted. That year saw the almost simultaneous birth of yieldcos and renewable energy securitisation, along with the publication of the green bank concept, which is now poised to inject $40 billion in investment into renewables over the next half-decade.
“We’ve been taking these to scale since then,” said Eckhart, who is speaking at The Solar Future NL 2016 in Utrecht, the Netherlands, this month. “The investment community has been educated on solar PV and has identified a group of asset owners they are happy with.”
The upshot is that capital markets now see renewable energy as an increasingly valuable asset class that can deliver significant returns at a time of low interest rates.
Stocks such as Brookfield Renewable Energy Partners are promising long-term returns of up to 15% a year, compared to, say, 2.5% for US real estate investment trusts in 2015.
Nevertheless, renewable energy securitisation is still in its infancy because the process requires long periods of time, typically between five and 15 years, for the establishment of a data set that can be accurately analysed for risk. Securitisation also demands standardised contracting. Some progress towards establishing this was made under the aegis of the US National Renewable Energy Laboratory’s Solar Access to Public Capital working group in 2013.
Mike Eckhart speaking at Solarplaza's Solar Asset Management North America conference in 2015
Securitisation “has come a long way,” Eckhart said, “but what it lacks is the scale that Fannie Mae and Freddie Mac provided to the mortgage industry.”
This will come, he said, but it will take time. Another potential concern for capital markets is the extremely low bidding levels being seen for solar in some PV markets. “They are betting on a continuation of the cost reductions that we’ve seen so far, but we’re not going to see that indefinitely,” Eckhart commented.
“We’re going to see projects that have won major procurements not getting financed because they bid too low.”
Despite these issues, Eckhart said he was convinced the outlook for capital markets financing of solar was “absolutely promising. We’re getting to the trillion-dollar level faster than people predict. On a scale of minus 10 to plus 10, it’s at plus eight.”
