Jerry Franklin is managing director of EnSmart Inc. (FILE)
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THERE IS A a new investment frontier across the globe. Large investment firms, large real estate companies and venture capitalists are all getting into energy, but they are not buying and selling oil, they are buying solar systems.
Large scale solar is quickly becoming one of the preferred investment opportunities in the more developed countries.
Investors who know nothing about energy have realised that with the right feed-in-tariff (FIT), the right support legislation and a power purchase agreement of at least 15 years, you can get a rate of return on your money at higher rates than keeping your money in a bank, government bonds or even some mutual funds. In Britain alone, there are 465 solar farms, and 184 of these sprung up last year.
The increasing investment in renewable energy in Britain is attributed to the fact that it’s a reliable income of around six per cent a year. This far outstrips anything you can get from a bank savings account and is double what a ten-year United Kingdom government bond pays, according to information from thisismoney.co.uk.
These investments are typically at utility scale starting from five megawatt (MW) plants and up. Companies are either partnering with solar installation companies or just outsourcing the installation. The bigger system the better because the kilowatt cost of the investment reduces significantly. Over the past five years, Innovative Solar Systems (ISS) has developed over 520 MW of projects in the United States.
Investment groups seeking to invest in early-stage development for higher returns are partnering with ISS. ISS has been partnering with investment firms to attract funding from $5 million to $100 million for the early-stage developments.
ISS has over two gigawatts (GW) of projects currently under development, and is expected to increase to over five GW in the next 12 to 36 months. For this reason, ISS is also seeking financial partners that will invest from $1 billion to $5 billion for the construction financing of many of the company’s project pipeline, reported PR Newswire.
It seems that solar power systems are the most common and have the largest and quickest growth worldwide. However, there are still investments in wind farms, concentrated solar power systems and other newer technology like ocean thermal energy conversion. Solar is the front-runner because it is the second cheapest renewable energy source at utility scale and its far easier to find viable sites for the plant and the maintenance cost is the lowest.
Therefore, in the emerging investment space, solar farms are the most mature and predictable and therefore the most attractive to investment companies that have no interest in technology. There is also a growing trend in the US where large financing companies are buying large volumes of household solar systems. So, they would go into a large housing development and offer each homeowner a solar power system for no upfront cost.
Effectively, householders buy electricity from the financing company and the finance company owns all the systems and owns the contract with the utility company. The homeowner goes into a contractual agreement with the finance company for ten to 20 years and only pays a monthly fee for the electricity they use.
This is a departure from the typical type of investment. However, for these are only done at a very larger scale, so thousands of homeowners at a time. The risk is a bit higher but the returns are higher, because the solar farms are seen as a wholesaler of electricity therefore the utility pay them a much lower FIT then an individual homeowner. Then it would have the same economies of scale with the procurement of equipment.
These companies are now looking outside of their countries to develop new markets in countries with the right regulatory framework and investment environment to expand their portfolio. Places like Africa, Latin America and the Caribbean are now seeing an influx of interest. Canadian companies have been looking at the Caribbean to expand their investments. Barbados is ahead of most of the English-speaking Caribbean, with the exception of Jamaica, in having the right environment and is therefore seeing a lot of interest from foreign investors.
The thing is, Barbadians are not seeing this investment opportunity and these companies are aggressive and very keen on investing in the Caribbean. Although Barbados’ economy is going through some very difficult times and we could do with the foreign investment, we need to be very careful with the level of foreign investment we allow in the energy sector. It would be counterproductive to have an influx of foreign exchange during the development stage and then commit the country to a long-term outflow of foreign exchange to pay dividends to these companies.
These companies will be around for the foreseeable future, therefore, we need to find a way to work with them. Barbados needs to determine what is the right balance of local versus foreign investment and what is right for our economy in the short, medium and long term. Our local investors need to understand this new frontier of investment opportunities and get involved before we are forced to give all the projects to foreign investors.
We need to acknowledge that if companies are coming from other countries and are willing to invest millions of dollars here then there has to be some merit to it. There are still a few key areas to be resolved by the Government to make these investments in Barbados a reality, but that is not slowing down or stopping investors coming and trying to get piece of the Barbados pie as they seek to fully exploit the new frontier of investment.
Jerry Franklin is managing director of EnSmart Inc. Franklin is an engineer, energy auditor, equipment tester, and energy solutions provider. He is also vice-president of the Barbados Renewable Energy Association. Email: firstname.lastname@example.org