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Decarbonizing energy are financial markets taking the lead?

Global investment in renewables and energy efficiency now outpaces that for nuclear energy. Renewables also accounted for more than a fifth of new generation capacity built in 2007. So how mainstream is the clean energy business in the eyes of financiers? Eric Usher reports, taking a particular look at the smaller, DE sector.

The renewable energy and energy efficiency sectors are seeing a level of commercial investment that most thought unattainable just a few years back, with US$148 billion of new money put into the sector in 2007, up from $33 billion in 2004. This fast-tracking of alternative energy technologies into the commercial mainstream is beginning to change the energy paradigm, although much more growth will be needed if today’s carbon-intensive energy system is to be left behind. This article draws on the work of the United Nations Environment Programme (UNEP) Sustainable Energy Finance Initiative and New Energy Finance in monitoring global investment trends in the sustainable energy sector, and analyzing the challenges ahead in meeting the global climate challenge.



The global climate needs to be stabilized soon

Studies have been begun to estimate both the economic effects that climate change will have on global society as well as the costs of possible climate change mitigation and adaptation measures. Although the capacity to enact either a mitigation or adaptation strategy is based on country-specific conditions, technology, and information availability, models have been used to calculate the approximate cost to stabilize atmospheric emissions at different levels.

Today greenhouse gas emissions in the atmosphere are approximately 455 ppm CO2 equivalent (CO2eq) and CO2 à‚— the main greenhouse gas à‚— is rising 1.9 ppm/year due to annual emissions of 49 gigatonnes (Gt) of CO2eq.1 The Intergovernmental Panel on Climate Change (IPCC) has concluded that to stabilize atmospheric concentrations of CO2 at 535à‚—590 ppm, global emissions in 2050 will need to decrease to within the 18à‚—29 Gt CO2 range worldwide and emissions must peak between 2010 and 2030, depending on model scenarios.

Hundreds of billions of dollars will be needed for mitigation

The United Nations Framework Convention on Climate Change (UNFCCC) Secretariat estimates a GDP cost of 0.3%à‚—0.5% in 2030 to return emissions to 2004 levels, equivalent to 1.1%à‚—1.7% of global investment, or $200à‚—210 billion in additional capital mobilization across the economy. Although these costs are large by some standards, the overall effect on world income has been calculated to result in a delay of GDP growth of only a few years,2 partly since much of the capital requirements could be diverted from business as usual investment activities or paid for by lower fuel costs and other savings. In its recently released Energy Technology Perspectives 2008 report, the International Energy Agency estimates that when compared on an undiscounted basis the investment required to shift to a low carbon path will be fully offset by the fuel cost savings for coal, oil and gas. At a 10% discount rate the fuel cost savings pay for some but not all of the investment cost.



New analyses have been tracking climate investment

UNEP’s Sustainable Energy Finance Initiative and New Energy Finance3 have been conducting an annual investment trends analysis in the renewables and efficiency sectors to provide new insight into the magnitude of the climate investment challenge and the response to date. This Global Trends in Sustainable Energy Investment 2008 report is not about predicting the future but rather understanding the present state of investment in the sector, the dollar view, and what this means in financial and broader economic and environmental terms.

Investment in renewables and energy efficiency has grown quickly

New investment in the sustainable energy sector à‚— defined as new renewables (excluding large hydro) and energy efficiency à‚— have increased significantly in recent years, reaching $148 billion in 2007 (see Figure 1). The most significant change occurred in late 2004, when wind and solar companies in Europe and Japan began to generate significant revenues, changing their view in the financial markets from relatively long-term future technology plays to present day, industrial-grade investment opportunities.

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Wind power, which surpassed 100 GW of installed capacity in March 2008, now receives more investment annually than large hydro power or nuclear, making it the leading climate mitigation technology in the eyes of financiers. In some instances renewables subsidiaries have become too large for parent companies and are being spun-off as independently listed companies.

The Spanish utility Iberdrola, for instance, spun-off its renewables subsidiary through an initial public offering in December 2007, following the success of France’s EDF in listing EDF Energies Nouvelles. The Iberdrola initial public offering raised $6.6 billion, six times more than the previous largest initial public offering for a renewable energy company. With a capitalization of $33 billion, this new Spanish renewables operator has a larger market value than all but the biggest European power utilities.

Engagement from the finance community has broadened

The quickest growth in sustainable energy capital mobilization has come from three sectors of the financial community that had previously shown little interest:

  • venture capitalists and private equity investors, who provide the risk capital needed for technological innovation and commercialization (up 42% in 2007)
  • public capital markets, which mobilize the resources needed to take companies and projects to scale (upà‚ 114% in 2007)
  • investment banks, which help refinance and sell off companies, allowing the all-important exit liquidity needed for markets to grow and for first mover investors to realize returns (up 52% in 2007).

The involvement of these three new financial players has signalled a broader scale-up in asset financing, the investment in actual generating plant capacity on the ground (up 61% in 2007). The breakdown of the types of investment going into the sustainable energy sector in 2007 is shown in Figure 2. Owing to the big names involved such as Goldman Sachs and some of California’s most prolific venture capitalists, these three new actors have had a strong knock-on effect that has further strengthened investor resolve to expand the particular climate mitigation sector.

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Emphasis is shifting towards decentralized technologies

Wind power is far from the only clean energy sector on the rise, and many of the technologies following in its tracks are much more decentralized, including roof-top systems like photovoltaics or solar thermal, and energy efficiency technologies on the demand side. Solar and energy efficiency were actually the two largest sectors in terms of venture capital investment in 2007, with solar bringing in 30% and efficiency 18% of the $9.8 billion raised last year (see Figure 3). Besides this high level of early stage investment, mostly focused on new technology development, these two sectors also fared well on the public stock markets, ranking second and third (after wind) with $9.4 billion and $1.6 billion raised respectively. Solar would have overtaken wind on the public markets if not for the Iberdrola IPO. Public market investment is typically used to scale-up production capacity.

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Perhaps the biggest news for solar was with the later stage financing, both small and large scale, used to deploy systems on the ground. In terms of asset financing à‚— the funding used to build large-scale projects à‚— solar came second with $17.7 billion mobilized, after wind at $39 billion.

Financial innovation opening new markets

Small-scale financing approaches are being used to develop solar power. In developed countries solar equipment manufacturers in the US have led the way, realizing that they could help overcome capital-cost barriers by acting as financial intermediaries.

One of the main financing tools used is the third-party power purchase agreement (TPPPA), which, according to some estimates, drove 60% of the solar capacity installed in California in 2007. Under a TPPPA, a third party designs, builds, owns, operates and maintains the solar power systems and sells back solar-generated electricity to the end-user. This model removes the burden of significant upfront costs from the end-user, and also allows the solar contractor, who has significantly greater expertise than the end-user, to assume the responsibility for system installation and maintenance. Tax credits and accelerated depreciation for the solar systems help to drive down their cost, as well as reducing the electricity price charged to the end-user.

SunEdison and SunPower are two leading TPPPA proponents. SunEdison first used the model in 2004 on a commercial installation, and has since installed 34 MW of systems for commercial users financed via TPPPAs (or SPSAs à‚— solar power services agreements à‚— as SunEdison calls them). SunPower uses a similar model for its SunPower Access programme.

A variation on this is where a city or county acts as financial intermediary, targeting residential customers. In Berkeley, California, as part of Berkeley’s Measure G mandate to reduce greenhouse gas emissions, home owners can finance a solar system through deductions on their property tax bill.

Solar installation financing is attracting heavyweight investors. Goldman Sachs, GE Capital and MMA Renewable Ventures are all investing. In April 2008, for example, MAA Renewable Ventures announced that it was to finance 14 roof-top systems on Macy’s California department stores, with SunPower providing panels and systems integration.

Developing countries, whose need for distributed generation is not so much driven by energy security and environmental concerns as by lack of grid access, are also benefiting from financing for small-scale distribution. Many developing countries have rural electrification programmes today and an increasing number of these rely on renewables and distributed financing models to provide access in off-grid areas. Besides electrification, many other clean energy systems and services are being installed with a range of end-user finance approaches.

For example, in Tunisia UNEP has jointly run the Prosol solar water heating programme with the local energy agency and has seen 35,000 installations gain financing through payments made via customer utility bills. UNEP has run a loan programme with two of India’s largest banking groups, Canara Bank and Syndicate Bank, helping to kick-start the consumer credit market there for solar home-system financing. 19,355 homes where financed over three years and the market continues to grow with other banks now beginning to lend. These programmes and others like them are now looking to the Clean Development Mechanism (CDM) to help finance the further uptake of these sectors. Although CDM revenues cover only a small portion of the capital costs, if appropriately structured they can be used to bring down barriers to end-user financing, which is often is the key to market uptake.

Engagement has started to shift towards large developing countries

Developing countries accounted for 22% of new investment in the global sustainable energy sector in 2007, up from 12% in 2004. Developing country investment grew 14 times, from $1.8 billion in 2004 to $26 billion in 2007, with China, India and Brazil accounting for the major share; all three countries are now major producers of and markets for sustainable energy, with China leading in solar, India in wind and Brazil in biofuels. The results in the rest of the developing world, however, have been less promising and require increased engagement from governments and the development finance community. Figure 4 shows the global distribution of investment across the different regions.

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Energy efficiency investment shows a similar trend to renewables
Energy efficiency is normally financed internally and is not generally identified as an investment unless it is undertaken on a significant scale. In 2007, investment in energy efficiency technology reached a record $1.8 billion, an increase of 78% on 2006.

These figures, however, are quite difficult to isolate from other industrial improvement activities. From the macro perspective the impacts of investments in energy efficiency are easier to quantify. Improvements in supply-side and demand-side efficiency have been helping to decrease global energy intensity (i.e. the ratio of energy consumption to economic or physical output), which on average has been dropping 1%à‚—1.5% per year.4 Since 1990, energy efficiency has met 52% of new energy service demands in the world while new energy supplies have contributed 48%.5

Most analyses expect future efficiency improvements to be in the range of 1.5%à‚—2.2%. According to a modelling analysis undertaken by the Joint Global Change Research Institute, however, if the rate of energy efficiency improvement could be increased to 2.5% worldwide it would be possible to keep CO2 concentrations in the atmosphere below 550 ppm through the end of the century.

Sustainable energy sector growth must be seen in perspective

The $145.6 billion of investment in new renewables in 2007 (calculated by subtracting energy efficiency investment ($2.8 billion) from total sustainable energy investment) was equivalent to 9.4% of global energy infrastructure investment and 1% of global fixed asset investment. This can be roughly compared to the $200à‚—210 billion that the UN Framework Convention on Climate Change (UNFCCC) Secretariat has estimated it will cost annually by 2030 in additional capital mobilization across the economy to return global greenhouse gas emissions to 2006 levels.6 A second comparison can be made to the figures in the Stern Report7, which concluded that the cost of stabilizing emissions at 550 ppm CO2eq would average 1% of global GDP à‚— approximately $134 billion in 2015 and $930 billion in 2050.

Though the UNFCCC and Stern estimates do not include the underlying infrastructure costs, but only the additional funds needed to decarbonize this investment, renewables’ recent capital mobilization success may provide some positive reinforcement for policy makers involved in the current round of climate negotiations. The fact that annual investment in renewables has increased by $115 billion between 2005 and 2007 demonstrates that it is possible to mobilize the capital needed to stabilize global climate à‚— provided the right mix of policies and economic conditions are in place.

The ever-growing numbers of supportive renewable energy and energy efficiency policies are certainly one of the reasons behind the scale-up of the sector even if the current level of direct government support is only just in line with other parts of the energy industry. Energy subsidies today total $250à‚—300 billion globally, of which $180à‚—200 billion are for fossil fuels and only $16 billion or ~8% for renewables.8 This share is a little less than the 9.4% that renewables currently have of total energy sector investment, implying that subsidy frameworks are slightly behind the level of investor commitments.

However, if a role of subsidies is to help society make the shift to a more diversified and decarbonized energy economy then the current share allocated to renewables does seem low. Unfortunately subsidy frameworks are mostly backward-looking, providing production subsidies for existing infrastructure, rather than lowering the deployment costs of new technology.

R&D trends tell a similar story

In 2007, the sector attracted $16.9 billion of R&D from governments and corporates, up 30% from 2005. This R&D spend is still relatively low, which is surprising for a sector that relies on being at the cutting edge of technology. Energy R&D accounted for just 4% of total government R&D in 2005, down from 12% in the early 1980s. By contrast, strong growth in venture capital and private equity (VC/PE) investment in clean energy à‚— up 106% since 2005 à‚— demonstrates a more dynamic sentiment amongst risk capital providers than R&D supporters.

Besides R&D and VC/PE, some public equity investment is also going towards scaling-up the technology and manufacturing base. For the past couple of years, growing acceptance by the public markets has encouraged sustainable energy and carbon companies to list their shares on stock exchanges worldwide and share prices have been pushed higher. During 2007, clean energy accounted for an estimated 19% of all money raised by the wider energy sector on the public markets, which is significantly higher than in previous years.

This effect can be seen in the performance of the Wilderhill New Energy Global Innovation Index (NEX), which rose 57.9% in 2007, building on an already strong 33.3% gain in 2006.

The sector is unlikely to fare as well in 2008, with clean energy stocks unable to escape the uncertainty that has characterized global financial markets. The impact of the credit crisis in the financial markets started to show through in early 2008, with few new listings on the public markets and stock prices down 17.9%. Corporate mergers and acquisitions (M&A) surged forward, reflecting the consolidation that tends to accompany tighter market conditions. However, by the second quarter investor uncertainty seems to have passed and overall investment during the first half of 2008 has been just above what was seen in the first half of 2007.

Although asset finance is down somewhat, VC/PE investment, public market capital raising and stock prices are all healthy, indicating that the finance community still sees strong fundamentals underlying the sector and is increasingly looking to take part in its future growth.


Whether renewables can now be considered a mainstream energy or climate option can be best seen by examining the power sector. Nearly $90 billion was invested in new renewable power generation plants in 2007. By the end of the year, 241à‚ GW of this clean generation capacity had been installed worldwide, of which 25 GW and 31 GW were added in 2006 and 2007, respectively. In comparison, the aggregate increase in capacity of the nuclear power industry globally averaged 2à‚ GW per annum between 2004 and 20079 and IEA has estimated that 7 GW of new large hydro capacity came on-line in 2007.

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As shown in Figure 5, renewables still represent only 5.4% of global power generation capacity and 4.6% of production. However, the 31 GW added in 2007 accounted for over one fifth of new power generation added to the global electricity system last year. It is also equivalent to about half of Spain’s total electricity capacity, so this is not only about success in Germany and Spain and Denmark. This is becoming a global phenomenon.

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Eric Usher is Head of the Renewable Energy and Finance Unit, Energy Branch, DTIE United Nations Environment Programme, Paris, France.
e-mail: eric.usher@unep.fr



2. Chritian Azar Christian and Stephen H. Schneider, “Are the economic costs of stabilizing the atmosphere prohibitive?”, Climatic Change 42, pp. 73à‚—80.

3. Global Trends in Sustainable Energy Investment 2008, UNEP SEFI and New Energy Finance. Report can be downloaded from #

4. IEA, 2006 “Energy technology perspectives 2006: scenarios and strategies to 2050”.

5. Realizing the Potential of Energy Efficiency, UN Foundation, 2007.

6. “Investment Flows to Address Climate Change”, UNFCCC Secretariat, Bonn, August 2007.

7. Sir Nicholas Stern et al, “Stern Review on the Economics of Climate Change” (Stern Review).

8. Trevor Morgan, ENERGY SUBSIDIES: Their Magnitude, How they Affect Energy Investment and Greenhouse Gas Emissions, and Prospects for Reform, June 2007.

9. Schneider, M., Froggatt, A., “The World Nuclear Status Report 2007”, January 2008.

Taking advantage of the markets’ expectations for the sector

European utilities began spinning out their renewables subsidiaries in late 2006, starting with the $691 million EDF Energies Nouvelles IPO in November 2006. The Iberdrola Renovables IPO followed in December 2007, and the EDP Renovaveis IPO in June 2008. The decision to finance these renewables operations as free-standing entities rather than as part of their larger utility operations illustrates how the capital markets are now distinguishing between old and new energy businesses.

Take the example of Iberdrola in its efforts to raise the capital needed to expand its renewables business. If it had chosen to raise the capital through a share offering from its parent company, investors would have valued earnings from the renewables business at around one-third of the value it was given as a separate listing (based on the prevailing earnings multiples à‚— see assumptions below).

This higher multiple was based on investor expectations of much higher growth potential for a renewables business than for a traditional utility operation. Whether Iberdrola Renovables’ continued growth will meet these high projections will take some years to bear out, but it is clear that the capital markets have created a dynamic for change in the energy sector à‚— one that even market incumbents are now starting to act on.

Notes: As at 31 December 2007, the EBITDAs (earnings before interest, taxes, depreciation and amortization) of Iberdrola and its renewables subsidiary were €5538 million and €564 million, respectively, and the enterprise value of Iberdrola €73,318 million. The IPO gave an enterprise value for Iberdrola Renovables of €23,617 million (this had risen to €25,095 million by 31 December as the share price rose from €5.30 to €5.65). These figures correspond to EV/EBITDA multiples of 13.2x and 41.9x, respectively.