In the eyes of many major investor groups today, renewable energy is a highly desirable investment class. It is critical to the decarbonization of the global economy and is on an upwards trajectory towards increased global usage, scaled-up levels of production, and lucrative pricing. Despite this, access to these investments is largely limited to a small subset of specialized players, influencing the types of projects that get developed and leaving pools of interested investors and their capital on the side-lines.
Even outside the governmental projects that currently make up 63% of the market (and are effectively closed to external investors), the majority of private market solar, hydro, or wind energy projects currently in development require equity investments of hundreds of millions of pounds. This is in addition to the 80-85% (of project cost) typically financed through green or ESG bond offerings. With limited access to effective syndication tools, these private-market equity investments are typically made by a handful of investors with the size and specialization to contemplate such large ticket sizes. While the appeal of equity in renewable energy assets is high among asset managers needing to meet ESG targets and High Net Worth Individuals and family offices looking to make a positive impact while growing their assets, the amount of capital needed to access these investments is often out of reach.
This means that the industry’s main financiers are specialised capital groups that often lack appetite for smaller projects, preferring big-ticket projects that keep overheads low. Is it any surprise then that the renewable energy projects coming onto the market conform to these investor biases? A larger diversity of equity investors can, in turn, foster a greater diversity of projects being developed – achieving the long term global need for renewable energy is made harder without an vibrant ecosystem of different players. To diversify and strengthen our supply, we must offer new channels to the supply of capital.
Digitalised investment instruments present the perfect opportunity for smaller investors to access this market. Distributed Ledger Technology’s (DLT) primary novelty is its ability to create trust between unrelated parties in markets with no centralizing authority. DLT based fractionalization (tokenization) of the equity in a project-specific ‘special purpose vehicles’ (SPVs) can serve as the basic foundation for the creation of a sophisticated digital investment instrument that delivers considerable advantages to both the renewable energy production sector and the investors.
The scope of this opportunity is not to be underestimated. Of the total $4.3T renewable energy assets forecast for 2030, only some $48B is predicted to be available in listed pure-play vehicles; in contrast, in the unlisted market for renewable energy infrastructure assets, the 2030 equity forecast sits between $0.2 and $0.3T.
Currently, this equity is primarily limited to institutional-scale investors. Secondary transactions occur, but they are often ‘lumpy’ deals involving large scale acquisitions of all or significant portions of the equity in operating projects. In addition to their large ticket sizes, executing these deals involves significant transactional friction for both buyer and seller. The trust established between parties by digitalised investment instruments, as well as the ability to digest the ticket size into palatable chunks through tokenization, can grant smaller investors access to both the secondary transactions and equity hither-to limited to institutions.
If we are to reduce the amount of carbon we release in to the atmosphere in a bid to become ‘net zero’, the renewable energy industry is going to need as much capital as it can get, and digitising investments may be the key to widen the net for investors. In the future, it is entirely possible that, individual investors may club together to finance smaller, highly innovative energy projects which historically institutional investors would have rejected. Lowering the barriers to entry into the sector is crucial if we are to meet our goals for decarbonisation and turbocharge growth.
Change, whether business or social, cannot be made without the efforts of many. And a greater pool of investors doesn’t just help the renewables industry, but also it will allow investors to benefit from the impressive returns from the sector – permitting smaller investors to compete with large institutions. In the next few years, it could be that micro investors can even access the sector, chipping in tens of dollars at a time – building both funding momentum, whilst helping an often-forgotten class of investors get a better deal than they would in a savings account. Digitised investment in green energy can overcome the perception that creating a sustainable global economy is exclusively the domain of governments by offering a path for all of us to become active participants.