Green spark: Renewables still generating returns

Environmental investor Impax has been approved to receive a €40m commitment from the European Investment Bank (EIB) for Impax's second infrastructure vehicle, Impax New Energy Investors II. The fund, with a €300m target, is set to invest in solar and wind projects across Europe.

Environmental infrastructure offers an interesting risk profile to investors; the risk is that of infrastructure while the returns are closer to those of private equity investments. "Investments in the sector rely on tariffs and as such are not subject to the volatile economy to which investors are exposed," comments Peter Rossbach, managing director of at Impax.

Deal activity in the sector can attest to its attractiveness. In recent weeks we've seen HgCapital acquire a 12MW solar PV in the Castilla-La Mancha region and an 8MW construction project in the Murcia region expected to be operational in April 2010.The deal was part of a €300m investment that also saw HgCapital take a 50% stake in Manchester-based Scout Moor 65MW wind farm. Another deal, albeit smaller in scale, saw dedicated environmental investors Amplio make a €13m investment for a total of 6MW of solar plants in the region of Puglia in southern Italy.

Solar assets are particularly interesting given the current cost of panels. "In 2009, our solar assets performed 13.5% above budget. One project is on track to return 50% of the capital invested within two years just on cash flow, without any refinancing or shuffling," said Rossbach.

Within European renewable energy markets, Southern Europe tends to draw the most interest in the solar sector. However, not all markets under the southern sun are equally attractive.

"The Spanish solar PV market has matured and become more dynamic, moving from a pure-build model to the acquisition of operating companies. It presents interesting consolidating opportunities. The Italian market is at a different stage. There are hungry buyers but prices remain high and the history of land use means parcels are smaller, meaning it very difficult to achieve the levels reached in Spain," notes Rossbach. He continues, "As for Greece, the tariffs remain in place, however, financing is very difficult to obtain. Local banks are not lending while foreign banks usually interested in project finance rather not increase their Greek exposure."

Geographically, Germany tends to be a point of reference for wind assets and developers. Returns tend to be in the mid-teens but the market operates differently from the solar one. In the solar segment, panel prices are dropping as the number of manufacturers increases and Chinese manufacturers are putting the market under strong pricing pressure. Wind is more cyclical as the number of turbine manufacturers is more stable; at present turbine prices are back at attractive levels.

In any case, with climate change high on the European (and beyond) agenda, environmental infrastructure is set to benefit from government incentives and thus remains interesting to investors. In a market with few exits, US player Denham Capital Partners just divested renewable energy developer SunRay Renewable Energy for a total consideration of approximately $277m, after a two-year holding period – proving how lucrative enviromental infrastructure can be.

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