Makin’ it blow: investing in renewable energy

Old school renewable energy.  Source: Google Images.

Old school renewable energy. Source: Google Images.

I’ve written before about one of my main principles of portfolio management: diversification.  Very important, as I come to this investment game with much humility regarding my ability to forecast asset returns.  Choosing many different return streams should *hopefully* give the family portfolio the best chance at steady, but appreciable, gains.

The latest iteration of this approach finds me looking at renewable energy; in particular, corporate bonds secured on renewable energy infrastructure such as solar panels, biomass power plants or wind turbines.  Here are a few websites I came across while researching the space:

Some thoughts:

  • Returns seem decent-high: most projects offer 6-10% p.a. interest, with tenors of 5-10 years.  Way better than the ~2%ish on government debt, or ~3.5% on corporate debt.
  • Bond security seems decent: in the docs I’ve seen, the asset (e.g. a windmill) is pledged as security for the bonds.  So more security than you get with the debt mentioned above.
  • Key risk is government risk: the economics of renewable energy are still tightly bound to government subsidies of various sorts.  In the UK (the focus of my research) the overarching EU scheme forces countries to generate ~30% of power through renewables by 2020.  The UK, for one, is nowhere near this.  So the government has rolled out several programmes to ensure those building renewable infrastructure get a guaranteed revenue stream.  BUT – as my dad always says, the only risk you can’t hedge is government risk.  In this case, suppose way more windmills get built than can possibly be used – would the government still provide the subsidies, particularly when some/all of these subsidies are paid through consumers’ energy bills?
  • Other risks seem mostly insured/hedged: these include construction insurance, operating insurance, power purchase agreements, etc.
  • In sum: the juicy return is in return for government risk.  If subsidies get slashed, with no grandfathering, you (as bondholder) end up with a windmill which generates uneconomic power.

Will I invest?  Given the timeline for most of these subsidies/schemes/agreements/quotas measure decades, it might be worth a punt for 5-10 years.  By then, we’ll likely either have far too much renewable energy than we know what to do with (not, in itself, a bad thing) or maintain status quo of needing more (with associated subsidies).


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