So, you’re ready to invest in renewable energy projects. Here’s where to start.
By Allan Riska | Chief Investment Officer | Renewable Properties
The landscape of solar and energy storage project investment has shifted, catalyzed by the Inflation Reduction Act (IRA). The investment opportunities offered by the IRA has attracted a new wave of investors, including private credit, infrastructure funds, insurance companies, and family offices. The evolving interest in renewables investments represents a fertile ground for investors seeking sustainable, profitable ventures.
However, investing in solar and energy storage projects has its own challenges and risks. These risks are manageable, but appropriately pricing the risk / reward tradeoff is critical to a successful investment. If you’re a first-time renewable energy investor, here’s a brief guide to what you should know before investing in a portfolio of community solar projects.
Understanding the new environment
The IRA has not only intensified the focus on green energy but also expanded the pool of investment players.
A renewables developer can now partner with:
- Private credit firms offer flexible financing solutions.
- Infrastructure funds provide long-term investment capital necessary for substantial projects.
- Insurance companies can contribute large-scale risk management expertise and cost-efficient long-term capital.
- Family offices, which often bring patient capital with a long-term outlook.
If you represent one of the above funds that’s investing in renewables for the first time, it’s crucial to collaborate with experienced solar developers and asset owners who are willing and able to articulate the risks, project needs, and potential hurdles.
Partnering with experienced solar developers is the first step to reducing risk. The unexpected will happen – both good and bad. Good surprises can, and often do, require more capital than bad ones. That creates real opportunity for the investors. The developer will require sufficient and expedient access to capital to successfully navigate the process, and a supportive investor will be capital-ready and solutions-oriented.
Since partnering with an experienced solar development partner is the first step toward a successful outcome, the next step is deciding at which stage you’d like to invest and its inherent level of risk and reward.
Let’s review these stages with the example of investing in a community solar project fund. While these themes are for renewables, generally, we will focus on community solar projects.
Investment stages in community solar projects
As an investor in community solar projects with or without energy storage, you can invest in three distinct stages.
- Development
- Project finance (late development through construction)
- Operation
Each stage carries different risk profiles, time horizons, and developer needs. You’ll need to be familiar with these stages to understand the risks and how to effectively communicate with your solar developer partners during these periods.
Development: Early to mid-stage
The early to mid-stage of development is characterized by relatively high risk and has a time horizon of two to four years, from market entry to commercial operation date (COD).
Developers in this stage require significant capital injection and partners who can offer creative solutions to unexpected challenges. Patience is key, as these projects often face unforeseen delays and regulatory hurdles.
For example, the permitting process has become increasingly complicated, even contentious. An experienced developer like Renewable Properties has permitting managers that directly engage with different community members and stakeholders, addressing their needs and providing answers to a myriad of questions. Investors who can provide policy and regulatory clout are especially valuable in navigating these complex processes and securing permits and pro-solar development regulations that also deliver for the communities where the projects are located.
The primary investor attraction at this stage is the potential for higher returns, compensating for the increased risk and capital deployment. However, the long-time horizon and market volatility present significant challenges, as regulatory shifts and market changes can affect timelines and profitability.
Consequently. the developer and the capital party must be in sync on how to navigate these ups and downs with a certain level of mutual trust.
Late-stage development (Late development through construction)
The late development stage focuses on securing the financing for construction and permanent capital in preparation for achieving project completion. The time horizon for community solar projects from Notice to Proceed (NTP) to COD ranges from six to 12 months.
As projects move from NTP to the construction phase, and then to operational status, investor risk decreases, but it requires an experienced developer’s meticulous project management to ensure timelines are met and budgets remain on target. Once again, a track record of past success reduces the risk of delays, but there can still be hard conversations and decisions that need to be made, especially as a project approaches NTP.
As a late-stage partner investor, your key considerations should include structuring the financial aspects to balance the risk and return, ensuring regulatory compliance, and overseeing construction to prevent delays and cost overruns. With each milestone achieved, the project’s risk profile improves, and its potential value and attractiveness to later-stage investors increase. However, once a project reaches NTP, there is a near perfect record that a project will reach COD.
Nevertheless, this stage remains capital-intensive, requiring significant funding until revenue generation begins. The complexity of managing numerous stakeholders and contractors is also challenging, so frequent reporting and capital planning is warranted.
Once again, partnering with an experienced Independent Power Producer (IPP) or solar developer can alleviate these challenges through their track record of comprehensive project management and stakeholder coordination.
Operating stage
Once a project becomes operational, the focus shifts to maintaining efficient operations and maximizing net operating income (NOI), while delivering for the subscribers, community, and investors. This stage generally carries a low-risk profile and offers long-term expected returns over a horizon of 20 to 40 years.
Operational efficiency and maintenance are crucial to ensure that solar and storage facilities run at optimal capacity. Investors must also implement strategies to maximize returns and adapt to changes in energy prices and market dynamics.
Although the operating stage provides a steady income stream and lower risk compared to the development stages, market fluctuations and technological advancements can impact profitability. Expect that the developer will make a continuous investment in maintenance to ensure peak performance.
Even in operating projects, there still lies opportunity. A growing trend is site repowers, which can involve replacing solar panels, inverters, and other equipment. Repowers use investment capital to upgrade the project’s technology and maximize the output on a site footprint, which should lead to increased annual kilowatt-hour production and improved financial returns. The right investor can offer efficiently priced capital and guidance to help the developer/IPP to efficiently scale these upgrades.
Capital matching: Know the trade-offs of the stages and invest accordingly.
While the IRA has provided some long-term stability, risks like tariffs on solar panels, a changing regulatory landscape, and permitting and zoning challenges will impact project feasibility.
One of the last steps is appropriately pricing the risk within that investment bucket. Have you considered the risks and objectives? For example, if you’re a life insurance company looking for long-term cash flows from operating projects, it may be tough for you to stomach what it takes to fund early-stage development at nearly any competitive rate of return.
The investment process is about education and expectations. The more investors and partner solar developers are willing to have conversations about the fund’s risks and opportunities, the better the outcome will be for all stakeholders.
Taking the time to understand particular investment stages and the nuance of each clean energy category will help new renewable energy investors to more effectively engage with their development partners to successful capital allocations.
Allan Riska is the Chief Investment Officer at Renewable Properties, leading a team that secures capital for solar projects from development through operation. With over ten years in the solar industry, Allan has closed more than $1.8 billion in capital across 750 MW of projects.
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