Mind the gap!
Recently, I came across the same article posted all over my LinkedIn wall, across all relevant industry groups on the network. It was this post on renewablenergyworld.com written by Dr. Thomas Hillig of www.th-energy.net, which was posted here in Solar Energy Network.
As the article brings up an interesting topic, I’d like to discuss it here. I do not want to repeat the entire article, but to understand what it is about, it is important to get the core message:
A renowned international finance company has mandated THEnergy to build a pipeline of off-grid renewable energy projects. Its subsidiary is establishing an off-grid fund with a planned EUR 100–200 million equity to invest. The equity is scheduled to be invested within an investment period of three years. Taking into account additional debt capital on a project level the finance company expects a total investment of EUR 200–400 million.
And the questions asked by Thomas Hillig were:
What is your opinion about the finance sector entering the off-grid world and investing in solar-diesel and wind-diesel hybrid? Is it a good fit? Will it boost the development of off-grid installations?
Immediately, Adam Hammond, CEO of Bluetech Capital Advisors & Bluetech Financing Solutions, commented, saying:
No. There has never been any shortage of capital looking for a home. The issue is sourcing well documented projects, at realistic terms, and with reputable off-takers.
And while I couldn’t agree more to his statement, it only looks on one side of the medal. The projects are only making half of the deal, the other half comes from the capital itself. The issue is not the money and never has been – but neither have the projects. It has been the gap between the capital and the projects. When we look closer to Thomas post, we find that he mentions that the minimum investment is 3 million EUR and the sweet spot between 10-15 million EUR, and return expectations are above 10%. Also, the investor wants to use 50%, as the total investment comes to 200-400 million €.
This means: A single project that is attractive for the investor, has the volume of at least 6 million EUR (including 50% debt). This, with a conservative figure of 2000 EUR per kWp equals a capacity of 3MW. And in total, to get the investors 200 million EUR on the ground, we thus need around 66 projects of this size. And a sweet spot project for the investor would be 20-30 million EUR (including 50% debt again), which equals 10-15 MW. And of these projects we need 5-10, depending on their size.
And this is where the problem is. There is a gap!
Capital offered into the off-grid market, but also more generically in developing countries, is neither matching the single projects nor the overall market. For some reason, the general understanding of these markets does not match reality. In reality, majority of the projects are within a project volume of way below 1 million EUR, when it comes to off-grid systems. Only a few are above, and even fewer are in the range of 20 million EUR or more.
And in addition of this mismatch in size, often the expected PPA terms also do not match projects. 20 years runtime of a PPA is very common in grid-conneted systems, but not in the targeted off-grid market segment, which obviously are mines. Here, the highly volatile natural resource markets and the short operational planning of mines of 4-8 years make long term PPA’s impossible, or cause high rates of the electricity price.
There have not been many off-grid projects realized in the past with an IPP/PPA structure, not because there wasn’t capital available, but because there was a gap between the investors expectation and the project reality. Mind the gap!
Update 03.11.2015: There was a mistake in the calculations. With 2000 €/kWp, a 20-30 million EUR volume would equal 10-15 MWp. Yet, the fundamentals – that there aren’t this many projects and that the PPA terms are not matching, remains the same.