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Centro Law Guest Series: How renewable energy investments help fight climate change

Interested in knowing more about investments in renewables and energy economics? Harikishan Mandalapu and Diego Tejada Evans are two consultants in the field of Energy and Sustainable Project Economics. Both have a particular focus on the evaluation of investment opportunities and the business development front of sustainable ventures and share their insights with us.

Thanks, Hari and Diego, for taking the time to have a chat with Centro LAW. What is your field of expertise, and can you explain more about energy economics?

Our experience is rooted in the oil and gas industry's corporate practices, where projects and acquisitions are assessed in contexts dominated by uncertainty and volatility.

Nowadays, we apply the same methodologies to the evaluation of green projects. We bring proven risk and uncertainty modeling techniques used in large corporations to investors seeking to gain insights from capital intensive projects within the renewable energy space.

Our mission is to maximize the value of investment portfolios by delivering a precise economic analysis of the opportunities at hand in simple language. Based on our work, investors can decide which of the emerging trends better balances their risk-benefit appetite for cash flow, generating life cycles of 25 years.

Can you tell us a bit more about investments in renewables? And any specific information that may be useful for investors wanting investment exposure to renewables?

Several countries, particularly in Europe, have voiced their commitment towards a carbon-neutral future, deploying policies and subsidies that support renewable investments.

When it comes to enabling energy projects financially, sustainability has become a go-no-go criterion.  Having a measurable positive impact is now an expected requirement from both the general public and the administrations in different countries. 

Governmental aid and open access for project finance schemes are now converging to boost the attractiveness of opportunities in the renewables space. This creates a unique context where investors can achieve meaningful returns by pursuing investments with measurably positive environmental and societal impact.

Investors seeking higher exposure to renewables can find a broad range of opportunities; technologies range from well-established ones to concepts that might disrupt a whole industry. These are exciting times, yet prudence is needed to fully understand the technicalities of ventures with the highest upsides and risks.

How can investments in renewables help to fight climate change? What is your assessment of the current situation?

Energy production and usage account for two-thirds of global greenhouse gas emissions. Investments in renewables help reduce the emission of CO2 linked to greenhouse effects on the earth's atmosphere. By replacing fossil fuel energy sources like coal and oil with renewables like wind, solar, geothermal, hydrogen, etc., we can reduce greenhouse gas emissions and mitigate climate change effects.  

The International Renewable Energy Agency (IRENA) estimates that 65% of the global energy supply should be renewables by 2050 to keep the temperature rise below 2°C (Paris Agreement). It requires more than 2 trillion USD per year in investments in renewables over the next three decades. Historically, private capital financed 90% of renewable energy investments globally.

At Centro LAW, we specialize in designing family offices for wealth owners, entrepreneurs, and their families. While family offices are increasingly focusing on sustainable investments,  investment performance is equally essential. How can we combine both aspects concerning renewables?

Today, renewable energy investments are delivering better returns than fossil fuels in most parts of the world. This is mainly due to the supportive regulatory frameworks (fixed long term offtake agreements, subsidized tariffs, soft loans, grants, fiscal incentives) that leverage the performance of private capital. 

However, renewable investments remain challenging to investors as they call for specific technical know-how to evaluate them correctly. One way family offices can overcome this barrier is by creating a trusted network of virtual resources that can help them demystify the complexity of the projects and regulatory frameworks, providing simple guidance and a full picture of potential future outcomes.

Can you outline the investment process for an institutional investor? Can you tell us more about due diligence, ticket size, costs, and the typical lifecycle of an investment? And, do you have any particular recommendations?

Once an investment lead is identified, it is contrasted with the strategy to ensure it fits: is this investment consistent with the investor's long-term objectives? Can it deliver on the expected returns? Does it complement or cannibalize the positions already held in other companies? Are there any issues that, at first glance, prevent us from investing in this venture? Do we understand the geographies and cultures where the company will operate?

Having confirmed the alignment of the opportunity with the investment strategy, it's time to run a first pass evaluation. This preliminary study will answer whether it would be worth engaging in a more detailed valuation process, which will call for more time and resources. The initial phases typically take from a few days to a few weeks.

Should the answer be positive, the engagement steps up and stricter confidentiality agreements are set in place to allow access to more detailed information. During this phase, which can last a few months, the goal will be defining a value range for the opportunity, highlighting the risks and upsides, and assessing the completeness of information, both technical, legal, and commercial.

Once your view of the value is determined, the negotiation with the seller can continue and,  should an agreement be reached,  transaction terms are agreed. A due diligence process is then launched eventually ending with the sale's completion, should everything be in good order.

Sustainable investment opportunities exist with project investment sizes ranging from USD 5 million to USD 500 million. However, we should not just look at the size of the total investment, as in some cases, investors can get access to green financing even from the early phases of the project. It is clear that for the last 2-3 years, commercial banks have raised their targets to increase the share of green loans. The typical lifecycle of energy investment is in the range of 20 to 30 years.

In general, what advice do you have for wealth owners that want to invest sustainably and make a positive impact on the world around them?

Keep an open mind and stay tuned to the latest developments on renewable energy technology.  Significant funding is going into disruptive approaches. Imagine what the world would look like if these efforts succeed and where you want to be as an investor when this happens.

A clear strategy with a long term view is crucial to succeeding in the space of renewable energy investments. Finally, connect the dots. Everything is interlinked, and seemingly unrelated developments in the blockchain, artificial intelligence, new materials, etc., are also going to revolutionize the energy domain.

About Diego and Hari

Diego Tejada Evans

With a common thread linking innovation and new concepts implementation across different countries, Diego focuses on driving raw ideas to the execution stage. His Madrid based company Conscious Next SL delivers advisory and business development services to businesses of different sizes and stages in renewable energy, sustainability, education, biotech, agritech, fintech, and health systems.

Harikishan Mandalapu

Experienced energy investment economist with a strong flair in finance, M&A, and strategic management. He supports the strategic problem-solving processes for informed executive decision making. Hari is passionate about energy, renewables, mobile technologies, and a curious learner of AI, fintech, and smart energy systems. His Copenhagen based company InoDays delivers economics advisory and analytics services for institutional long term infrastructure investments.

02-09-2020

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