Clean energy investments have been available to high net worth individuals and institutions for years, but for most of us, this is an exciting new opportunity.
Not all clean energy investments are created equally or for everyone. There are opportunities for investors with higher and lower risk tolerances, for investors seeking to maximize their impact, and for investors with shorter or longer time horizons.
So, how to tell them apart, and determine which are right for you? Here are six considerations to keep in mind when choosing a clean energy investment best tailored to your financial and impact goals.
1. Clean energy companies or clean energy projects?
Investing in clean energy companies
When most people think about investing in clean energy, they’ll think about buying shares in a company like SunPower (solar panels), Vestas (wind turbines), Tesla (electric cars), or even a brand new startup.
While the trends for clean energy are overwhelmingly positive, individual companies can be impacted by government policy, competition, technological innovation, the strength of their management team, and still other factors. Picking winners and losers in established industries is hard, and picking them in emerging industries is even harder. Another option is investing in a cleantech Exchange Traded Fund (ETF) or mutual fund, distributing the risk and allowing your investment to track the industry’s fortunes and not just the successes or failures of one company.
Investing in clean energy projects
Investing in clean energy projects is different. Here, the money is used to provide project financing for clean energy equipment that generates electricity (such as solar panels) or reduce energy consumption (such as LED light bulbs).
By “project” it is meant that:
- there is equipment - real assets - that generate energy or reduce energy use;
- there is a customer that has contracted to purchase this clean energy, often for a set price over a period of time; and
- the equipment is owned by an entity different from the development company which owns the assets.
2. How are returns generated?
When investing in clean energy companies
When investing in shares of a clean energy company, the returns are generated when the company (or companies in the case of a fund), grows in value, providing capital gains, and when they pay dividends. Of course, stock values fluctuate based on company performance and broader market trends as well.
When investing in clean energy projects
Clean energy projects generally make money in one of two ways.
Energy generation projects generate revenue based on the sale of clean energy.
Energy efficiency projects help clients spend less money on energy, and investors are paid out of the clients’ energy savings. (The net result is that the client spends less on energy, and uses part of the savings to pay the project developer.)
Sometimes these returns come as a share of the savings, and sometimes payments are fixed. It may help to think of energy generation projects getting paid for megawatts, while energy efficiency projects get paid for saving megawatts -- for generating negative watts, or “nega-watts”, if you will.
There are also different types of clean energy project investments, for example debt or equity.
Debt investors accept modest returns, in exchange for first access to cash flows. They can also get priority on collateral such as project equipment, in the unlikely event of failure.
Equity investors get access to cash flows last, and in exchange for higher risk, can see higher returns.
3. Who is paying?
Corporate or Government bonds
With corporate or government green bonds such as Apple’s recent $1 billion issuance or the Ontario Government’s Green Bond, your investment is backed by their balance sheet. Buyers are expressing confidence that the company or government is strong enough financially to pay them back. Apple’s credit rating is AA+ (read: really good) so theirs would generally be considered a low-risk corporate bond.
Project-backed bonds are paid back by the counterparty. For Green Bonds, this is the corporation, government or individuals ultimately purchasing the project’s megawatts or negawatts. Bond buyers need to determine whether the counterparties are creditworthy; whether they will be able to continue making payments into the future. It’s much like what a bank does when it performs a credit check on a customer wanting a mortgage.
A Green Bond example could be an Ontario-based solar project with a contract under the feed-in-tariff program with Ontario’s Independent Energy Services Operator (IESO), a crown corporation with a credit rating of AA2. The likelihood of these 20-year power purchase agreements being cancelled is considered by industry experts to be very low, so investors can reasonably expect that as long as power is being produced, these projects will generate steady, predictable revenues for loan and interest payments.
4. How established is the technology?
Clean energy technologies range from the wildly experimental to the well-established, and a clean energy project’s risk profile is impacted by the maturity of the technology in use. As can be expected, projects that use long-established technologies (such as solar panels) are generally lower-risk than projects that use newly developed, or experimental technologies (such as, for example, solar roads).
Some investors welcome the prospect of supporting new technologies that may disrupt markets and offer higher returns. These investments are generally a better fit for investors willing to accept higher risks because they can afford losses, and who ideally have the expertise to evaluate the technologies and business models.
Many - perhaps most - of the technologies needed for deep carbon reductions are already mature. Solar panels are an example. While the technology continues to rapidly improve, they have been been commercially sold for decades. The main challenge they face is scaling up worldwide deployment, to maximize their positive impact.
5. How easy is it to sell the investment?
An investor’s investment choices will depend on many factors, including whether they might need access to their capital. A person planning to put a down payment on a house in the near future will probably want “liquid” investments they could quickly convert to cash. An individual with a longer-term strategy might add illiquid investments such as private placements to their portfolio.
Liquid: Easy to sell
Some clean energy stocks (e.g. Tesla, First Solar) or cleantech ETFs are traded on public markets. They can be bought by any member of the public, which means they are relatively easy to sell if investors need cash.
Illiquid: Cannot be sold
Private investments are investments that are not listed on a public exchange. This means they are more difficult to sell, because sellers may need to seek out potential buyers. For this reason, individuals making private investments should only invest amounts they can afford to set aside for the length of the investment term.
6. How much impact, and how do you know?
Different clean energy investments have different levels of impact.
Investors looking to support new technologies or business models may want to invest in the startup directly, providing capital to develop their technology. Others may prefer to invest in the startup’s projects, providing capital to deploy the technology to the world. And there is risk and return associated with impact too. You could create massive impact by investing in a new technology or, that technology could never be deployed.
Investing in a proven technology with measured carbon reductions may be less disruptive, but can also deliver more certainty of carbon reduction. Individuals with the goal of maximizing their carbon reduction impact may focus on supporting clean energy projects in regions it will displace fossil power from coal, diesel, or natural gas. Others may prefer to support clean energy development in your local community.
How CoPower does it
CoPower Green Bonds are an investment in a diversified portfolio of loans to clean energy projects, not clean energy companies. The projects in our Green Bond portfolio use established technologies. Investor returns come from the steady revenues generated by the sale of clean energy or from energy savings as laid out in contracts with counterparties where the risk is low to moderate like a government or a diversified pool of counterparties, such as a pool of condo corporations.
As a private investment our bonds are illiquid and while they wouldn’t be right for day traders, they can help diversify a primarily public-markets portfolio and can be one of the pillars of a “buy and hold” investment strategy.
Finally, CoPower believes transparency is the best policy, and the only way to keep greenwashing out of the impact investing industry. We report on the impacts of our clients’ personal investments with each quarterly financial update.