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The state of IPOs in the renewable energy sector

BY ANDY CURRIE. The renewable energy sector has been consistently growing. According to data from the United Nations Environment Programme and Bloomberg New Energy Finance, investment in renewable energy projects is now outpacing investment in new fossil fuel-powered generation capacity. We are seeing 11 per cent more investment in the sector than in 2010, largely driven by a combination of incentives to invest in the energy landscape and political pressure to reduce emissions.

In 2012, the sector was valued at £12.5bn, with an estimated value of £50bn predicted by the end of the decade. With this in mind, it comes as no surprise that renewable energy has generated plenty of interest lately. Investment projects like Spanish multinational electric utility company Iberdrola’s construction of an offshore wind farm last year demonstrates the growth potential that businesses see.

However, whilst activity is on the up, energy developers, operators and technology designers in the renewable energy sector have had mixed results on public markets.

In the low-interest-rate environment, the public markets have traditionally favoured operating energy producers, due to the predictable nature of their returns to investors. An example of this is Greencoat UK Wind, which managed to raise £260m on the London Stock Exchange in March 2013. Wind assets such as this have no fuel supply risk and the tariff structures provide a low risk income stream to investors. Due to the current market attitude towards an investment, an IPO is a viable exit route for developers once they have operated and established assets. However, the public markets have had less success with companies focused on project development. 

Case Study: Greencoat UK Wind
The London-based wind power investor is a subsidiary of Greencoat Capital, a cleantech and renewables focused infrastructure business. The company has a broad investor base which includes numerous blue-chip institutional investors. It currently has a portfolio of 16 wind farms located in the UK which are mainly based on-shore. Greencoat UK Wind was the first renewable infrastructure fund to list on the London Stock Exchange main market and is the only fund based in the UK. It successfully raised £260m back in March 2013, which was to help acquire six new wind farms from RWE and SSE.
Project development is reliant on a number of external factors outside of the company’s control, and the evidence would suggest that the time and resources needed to successfully grow renewable projects is consistently underestimated. With companies such as Kedco and Helius Energy experiencing technical and financing issues, there is a big question mark as to whether public markets are the best place for these types of companies to ply their trade. Many businesses tend to burn through cash reserves before delivering a healthy return, due to these external issues.

Companies, which have developed intellectual property in the sector, have experienced a mixed reception on the public markets, and are seen less as part of the renewable energy sector and more as general technology. Unlike renewable energy project development, technology is something the public market is used to dealing with. Therefore, the market has appeared to be more tolerant of these types of companies. Some have been able to consistently raise further finance for development, with AFC Energy, raising £6m in October 2014, for its alkaline fuel cell technology designed to reduce the cost of electricity.

The two renewable technologies which have had the most success with external finance in the sector are wind and solar. A report by the Renewable Energy Association in 2012 found that wind power businesses currently employ 31,400 staff, with combined revenues of £4bn and exports of just under £500m. A notable transaction from the report was global solar energy provider SunEdison and renewable energy company TerraForm Power’s acquisition of wind and solar power developer First Wind Holdings for $2.4bn in November 2014. Deals such as this accounted for an 80 per cent increase in M&A in Q3 2014, compared to the corresponding period of the previous year.

Solar power has also sparked interest among M&A and private equity, with renewable energy sources accounting for 29 per cent of total investment in Q4 2014. We have seen the likes of Triangle Peak Partners commit $250m into residential solar company Sunnova Energy in November last year, as well as Taiwanese smart cities start-up Gogoro securing $100m from private equity backers GSO Capital Partners and Franklin Square Partners.
Although there is evidence of both solar and wind power driving M&A in the energy sector, legislation changes are inevitably having a significant impact. In particular, the government’s Electricity Market Reform (EMR) initiative may cause an increase in M&A and public listings.

The Department of Energy and Climate Change launched the EMR programme in early 2013, with the idea of implementation to occur in late 2014 for energy businesses. The programme aims to replace the UK’s ageing electricity infrastructure with a more diverse and low-carbon energy mix. This stands to change the landscape for energy businesses, particularly developers. Whereas previously these businesses were delaying their new renewable projects due to increased uncertainty regarding legislation, EMR has provided investors with a clearer view until 2020.

There has been a history of government changes giving markets uncertainty. For example, in 2010 the Czech Republic government cut spending for solar projects of up to 45 per cent, demonstrating the risk of investing in renewable energy projects reliant on public funding. However, the UK has learnt from earlier shocks, such as the unexpected changes in the solar tariffs, and the industry has been anticipating changes to energy legislation for some time.

The rollout of CfDs (Contracts for Difference) under the EMR legislation is aimed at reducing the level of risk to projects, once an application for support has been successful. The long-term contracts offer stable and predictable incentives, which is attractive to investors in low-carbon generation.

However, whilst recent clarifications in regard to CfDs have now provided more certainty for project developers with successful applications, pre-application development will remain at risk of not receiving support. This is due to the preconditions of an application, such as planning permission, meaning that significant capital must be invested in development to reach this stage. This change in mechanism from the outgoing Renewable Obligation Certificates (ROCs) therefore places early stage project development at increased risk. It also decreases the likelihood of companies that are purely involved in renewable energy project development being viable for the public markets. Development may still be carried out by listed companies, but this will likely form a smaller part of a business supported by consistent revenue streams.

The first round of the auctioning process for CfDs has recently been completed, with contracts being signed in March this year. As all projects which received a CfD are given a 12-month window to reach financial close, we are likely to see energy companies complete a flurry of deals in the second half of 2015 and the first quarter of 2016. Zeus Renewables’ own site in South Wales was one of the first advanced conversion technology projects to successfully obtain a CfD allocation. What will be interesting is whether the public market will play a significant part in funding these new projects. We suspect, however, the majority of the capital required will come from other sources.

Whilst renewable energy company listings have been few and far between, in general the energy sector has enjoyed some success globally. Highlights include the C$723m Toronto Stock Exchange IPO of natural gas producer, Seven Generations, as well as the $1.1bn listing of exploration and production spinoff Antero Midstream Partners in December 2014.

The IPO is certainly one to consider for renewable businesses, however, providing there is a clear focus that makes them attractive for investors. The public markets, particularly in the UK, have been favourable lately, with the FTSE closing at a record high in March 2015. As the markets are continually looking for innovative businesses and investors remaining highly active, listing in this environment is an increasingly viable option for the right business.

For example, if the business already has operating assets, which are delivering decent returns, then the risk of taking the business public is far lower. As well as this, businesses with a truly innovative product or offering, providing it has strong intellectual property, will also likely benefit from listing on the markets.
In the coming years, the renewable energy sector will continue to grow as governments face increasing pressure to move away from the reliance on fossil fuels. The sector is predicted to double by 2025, as the global renewable energy capacity increases. Closer to home, the EMR will have a significant impact on driving M&A and perhaps on public listings. The business has to be right, however, with good examples over the past few years, there is no reason why the sector can’t be successful on public markets.
Andy Currie, director at Zeus Renewables, an affiliate company of Zeus Capital, takes a look at IPOs in the renewable energy sector and the reasons behind the relative lack of activity.

Posted 21/04/2015 by Reg Tucker

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