Sustainable energy and efficiency business offer strong returns, especially when combined with EIS tax reliefs
The case for investing in sustainable technologies and renewable energy generation is becoming increasingly compelling and, with the assistance of skilled fund management, the returns available are highly attractive. The fundamental drivers for sustainable energy and resource investments are strong as concerns grow about energy security and the long-term sustainability of oil supplies. Much of our energy comes from fossil fuels, which have an uncertain future. Nuclear power, for many years considered a viable alternative, is no longer a straightforward or politically palatable choice, particularly in the wake of last year’s sad events in Japan. The sustainable investment opportunity is therefore growing and will be underpinned by long-term drivers including energy and resource demand growth as the world population is forecast to rise from 7bn currently to more than 9bn by 2050.
Many emerging economies are expected to grow their GDP per capita to levels comparable to current developed markets by 2050. World energy consumption is forecast to rise by more than 50 per cent from 2008 to 2035. The International Energy Agency (IEA) estimates that cumulative energy investment of $38trn (£24.1trn) will be required for the period to 2035 to meet growing energy demand. Another driver is constraints on the supply of energy and resources, which include ‘peak oil’, water security, resource security and commodity price rises and volatility. Many fossil fuels are being gradually depleted and remaining reserves are often in regions of political instability. Opinions vary as to when ‘peak oil’ – the point after which oil production starts to decline – will be reached. However, the consensus is that the era of ‘easy oil’ is coming to an end.
Governments are also increasingly motivated to develop diverse energy portfolios so they are not wholly reliant on one particular fuel or dependent on one particular geographical region for supply. Commodity prices for resources continue to be volatile, which drives a need to stabilise prices by making supply and consumption more sustainable. In addition, water is becoming increasingly scarce. With more than 260 river basins crossing international boundaries, there is intense global pressure to become more efficient with our use of water for domestic, agricultural and industrial production, and infrastructure and technology that can help do this is highly valued. Demand for sustainable solutions provides further opportunities for investors. Falling costs for sustainable technologies, particularly with recent declines in solar photovoltaic (PV) costs, are making such technologies increasingly cost effective.
There is also a strong international push to mitigate the effects of climate change and its financial consequences, such as insurance losses and wider economic decline.Many countries have identified the sustainable sector as part of their long-term strategy for economic growth and see it as being able to generate significant numbers of jobs during a period of wider economic difficulties. The UK Department of Energy & Climate Change estimates 6.8 per cent of our energy came from renewable sources in 2010. However, the government has an EU-set goal of increasing this to 15 per cent by 2020. For the UK to meet this goal, a huge amount of investment in sustainable energy is going to be required in the next eight years. This helps make opportunities in the sector very attractive in this country.
To generate strong returns, investors should focus on deploying capital quickly and efficiently in sectors such as energy generation – including hydroelectricity, anaerobic digestion and biomass – or in energy efficiency, such as in the industrial, property, construction and water sectors. This is assisted by targeting investments where revenues are either based on feed-in tariffs which are available in anaerobic digestion, hydroelectricity and community projects, or where investments will benefit from revenues from counterparties such as local authorities or utilities. Compared with the risks, strong returns are available through investing in developing cash generative businesses, preferably with revenues from strong counterparties and contracts. If available, government feed-in tariffs for green energy generation also complement this strategy. This approach also mitigates the risk of losing money because it incorporates assets that generate a regular yield.
In February the anaerobic digestion company Adgen Energy was acquired by Tamar Energy, which announced plans to establish a network of more than 40 anaerobic digestion plants in the UK. Tamar is backed with £65m of funding from a group of high-profile investors, including Rothschild investment trust, Lord Rothschild, the Duchy of Cornwall, Middle Eastern sovereign wealth funds and Sainsbury’s. It has also won public support from the UK government for its plans to generate 100 megawatts of green electricity within five years. It is important to remember, however, that this is a highly specialist sector in which access to a pipeline of deals is extremely important.
Investors and advisers should seek out investment managers with access to so-called ‘spade-ready’ projects.
Enterprise investment schemes (EIS)
As structures for gaining access to opportunities in this sector, enterprise investment schemes (EIS) have particular attractions for UK taxpayers, principally because of their suite of valuable tax reliefs. The initial 30 per cent income tax relief that EIS investors receive can offer a significant uplift to their final returns. When this is combined with an investment strategy in sustainable businesses, a strong investment return over five years can be achieved. A further benefit of investing in a structured EIS scheme is the access it can give to highly qualified, expert and talented management teams with strong track records. They can also provide diversified portfolios of investments that will not be strongly correlated to stockmarket movements because of the secure and high quality revenues. Sustainable energy and efficiency businesses and assets offer strong investment returns, especially when combined with EIS tax reliefs that allow these gains to be received by investors unencumbered with a tax burden. Demand growth, energy security and supply constraints all offer long term investment markets. Coupled with government commitments to reduce carbon emissions and substantially increase renewable energy generation in the short to medium term, the sustainable investment market offers strong returns to investors. As a further benefit, they will also be backing businesses that can have a positive impact on our environment.
Jim Totty is managing director at Sustainable Technology Investors
Original Article : FT Advisor