Ways of gaining exposure to renewable energy

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Commodities - May 2013

The rapidly developing biofuels industry has helped to put renewable energy on the map, with mandated blending targets indicating that the sector is ripe for further growth.

Currently, just 6bn litres (or 4.75 per cent) of European transport fuel comes from renewable sources but as this figure needs to rise to 18.5bn litres by 2020, the renewable transport fuel market is set to triple in just seven years.

Sustainable biofuel projects are currently in a very strong position. These schemes use technology with known commercial results and operate within a supportive regulatory environment – as demonstrated by the now binding UK Renewable Transport Fuel Obligation.

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Furthermore the UK is ideally suited to domestic biofuel production, with a large transport fleet, a surplus of low-grade feedstock and an existing petrochemical infrastructure.

The renewable energy sector has undergone huge leaps in technology and development in the past few years and there are a range of projects offering attractive investment propositions with market-wide appeal.

Many opportunities in the renewable energy sector are supported by government incentives to encourage investment. As a result, these tax efficiencies can be used to enhance returns or offer downside risk protection.

Biofuel projects are particularly attractive as they usually have large capital expenditure requirements that generate in-year capital allowance relief that can be used in mitigating tax liabilities. These schemes may also contain expenditure on energy-saving plant and machinery, attracting enhanced capital allowances that generate 100 per cent first-year allowances.

Such projects tend to be sited in regeneration areas or ‘enterprise zones’, which may also attract Business Premises Renovation Allowance relief on renovation costs.

But project finance can be difficult to secure in the current climate. An alternative source of finance, which is starting to attract interest in the renewable energy sector, is ‘retail debt’.

Products often referred to as ‘mini-bonds’ with a fixed term and return have been borne out of a clear demand from retail investors.

The best-known example is energy firm Ecotricity, which raised £20m in two tranches – offering a four-year term of 6-7 per cent interest with a minimum investment of £500,000.

While other investments look towards peer-to-peer lending, doubts surround the regulation and default-rate risks associated with this type of finance. With retail debt – a proven source for raising project finance in the renewable sector – this type of investment can bypass many of the issues faced and secure the necessary funding.

Jonathan Turney is an associate director at Future Capital Partners