A changing clean energy market is creating a need for new ways to fund projects in the sector — and private capital firms have taken notice.

These firms are backing businesses that have adopted models outside of traditional equity and debt investments to finance clean-energy and energy efficiency projects. In one such deal, Apollo Global Management said last week it expects to invest as much as $200m in royalty-financing company Great Bay Renewables.

As improved renewable energy technologies drive down generation costs and the industry becomes less dependent on subsidies, project owners are looking for financing methods that insulate them from oscillations in electricity prices. Meanwhile, an increasingly decentralised power market is fostering a proliferation of local suppliers and customers with their own capital needs, industry experts said.

“It’s no longer about government subsidies and tax incentives. It’s about economic decisions,” said Frank Getman, Great Bay’s president and chief executive. “But while we’ve had this massive innovation on the technology front, there’s been very little innovation on the financing front.”

Getman drew on his experience in the oil and gas sector when he decided to use royalties to fund power-generating windmills and solar panel installations.

“Royalty financing has become the accepted component of the capital stack in oil and gas and mining, and we think that’s going to happen in renewables as well,” he said.

Royalty-financing structures, which give investors a cut of a project’s operating revenue, appeal to developers because they don’t involve selling equity too early in the development process, Getman said. Royalties also better align project owners and investors than debt does.

“You can’t really default on a royalty,” Getman said. If a project’s revenue declines, the investor’s share will shrink along with the owner’s, he said.

Investment firms also are backing businesses that promote new forms of financing for users, rather than suppliers, of clean energy.

For example, Generate Capital recently committed as much as $600m to Alturus, a supplier of water treatment, energy storage, power generation and related systems. The Boston-based Alturus sets up and operates these systems for its customers without requiring an upfront payment, which makes it easier for customers to commit to them as they don’t compete for capital with other corporate needs.

Private-equity firms have invested $11.28bn in renewable projects of all sorts so far this year, nearly double the $5.74bn invested in all of 2019, the American Investment Council, a lobbying group for the alternative investing industry, said Thursday, citing information from PitchBook.

As the renewable-energy sector continues to grow, firms likely will find more opportunities to back not only projects, but also project backers using new forms of financing.

“We’re going to have increasing demand with lower costs,” Getman said. “We just have to get the financing right to be able to accelerate this adoption of clean energy.”

Source: Private Equity News

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