By Paul Raftery[1] and Dung Latieule[2]
For starters…
The world is awash with energy projects and with people passionate about their projects. Working with Pan Ocean Advisory we have sought to understand what the requirements of investors are. Jean-Michel Floc’h introduced Dung Latieule as she had several investors seeing business opportunities and many of the projects flooding into her office did not have suitable supporting documentation.
Over the last few months, Projects RH (PRH) has been working with a number of clients as they prepare to raise money for renewable energy projects. At PRH we do not like to see people spend money on materials when is clear that their project will not meet the requirements of investors.
The contents of this article should be seen as limited by our collective experience in this challenging world of energy transmission. The teams at Project RH, Pan Ocean Advisory[3], Phoenix Univers and Floc’h International[4] see many projects but not all nor do we know all investors. Following the formula outlined is no guarantee of success as every project and each investor has unique idiosyncrasies.
We hope by sharing our experiences that good potential projects will be more effectively financed. Due to mandates we have, and projects we are working on, we will need to speak in generalities.
The basics of what an investor wants:
First, we need to develop a general language of this discussion so we will start with the basics:
1) Investment size,
2) Name plate capacity,
3) stage and
4) location
These are descriptors and it does not mean investors are only looking for “A class assets in A class countries”.
The basic parameters of an investment we are seeing investors looking at is at least USD 100 million. It has a name plate capacity of 100MW. It is construction-ready, which means some investors will invest in greenfield projects. Naturally, some investors require more, but this is the baseline.
Most investors understand the world does not consist simply of A class countries but focus more on A class opportunities.
Investors generally have their own benchmarks with respect to return on investment and return on equity. In the current market, investors are going to be looking for at least 14% ROI and one certainty that they can get their funds out of the country in which they are invested.
Investors are generally neutral about political parties and do not wish to be involved in local politics. However, they are concerned about governments that wish to nationalize their assets.
The greater concern lies in the natural advantage of a country in the energy source they seek to benefit from. For instance, a solar project is more likely to succeed near the equator, but that does not mean there can be no solar projects in the United Kingdom.
Similarly, while there are concerns about the environmental impact of building dams, river run-of-river hydro projects are popular. Nevertheless, investors look for rivers that flow most of the year or hydro projects that use existing dam infrastructure.
Most investors are pragmatic; they're looking for a good project in a good location where there will be no surprises and where any tax agreement or concession they enter will be honored by successive governments.
Do Investors have preferences of any type of power project?
Investors, like all human beings, have several priorities and often wish to have a balanced portfolio even though they are focused, for example, on the energy sector. They are not looking to have all their investments in one country or in one form of renewable energy source.
We wish to be clear that the parties we have mandates from are not investing in new fossil fuel projects, and they do not include in this blue hydrogen. Likewise, most of our investors do not see the use of gas peaking as running long beyond 2050 and therefore making an investment more and more questionable each day, but today it will clearly have a life of 25 years.
We would say that the personal principles and views of the founders and partners of the major energy investment houses are critical in their investment making decision principles. They also know where they have been successful and built expertise – and where they have not.
We see the principles being driven by economics. There is a distinction between funds and some UHNW. Most funds see a primary duty to protect the environment not just for themselves but for future generations. Most see that their funds are mandated to protect and look after the community from which they are received and on which they are meant to benefit.
In contrast, UHNW-based funds have their views on the future and have a broader mandate.
Which Renewable Wins?
Before trying to find a single winner, it is important to remember that the next energy project must have a purpose for which it is built - such as a new hydrogen plant or fitting in with the existing energy mix. Most grid systems are supplied by a mix of energy providers which need to be matched to the needs of the community which the grid serves.
Looking at our collective requests, it will be of no surprise that the priority areas for investors seem to be:
1) Solar
2) Wind
3) Waste-to-energy
4) Hydrogen
5) Hydro
6) Transport fuel
7) New port terminals and storage facilities for hydrogen bunkers.
Each country has its own Experience in history, politics and taxation, climate and geological formations which influence the opportunity and efficiency of different types of renewable energy.
Solar
Solar energy may be well-established, but surprisingly there are fewer and fewer suitable sites for building arrays close to cities that can generate 100 megawatts. It's important to remember that about 60 hectares of flatland are needed.
It's also important to note that the nameplate of 100 megawatts does not indicate the dispatched power, which will only be available for about 9 hours a day. As a result, most solar power projects require battery storage or complementary base load power to be economically efficient for grid support. Solar energy alone cannot serve as base load power. We are seeing an increase in demand for solar energy to make hydrogen, as hydrogen machines can be turned off and on as power becomes available at the right price.
The best opportunities for solar energy lie in the less developed world, where people are still willing to pay more than 8 US cents per kilowatt hour. It is not uncommon for us to see prices at 11 cents, which is generally considered an attractive price. However, the transmission lines with sufficient capacity and a Power Purchase Agreement from a creditworthy or strategic organization, such as a national power authority, are critical.
Wind
Wind is surprisingly number two even though it is inconsistent and upsetting birds.
The allure of wind can be attributed to well-known wind tunnels around the world, but wind does not blow the same all the time. Wind, like solar, is not dependable for base load, but it can be stored and is great for use in industries such as the production of steel using the arc process and the production of hydrogen. It also requires an offtake agreement and storage. Together, these factors change the economics.
Waste-to-energy (WTE)
Waste-to-energy (WTE) is our third choice, and it is in high demand due to government policies that aim to phase out the burial of urban waste. There are also community pressures to recycle and reuse waste instead of just incinerating it and contributing to CO2 and methane emissions.
Importantly the waste is streamed there are intermediate products are made including making biodiesel and capturing gas emissions for turning into electricity. What we are seeing in many jurisdictions he said the government is guaranteeing disposal fees and tonnage which will ensure that the project remains profitable as they are not prepared to have the waste buried or exported.
Waste-to-energy technology is well-established, but the challenge is ensuring a constant supply of waste to keep the plant running 24/7 and generating a steady stream of energy to the grid. It is important to stream the waste to produce intermediate products such as biodiesel and capture gas emissions for electricity production. In many jurisdictions, the government guarantees disposal fees and tonnage to ensure the project remains profitable since waste burial or export is not an option.
Many of the projects we have seen are driven by carbon credits as a primary source of revenue, along with the sale of renewable gas, oil, fertilizer, heat, and electricity. Investors appreciate the multiple revenue streams.
Hydrogen
The production of hydrogen is amazing and clean. In summary, energy is applied to water to produce stored hydrogen, or ammonia converted from hydrogen, which releases stored energy and produces water as a byproduct.
Though the fundamentals of the chemistry are simple, the process is not. However, there is a significant demand for hydrogen to replace fossil fuels and for stranded energy production assets to be used for hydrogen production when the electricity they produce is not in demand. Despite the fact that mobility and transported goods are not decreasing, the method of powering them is changing. We see that public transport has led the way but private transport and long-distance haulage are likely to be enticed by hydrogen rather than fossil fuels.
The basic chemistry is well-understood, and the question now hinges on refining the application of energy and reducing the amount of energy lost between conversion and re-conversion. It is currently known that hydrogen can be made for less than USD 10 per kilo, and with the $3 per kilo subsidy included in the Inflation Reduction Act, there is a strong impetus for transportation firms in the United States to lead the way by switching to renewable hydrogen as a fuel source.
Aviation fuel
Aviation was one of the early industries to adopt its own code of responsibility for its own emissions. It is an industry with a high profile and is still considered by many to be a luxury rather than a necessity. We think we will see the aviation industry increasingly move to non-fossil fuel substitutes.
This will include products from waste-to-energy and storable renewables such as hydrogen. We believe investors, many of whom recognize the need to fly for business, will be specifically interested to see that such fuel is made available and that airlines will accept a commercial price for green fuel because they have no choice.
Storage and distribution assets
The investment community is happy to invest in storage, transmission, and loading facilities as part of the opportunities associated with the green energy transition. This willingness includes pipelines and bunker facilities for aviation gas, hydrogen, and ammonia. The same community is willing to invest in battery storage and trading around key assets. These generally occur as a bolt onto a strategic investment. It is often the way that investment gets monetized.
For example, a solar energy project may be exclusively for the making of hydrogen, which is turned into ammonia and exported. This specific example is already happening around the world. Importantly, the investors we are working with are very clever people, and they understand the opportunities needed to take advantage of monetizing the activity of the renewable energy opportunity. Our investor community is keen to see the integrated project linked to a secure revenue source.
What is the bottom line?
Given that most investors are agnostic, to some degree, when it comes to technology and location, their main drivers will be risk and return. We believe investors are seeking an ROI of 14% and an ROE of at least 25%. We anticipate customary margin risks, such as political and supply chain disruptions. Benchmarking will likely be done in USD.
The commercial price point must be sufficient to justify the investments in this sector, which we believe will require a minimum ROI of 14% and ROE of at least 25%.
What data are investors looking for?
Investors are time-poor and prefer traditional forms of communication to quickly make decisions. Unfortunately, many projects risk being ignored if not presented in a user-friendly manner. Projects should be presented with an endorsement from a source that is seen as reliable, particularly if they have worked together before.
The Project RH business model and how we prepare our materials for the consideration of investors has proved a successful format and is similar to the major energy and resources companies’ model. We provide our clients with a financial model for at least five years as a single point of truth. This model includes:
1) Balance Sheets,
2) Profit and Loss Statements,
3) Cash flow statements,
4) Sources and Application of Funds table, and
5) An investment evaluation based on a clear ROI an NPV at a discount rates of 15% and 20%
At Projects RH, we are still required to produce information memoranda that contain all the usual materials, with a clear focus on the capacity and experience of the management. What is interesting is that investors continue to show a strong interest in ensuring that the management they see will stay with the project, and that they have at least 10 years of experience in the energy sector. There are no concessions on the presentation.
The general feeling is that if a project is not willing to have a strong presentation with appropriate pitch tricks and teaser documents, they are not serious about raising money.
As we have discussed, investors are being asked to invest at least USD 100m or more, and when it comes to that, they require their parties to come to them with first-class materials. This is not only a mark of respect but also to demonstrate that they understand the business they are in and show that they can look after their money. Management of these businesses’ risks, as seen by investors, is far more important than political risk. They are saying that candidates need to get the first thing right first. Many see the technologies and opportunities we show them as being transferable. The work we do with renewables, they can already envisage in other locations, so most of the investors we work with are capable of repeat transactions.
First things first
There is capital available for good renewable energy projects in most parts of the world. The global investment unit is USD 100m or more as this covers all the transaction costs. The investors, in aggregate, are happy with a multiplicity of renewable energy generation and storage technologies. The ROI must be 14%, and the ROE at least 20%.
Money is there for good projects with good management.
Investors do have hurdles, and communications with the investment community must be in their language and meet all their information needs.
Is your energy project ready to meet these challenges? And, do you want to get your documents prepared professionally so that it can be present to the investor community by the team? Please contact Projects RH. As Yoda said: “Do. Or do not”.
By Paul Raftery, CEO of Projects RH and Dung Latieule, Director of Phoenix Univers Limited. We are happy to receive questions of comments at paulraftery@projectsrh.com
----------------------------
[1] Paul Raftery is the CEO of Projects RH (PRH) and has a long career in the financing of energy and mineral projects. His current interests include property, food and mineral processing. Whilst based in Sydney he works on a daily basis with the PRH teams in the Americas and Asia. In the last 6 months he has spent 6 weeks in Asia and 6 weeks in the Americas. PRH is a hands-on consulting business. Please see www.projectsrh.com and https://www.linkedin.com/in/paul-raftery-5706794a/
[2] Dung Latieule is Director of Phoenix Univers Limited, with special responsibility for energy projects. She is based in London and is mandated by a number of firms to secure property and other assets for funds and private UHNW (Ultra High Net Worth) investors. Dung was born in Vietnam and educated in Paris where she competed her master’s degree in business and administration at the Sorbonne. After living many years in Paris, post covid-19 Dung and her husband moved to London.
Dung commenced her professional career with Deloitte Touche in France before moving into international property, infrastructure assets, telecommunications and sourcing of investments and products. Today Dung has a wide portfolio of activities and today will share with us her guidelines for green energy investments based on her mandates.
Her current focus is on large projects (USD 100m+) and she is a constant traveller fulfilling a number of mandates. https://phoenixunivers.com/ and https://www.linkedin.com/in/dung-latieule-3b672111/
[3] Pan Ocean Advisory Group Limited (POAG) is headquartered in Hong Kong but has a major presence in Vancouver. It is lead by its Executive Chairman, John Taylor Martin (a.k.a. “Jack”) based in Hong Kong. POAG has representation in 42 centres around the world. (See; https://www.linkedin.com/in/john-taylor-martin-175562114/ and www.panoceanadvisory.com
[4] Dung and I were introduced to each other by Jean-Michel Floc’h of Floc’h international Group, who spends most of his time between Shanghai and Sydney. Jean-Michele works with us in this area. See http://www.flochinternationalgroup.com/ and https://www.linkedin.com/in/jeanmichelfloch
