By Scott Hill, Clean Energy Advisors
As direct investing in renewable energy becomes more common, especially investments available to a wider group of investors, it's important to remember there are three specific considerations you'll want to address first before you get into the common due diligence information we're all used to (management team, track record, financials, etc.). These three considerations are technology, development, and the off-taker.
Renewable energy is advancing at an impressive rate. Universities, labs, and private companies are exploring ways to create and improve renewable and sustainable energy sources. While some of these technologies hold great promise in the future, you need to be mindful of how "proven" the technology is today. Some renewable energy technologies have enough history to provide understandable and verifiable metrics. They can be used to help determine how likely the technology will create a consistent stream of revenue and return on investment today and into the future. Some technologies, however, are very new. Like pharmaceutical drugs, that need more time to determine efficacy, new forms of renewable energy need time to determine if the energy source is both scale-able and practical.
The second consideration is development risk. As technologies become more readily available and the idea of putting these technologies into service becomes more of a reality, companies will use this momentum and optimism to raise capital. Development risk is an important factor as it can take a long time to get the project from concept to completion, depending on the size of the project, zoning, and other issues. The key is understanding the likelihood that the projects will be completed in a timely fashion. How long will it take to start seeing a return on your investment? In other words, does the firm raising capital have vetted "shovel ready" projects already identified or is the company raising money first before it finds projects.
The third consideration is the "off-taker." In renewable energy, the off-taker is the customer or customers. Most projects, except residential, involve projects that are large enough to meet the needs of a large customer or group of customers. It's important to understand who the customer is, the credit quality, the contract, if any, between the company producing the power and the customer(s) purchasing the power, and how much the customer(s) receiving the power will pay for it.
Once you better understand these three important considerations, you can more quickly dig into other areas of the due diligence process. And frankly, it will help you better understand renewable energy which, for most of us, is a new type of investment.
Our world is facing some serious threats from carbon emissions. Scientists say climate change is real and needs to be dealt with immediately. Health experts are making a connection between dirty fuels and our health. Would you live next to a coal burning power plant? Would you let your kids play in water nearby that plant?
Investing directly in renewable energy is both worthwhile and meaningful. If you look closely at possible technology, development, and off-taker concerns, you can substantially mitigate risk. By knowing what to look for, you can make more informed decisions about renewable energy investments.
Scott Hill is Chief Business Development Officer of Clean Energy Advisors. CEA provides investors with the ability to directly own utility scale solar energy projects that provide predictable income, preserve capital, and create positive impact. Scott attends and speaks regularly at family office and impact investing related conferences. http://www.cleanenergyadvisors.net