What does this mean for discount rates?
Falling technology costs, access to lower cost capital and greater independence from government support is driving investment growth in the global renewable energy sector. Rapid commercialisation and industry expansion has led to renewable energy approaching the tipping point to “grid parity” in parts of the world. Grid parity means that energy can be generated from renewable sources at a price cheaper or equal to purchasing it from the electricity grid, which still relies heavily on fossil fuels.
$201 billion was invested globally in utility scale renewable energy projects in 2016 alone, with wind and solar leading the way. Many of the sector’s active investors are the larger funds looking for long-term and stable inflation indexed cash flows. The discount rate (a proxy of cost of capital) is important for all investors, as it is key to determining the fair value or market price for projects. However, accurate data is extremely hard to access, causing investors to rely on their own experience and advice from valuation experts.
Therefore, Grant Thornton UK surveyed investors in renewable energy markets to find out typical discount rates. More than 100 investors from ten strong renewable energy markets were surveyed. Collectively, they represent billions of dollars of capital under management. Investors were asked their views on levered and unlevered cost of capital across hydro, solar, onshore wind and offshore wind projects.
Some key results of the Renewable energy discount rate survey [ 2929 kb ], include, unlevered discount rates:
- across Europe and North America average 6%, 6.5% and 7.5% for solar, onshore wind and offshore wind respectively
- in the Nordics average 5% for hydro
- in Australia average 6.75% and 7.5% for solar and onshore wind respectively.
The cost of capital needs to be considered in the context of the various underlying assumptions such as power curves, inflation, project lives, and so on: all of which will vary for each respondent.
What does this mean for investors?
There is a significant amount of capital out there wanting to find a home. Part of the appeal of investing in renewable resources projects is the asset class which has inbuilt proven technologies and inflation indexed cash flows. Renewables projects globally are attractive due to high growth projections and M&A opportunities. Environmental challenges are by nature on a planetary scale and as a result investors need solid data to back up their capital decisions.
In turn, as valuers, we need to have robust insight into each of the renewable energy sources across the markets where we value projects. When it comes to having a view on cost of capital, it is important to be as close to funds and transactions as possible. Hence, we launched this survey to help augment our experience valuing such projects and to ensure our clients are well informed.