Renewable energy discount rate survey

Grant Thornton, in collaboration with Clean Energy Pipeline, is pleased to present the “Renewable energy discount rate survey report”.

The survey is aimed at gauging investors’ perception of cost of capital and was distributed across ten geographies which have strong renewable markets: Australia, Canada, France, Germany, Ireland, Italy, Nordics, Spain, the UK and the USA. In total, over 100 investors responded to the survey, representing billions of pounds of capital under management.

The discount rate (a proxy of cost of capital) for secondary market renewable energy M&A deals is a vitally important piece of information for investors. It is a key driver in determining the fair value or market price for projects. However, this data is extremely hard to gather so investors often have to rely solely on their own experience and advice from valuation experts in evaluating the cost of capital.

Renewable energy is at the forefront in the fight against climate change. This has translated into rapid renewable energy commercialisation and industry expansion, therefore leading to an increase in the number of deals in the sector. Some $201 billion has been invested in utility-scale renewable energy projects alone in 2016, with wind and solar leading the industry in terms of MW deployment and deal value. The market is expected to see high growth in investments over the coming decades as project costs continue to decrease and grid parity is achieved in more and more geographies.

Renewables account for 39% of Italy’s 284 TWh of electricity generation in 2016, enabling the country to reach in advance its EU objective of at least 20% final energy consumption from renewable sources by 2020.

The situation in Italy

By 2005 Italy had introduced an incentives schemes for solar power. By 2011, Italy boasted one of the world’s largest solar power sectors which was promoted through a combination of premium tariffs, feed-in tariffs and tender schemes. However, subsequent cuts to the country’s renewables subsidy scheme almost ended its greenfield market.

Italy’s renewables market, particularly for solar, now stands highly fragmented as many investors seek to consolidate their holdings in the country through project acquisitions. In fact, notable deals in Italy in the past three years involved significant portfolio consolidation. The consolidation process is still on-going but it is becoming more difficult for investors to find notable portfolios.

Stefano Salvadeo, Co-managing Partner and Head of Advisory of Bernoni Grant Thornton, commented the survey results in an interview to Forbes:

“These values are representative of the return on capital expected by investors. Thanks to the recovery of interest rates, we can expect a new rise in the trend”, explained Stefano Salvadeo. “Also, this trend in the secondary market is expected to continue due to a reduction in quality transactions, being already subject to trading”.

“Those companies that have already developed plants and want to put them on the market can benefit from this situation and from a dynamic market. The age of small plants is over. This is the right time for optimization through scale economies”.

“The primary market doesn’t exist anymore”, explained Salvadeo, “while acquiring a plant that has been functioning for years does not imply any technological or administrative risk. We must also consider that quality locations have already been developed and that there are no new incentives planned in the short term”.