It's been a momentous year in many of the markets that we cover. Graham Cooper and Sophie Robinson-Tillett reflect on some of the key developments.
The dramatic slump in the price of crude oil has triggered a sell-off in many renewable energy stocks, as some investors believe it makes 'green' energy less financially attractive. But there have been some innovative and bold moves from the renewables industry in 2014 which illustrate a sustained appetite for the sector from a wide range of financial institutions.
In May, the Dutch project Gemini became the largest project-financed offshore wind venture in history, securing €2.8 billion ($3.4 billion) in debt and equity to pay for its construction. 70% of this financing took the form of non-recourse debt, and the deal closed oversubscribed, showing a real willingness by investors to take construction risk on major projects, if the transaction is structured well.
In the UK, a spate of listed renewable energy funds tapped the market in the second half of 2014, with varying degrees of success. In October, Greencoat Wind smashed its £100 million ($155 million) target, raising £125 million in a share placement. Foresight Solar, on the other hand, was hurt by volatile equity market conditions when it raised just over £60 million in the same month – well below the £100 million it was hoping for.
In addition, Bluefield Solar Income Fund, The Renewables Infrastructure Group (TRIG) and NextEnergy Capital all placed shares in the last quarter of the year.
This flurry of fundraising in the UK market took place against a backdrop of major regulatory change for renewable energy in the country. In April, the government rolled out an early form of its new subsidy regime – contracts for difference (CfDs) – which will replace the current renewables obligation certificate (ROC) programme before the end of the decade.
Bidding for the second round of CfDs was scheduled to begin early in December, but has been postponed following appeals from some companies excluded from the auction on eligibility grounds. Industry experts now expect bidding to commence in February
CfDs use a 'reverse auction' process to select projects that can provide energy to the grid at the cheapest price. Baker & McKenzie's Graham Stuart, told Environmental Finance that uncertainty about the new regime was the "biggest issue" of the year for his London-based environmental markets practice.
Bidding for the second round of contracts was scheduled to begin early in December, but has been postponed following appeals from some companies excluded from the auction on eligibility grounds. Industry experts now expect bidding to commence in February.
Across the Atlantic, some US players are hopeful that the pricing of renewable energy certificates (RECs) will benefit from the fall in oil prices, as fewer renewable energy projects come online, generating fewer new certificates for the market. Certainly, RECs programmes throughout the country have seen strong price growth this year, with prices in the Pennsylvania-New Jersey-Maryland Interconnect – the biggest electricity market in the US – rising from $12 to $17.
The US has also been leading the trend for renewable energy yieldcos – firms that only own operational assets, and can be spun off from a larger utility or developer to provide an investment option that carries no construction risk.
New York-listed SunEdison floated Terraform earlier this year, raising 10 times its original target. The yieldco has been active throughout 2014, acquiring renewables firms Hudson Energy Solar and First Wind over recent months, as well as a fleet of 39 solar projects from Capital Dynamics US Solar Energy Fund.
Following the success of Terraform with investors, SunEdison announced plans for a second yieldco, this time focused on its assets in Asia, which is expected in the next few months.
Following the success of Terraform with investors, SunEdison announced plans for a second yieldco, this time focused on its assets in Asia, which is expected in the next few months.
In Spain, Abengoa Yield was 17 times oversubscribed when it floated, and the firm has recently said it will reduce its stake in the yieldco. SunPower and Canadian Solar are also expected to bring yieldcos to the market in the year ahead.
Another major investment trend of the year was the dramatic growth of the green bond market, which trebled in size to more than $35 billion, from just over $11 billion in 2013. And, along with greater issuance, came more maturity in the form of bigger issues, a greater variety in credit quality, tenor and currencies, more corporate issues and several new market indexes.
Among key milestones in the evolution of the market were the publication of the Green Bond Principles in January which attempted to address some of the concerns about transparency and integrity, and the €2.5 billion ($3.1 billion) issue from GDF Suez – the biggest to date.
Further rapid growth is expected in 2015, but fundamental questions remain, including what exactly qualifies as 'green'.
This question will be of particular concern as more mainstream institutional investors enter the market. Many issuers reported growing interest this year from these traditionally conservative firms, such as pension funds and insurance companies.
Zurich Insurance, one of the most active investors in the market, announced in July that it planned to invest $2 billion in the market, double its original target
Zurich Insurance, one of the most active investors in the market, announced in July that it planned to invest $2 billion in the market, double its original target. Two months later, Barclays pledged to increase its investments in the market from £430 million ($669 million) to at least £1 billion by the end of 2015.
Another significant issue for investors this year was the well-publicised risk of certain oil and coal being rendered unburnable, or 'stranded', as a result of price moves or climate change regulations. The potential financial implications of this risk were hammered home in a series of reports from the Carbon Tracker Initiative (CTI) and others.
In a detailed analysis of the oil market in May, the CTI argued that some $1 trillion of oil reserves already earmarked for development over the next decade are economically viable only when the oil price is above $95/barrel. Since then, the price of Brent crude has plummeted to around $60.
A later report on the coal industry warned that "the economics of coal are not good … coal prices are down; returns are down [and] share prices are down." It called on institutional investors to engage with coal producers to ensure they maximise value, either by redeploying capital away from high-cost projects or by returning cash to shareholders.
These warnings were echoed by several influential voices over the course of the year, including ratings agency Standard & Poor's and Mark Carney, governor of the Bank of England. A slew of institutional investors took note and several announced plans to divest wholly or partially from fossil-fuel companies.
Norway's $800 billion Government Pension Fund Global – the world's largest sovereign wealth fund – set the ball rolling when it announced it had sold half its holdings in coal companies in the past two years. Others followed suit, including the $860 million Rockefeller Brothers Fund and the SEK840 million ($117 million) Second Swedish National Pension Fund (AP2).
And, at the UN Climate Summit in September, the Portfolio Decarbonisation Coalition was launched with the aim of 'decarbonising' $500 billion of institutional investments. Founders included two of the largest asset manager in Europe – Amundi of France and the Fourth National Pension Fund of Sweden (AP4).
Many large mainstream investors, however, believe that engagement with fossil-fuel companies is a more practical approach than divestment
Many large mainstream investors, however, believe that engagement with fossil-fuel companies is a more practical approach than divestment, as highlighted in a Roundtable organised by Environmental Finance in November.
A key argument of advocates of the stranded assets hypothesis is that regulations to combat climate change may prevent many oil and coal reserves being used because burning them would lead to a dangerously high concentration of greenhouse gases (GHGs) in the atmosphere.
The reality of this possibility was underlined at the New York Climate Summit where UN secretary general Ban ki-Moon said 125 heads of government reaffirmed their determination to limit global temperature rise to less than 2°C, with many advocating a peak in GHG emissions before 2020 and a decisive reduction in emissions thereafter.
This renewed resolve to tackle global emissions of greenhouse gases was evident in the following weeks which saw major announcements from the EU, China and the US, among others.
The EU's new climate and energy policy framework for 2030, approved in October, committed the 28 member states to:
- cut GHG emissions to at least 40% below 1990 levels;
- have at least 27% of EU energy consumption derived from renewable sources; and
- aim for an improvement of at least 27% in energy efficiency compared with 1990.
The following month, in an unprecedented joint statement by the US and China, Beijing pledged, for the first time, to reduce its absolute level of emissions, while President Obama committed the US to reduce its GHG emissions to 26%-28% below 2005 levels by 2025. This compares with a current US target of a 17% reduction by 2020.
The EU carbon market was also buoyed by the 2030 targets and proposals to remove the substantial overhang of emissions allowances that have depressed prices in recent years. The average price of EU allowances for the year was 30% higher than in 2013.
China later confirmed that a national emissions trading programme would play a key role in helping it achieve its overall emissions reduction goal.
The pioneering EU carbon market was also buoyed by the 2030 targets and proposals to remove the substantial overhang of emissions allowances that have depressed prices in recent years. The average price of EU allowances for the year was 30% higher than in 2013. Several analysts predict even stronger gains next year.
The younger US carbon markets in California and the north-eastern states are also expecting to see higher prices and trading activity next year thanks, in part, to the Environmental Protection Agency's June call for power plants to cut their emissions by 30% from 2005 levels by 2030.
The agency is encouraging states to look at regional approaches and to consider using emissions trading, to help them meet this goal, market insiders say.
But not all countries share this enthusiasm for GHG markets. Australia, notably, turned its back on carbon trading in July when the government repealed the previous administration's Carbon Pricing Mechanism.
And the year ended with a whimper, rather than the hoped for bang, as the UN's annual climate change meeting ended in Lima with the bare minimum of progress required if, as intended, a new global agreement to curb climate change is to be agreed in Paris next December.
"Two weeks of climate negotiations in Lima started well, but deteriorated into a disappointing outcome," concluded Zoe Knight, head of HSBC's climate change centre, and Wai Shin Chan, a climate change strategist at the bank.
"All is not lost, since many countries are working on their own climate plans, but there is a tough year of talks ahead," they added.