CLEAN ENERGY INVESTING A comprehensive guide for institutional investors focusing on private assets Edited by Capital Dynamics With compliments of Dear Reader, In today’s volatile investment environment, both private and ‘real’ assets are playing increasingly impor- tant roles in traditional portfolios as investors seek new routes to return on investment. Simultaneously, considerations about environmental, social and governance issues are gaining prominence among investors all over the globe. It is against this backdrop, and that of a changing climate, that clean energy investments in private assets have quickly become a mainstream investment choice. In particular, investments in clean energy infrastructure are especially attractive as they offer some of the most unique investment opportunities available within the private asset space. Capital Dynamics recognised the return potential early, and in 2010, launched a clean energy infrastructure investment platform to capture those opportunities. We have gained extensive insight and practical experience during our pioneering work over these last years. We now have an occasion to share some of what we have learned and are thus delighted to pres- ent you with your personal copy of Clean Energy Investing. Edited by Capital Dynamics* and published by the highly respected private equity publisher PEI, this distinctive book provides a concise overview of clean investing in private assets. It features a collection of chapters contributed by experts in their respective clean energy fields – each of whom provides a high-level perspective on the clean energy market and practical information about investing into it. Whether you are already a Capital Dynamics client or are considering a partnership with us, we hope this publication will inspire you to take a closer look at clean energy investing and our extensive expe- rience within the field. It is our hope that you will find Clean Energy Investing’s 360-degree view on clean investments in pri- vate assets thought-provoking, informative, and a practical point of reference. Thank you and best wishes from your Capital Dynamics team. Capital Dynamics is an independent asset management firm focusing on private assets including private equity, clean ener- gy infrastructure, and real estate. Capital Dynamics offers investors a range of products and services including funds of funds, direct investments, separate account solutions and structured private equity products. Our senior investment professionals hold an average of over 20 years of investing experience and due diligence expertise, gained through diverse backgrounds as fund investors, direct investors, and co-investors. With 160 professionals and 10 offices worldwide, Capital Dynamics is able to deliver top-quality service to its client base of sophisticated institutional investors such as pension funds, endowments, fam- ily offices, high net worth individuals, and advisors. Headquartered in Switzerland, Capital Dynamics has offices in London, New York, Zurich/Zug, Tokyo, Hong Kong, Silicon Valley, Sao Paulo, Munich, Birmingham (UK), and Brisbane. * ‘Capital Dynamics’ comprises all affiliates of Capital Dynamics Holding AG. CLEAN ENERGY INVESTING A comprehensive guide for institutional investors focusing on private assets Edited by Capital Dynamics With compliments of Published in June 2012 by PEI Second Floor Sycamore House Sycamore Street London EC1Y 0SG United Kingdom Telephone: +44 (0)20 7566 5444 www.peimedia.com © 2012 PEI ISBN 978-1-908783-04-2 This publication is not included in the CLA Licence so you must not copy any portion of it without the permission of the publisher. All rights reserved. No parts of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means including electronic, mechanical, pho- tocopy, recording or otherwise, without written permission of the publisher. Disclaimer: This publication contains general information only and the contributors are not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Neither the contributors, their firms, its affiliates, nor related entities shall be responsible for any loss sustained by any person who relies on this publication. The views and opinions expressed in the book are solely those of the authors and need not reflect those of their employing institutions. Although every reasonable effort has been made to ensure the accuracy of this publi- cation, the publisher accepts no responsibility for any errors or omissions within this publication or for any expense or other loss alleged to have arisen in any way in con- nection with a reader’s use of this publication. PEI editor: Anthony O’Connor Production editor: Julie Foster Printed in the UK by: Hobbs the Printers (www.hobbs.uk.com) Contents Figures and tables ix About the editor xiii Editor’s introduction xv By Dr Katharina Lichtner SECTION I: GENERAL CONSIDERATIONS 1 1 The energy horizon – 2012 and beyond 3 By Walt Patterson Introduction 3 The aftermath of Fukushima 4 Traditional electricity generation 5 Challenges for investors 6 Governments, regulators and consumers: all at odds 7 Incentives are badly needed 8 2 Managing the risk of climate change and climate change regulation 11 By Guido Schmidt-Traub, CDC Climat Asset Management The case for reducing greenhouse gas emissions 11 Policy tools for mitigating greenhouse gas emissions 12 Investors and the adaptation challenge 13 The emerging regulatory framework for climate change mitigation 15 Conclusion: What does climate change regulation imply for investors? 21 3 International climate finance and clean-energy investing 25 By Dr Aled Jones, Global Sustainability Institute, Anglia Ruskin University Introduction 25 The United Nations and global expectations 25 Clean-energy investing 29 Cleantech venture capital 30 Private equity 31 Public equity 32 Clean energy infrastructure 32 Green bonds 33 Partnering for success 34 Achieving the required scale 36 Conclusions 37 v Contents 4 Promoting investment in Asia’s clean energy market 41 Private Equity International talks to Bindu N. Lohani, Johanna Klein and Anil Terway of the Asian Development Bank 5 A new opportunity in energy cooperation: The Europe-China Clean Energy Centre (EC2) 47 By Professor Shi Dan and Dr Alessandro Costa, Europe-China Clean Energy Centre Investing in innovation 47 Spreading the message 49 A new opportunity in Sino-EU clean energy cooperation 49 Mapping the path for clean energy cooperation 50 Looking into the future 52 6 Is Japan on the verge of a new energy model? 55 A trilateral conversation held in Tokyo between Nobuo Tanaka, former executive director of the International Energy Agency, Tatsuo Masuda, professor, Nagoya University Commerce and Business Graduate School and Thomas Kubr, CEO of Capital Dynamics SECTION II: CLEANTECH AND CLEAN GROWTH 65 Introduction 67 7 How to build a financially successful cleantech portfolio 69 By J. Stephan Dolezalek, VantagePoint Capital Partners and Spencer Punter, Capital Dynamics Cleantech: the opportunity 69 Is the opportunity a mirage created by government regulation? 70 Lessons learned from the first decade of cleantech investing 71 Some ‘rules to win by’ in cleantech investing 74 Overview of specific subsectors within cleantech 77 8 Investing in European cleantech 81 By Rolf Nagel, Munich Venture Partners Introduction 81 The growth of cleantech investment 82 European patents – a proxy for innovation 84 Europe’s cleantech fund managers 86 Focus on Germany’s cleantech market 87 Centralised versus distributed forms of energy 89 Energy storage will revolutionise cleantech 90 Green ICT 91 Value creation and due diligence 92 Financing aspects 93 Regulatory risks 95 Conclusion 95 vi Contents 9 Q&A: Clean-growth investment strategies and opportunities 97 Neil Auerbach of Hudson Clean Energy talks to Private Equity International about the upcoming attractive investment environment for experienced clean energy-focused private equity fund managers 10 Funds of funds in the clean growth space 105 By Keimpe Keuning and Nathalie Gresch, SAM Private Equity Introduction 105 What are clean-growth investments? 106 Value creation in the space 107 Who are the players? 110 Risks and other considerations 114 Diversification considerations and due diligence priorities 115 Due diligence 117 Regulatory aspects specific to the space 118 Four key take-aways 119 SECTION III: CLEAN ENERGY INFRASTRUCTURE 121 Introduction 123 11 Asset and portfolio allocation issues 125 By Philippe Jost, Capital Dynamics Introduction 125 From cash flows to returns 126 CEI benchmarking 130 CEI in a portfolio of assets 133 Inflation hedging 135 Conclusion 136 12 Capital protection features of renewable electricity projects 139 By David Scaysbrook and Tim Short, Capital Dynamics Introduction 139 Revenue streams and risks 140 Prospective and retrospective risk 141 Regulatory incentives 143 Protection of invested capital 144 Investment paper excerpts 147 Conclusion 149 13 Risk premium valuation methodologies: the cost of equity in US solar energy projects 153 By Rory Quinlan and Kathryn Rasmussen, Capital Dynamics Introduction