Renewable

`` Energy: Growing sources of investment

November 24, 2014

Driven by improving sector dynamics, renewable energy witnessing emergence of newer

investment options in the capital markets segment
The global renewable energy market has grown rapidly over the past few years, propelled by rising environmental awareness and the
need to ensure energy security, aided by technological advances that have led to lower installation costs. These positive developments
have encouraged companies to initiate a greater number of large-scale renewable energy projects, thus increasing the financial needs
of the industry. Although funding through traditional sources (government and supranational banks) continues, increased private sector
(non-government sources) participation is required in meeting rising financing requirements in order to ensure rapid yet sustainable
expansion of the industry in the coming years.

The debt and equity capital markets have access to a significant base of funds and investors with varied levels of risk appetite, making
them among the most likely avenues that the sector can turn to meet its funding needs. Encouraged by rising investor interest in the
sector due to its attractive growth prospects, newer investment options in renewable energy, such as green bonds and YieldCos have
begun to emerge in the capital markets, which have been very well received. We analyze the increasing relevance of these newl y
emerging funding options, considering the changing industry landscape and funding scenario.

Global Renewable Energy Investment Scenario

Despite uncertain market conditions and concerns over government policies, the renewable energy sector has expanded rapidly over
the past decade. Globally, new investments in renewable energy in 2013 have been estimated at USD214bn by Bloomberg New
Energy Finance (BNEF). Renewable energy projects (excluding large hydro projects) accounted for 43.6% of the new generating
capacity installed worldwide, raising its share in global power generation from 7.8% in 2012 to 8.5% in 2013 and the share of global
power capacity to 13.7% in 2013 from 12.6% in 2012. BNEF estimates that about 81GW of new renewable energy capacity (excluding
large hydro projects) was added in 2013, slightly lower than the 88GW added in 2012. Although solar photovoltaic (PV) capacity
additions went up by about 26% in the period, wind capacity additions fell to 31GW in 2013 from 44GW in 2012, mainly due to
uncertainty over the impact of the expected expiry of the Production Tax Credit in the US.

Global Renewable Energy Investment Scenario – 2013 (USD bn)

New investment in renewable energy by asset class
Renewable Energy contribution to power generation
300 CAGR 21% 279 50% 43.6% 43.6%
250 38.9%
250 227 40%
214 32.4%
28.8% 30.5%
200 171 168
146 30%
150
18.5%
100 20%
100 12.6% 13.7%
65 10.2% 11.4%
7.6% 8.3% 9.2%
40
50 10%
0 5.2% 5.3% 5.9% 6.1% 6.9% 7.8% 8.5%
0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2007 2008 2009 2010 2011 2012 2013
Asset Finance Small-distributed capacity RE as % of global power capacity
Public Markets VC/PE
RE as % of global power generation
Government R&D Corporate R&D
RE capacity as % of new global power capacity
Source: UNEP, Bloomberg New Energy Finance
*Asset finance volume adjusts for re-invested equity. Total values include estimates for undisclosed deals

Declining costs increase sector’s competitiveness; lower dependencies on policy support a positive sign
Although a decline in total investments by about 14% was witnessed in 2013, a significant portion of it is attributed to decline in
installation costs, especially for onshore wind and solar PV projects. A sharp reduction in the costs of solar PV cells resulted in
installation of a record amount of PV capacity at about 39GW, against the 31GW witnessed in 2012, though the investment amount in
PV in 2013 was at USD104bn, 23% lower than its 2012 level.

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Renewable
`` Energy: Growing sources of investment
November 24, 2014

Lower costs and enhanced efficiencies enabled renewable energy projects, to be built in several locations across the globe, without
subsidy support. There were concerns over future policy support for renewable energy leading to delays in investment decisions in
2013 in few countries, especially in Europe and the US. However, many countries such as Brazil, South Africa, and New Zealand
witnessed new projects being set up and operating successfully, with no subsidy support.

Continued strong investment in public markets and asset finance; venture capital and R&D investments lag
Over the past 10 years, asset financing has been one of the major avenues of investment, constituting more than 60% of the total new
investments every year, as the industry continues to witness substantial activities in setting up renewable energy generation projects
through balance sheet or bond/debt financing. Investments in small-distributed capacity (investments in small-scale capacity) have
picked up since 2009, with the emergence of small-scale investment avenues in the sector, mainly solar, both at residential and
community levels.

Investments in venture capital (VC) and private equity (PE) have declined over the period, with VC/PE constituting just 1% of the total
investments in 2013, as investors have been unable to narrow down the suitable exit opportunities. In contrast, investments in public
markets (equity investments in renewable energy companies) have increased at a CAGR of 51% over the last 10 years, driven by
increasing public awareness, emergence of newer companies, and renewed optimism on the growth prospects of the sector.

Promising growth prospects ahead

Strong growth is expected in the renewable energy sector over the next decade as an increasing number of renewable energy
projects are now economically feasible and less dependent on government support. This is due to technological advances
resulting in lower capex requirement, growing funding sources leading to lower cost of financing, higher access to the grid,
and rising environmental awareness.

Although initial investments in renewable energy were made by developed nations, specifically the US and countries in Europe,
developing nations have rapidly increased their focus on renewable energy investments in the last 10 years. Global investment in the
sector in the past decade has been majorly driven by a high CAGR of 42% in China, 37% in the Middle East and Africa, and 27% in the
Americas (excluding the US and Brazil). Considering the clean energy targets set by many developed nations and the immense growth
potential in larger developing economies, investments in the sector are expected to increase significantly in the coming years. BNEF
expects renewable energy to constitute 65% (USD5.1trn) of the estimated investment of USD7.7trn in power, and 60% of the total new
capacity additions expected over the next 15 years, and the share of fossil fuels in power generation is likely to drop from the current
level of 64% to 44% in 2030.

Global Renewable Energy Investment Outlook – 2030

Global installed capacity mix – 2012 and 2030 Aggregate energy investments by 2030

6%
33.8%
Fossil Fuels
44% 66.2%
2012 30% 2030 Renewables
51% 10,569 GW Nuclear USD7.7trn
64% 5,579 GW
Others
Renewables

5%

Source: UNEP, Bloomberg New Energy Finance, Aranca Research

In the past, levelized costs of energy for renewable energy was higher than that of conventional energy, with the exception of large-
scale bio-energy and hydro plants, thus remaining dependent on government policy and subsidy support to remain competitive.
However, recent technological advancements have ensured a rapid decline in initial costs for setting up renewable energy
infrastructure, especially for solar PV and onshore wind energy generation capacities. According to BNEF, the levelized cost of
generating crystalline silicon PV, crystalline silicon PV with tracking, and thin-film PV fell 53%, 49%, and 34%, respectively, during the

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Renewable
`` Energy: Growing sources of investment
November 24, 2014

period from 2009 to the beginning of 2014. More advancement in technology is expected to lower the costs further, increasing
competitiveness and reducing dependence on policy support. Investment costs in solar energy, in particular, are expected to decline to
fully competitive levels over the next decade.

While concerns over future policy support for renewable energy delayed investment decisions in 2013 in numerous countries, especially
in Europe and the US, declining costs are expected to ensure lower dependency on subsidies and policy environment in the future.
However, going forward, policymakers across the globe need to have a clear policy outlook and ensure proper phasing-out of policies
(in line with lowering costs) to enable stable growth of renewable energy investments.

Capital Markets – A sustainable solution to the sector’s funding requirements

Earlier, renewable energy companies were mainly financed through government funding and supranational banks, as the industry was
in a nascent growth stage and required financial support for continued growth. Recently, as declining costs and increased
environmental awareness have been propelling growth in the renewable energy industry, the expanding scale of projects and capital
intensive nature of the sector have led to rising financing needs, both in the utility-scale and small-scale renewable energy projects.
Although funding through traditional sources (government and supranational banks) continues, there is an immediate need for higher
participation from private (non-government) sources in meeting rising financing requirements so as to ensure rapid yet sustainable
expansion of the industry in the coming years

Considering the increasingly positive outlook on the sector’s growth prospects, recently institutional funds (global pension funds,
insurance companies and other institutional investors) and individual investors have been looking to tap into this opportunity to invest in
the sector. Encouraged by rising investor interest, newer products such as green bonds, green asset-backed securities (Green ABS),
and yield-oriented equity structures called YieldCos have entered the debt and equity capital market arena. These products are
structured differently to cater to different levels of investor risk-return appetite, whereas in the past, investment options have been
largely restricted to growth-only returns. The reach of capital markets, and the varied investor base that it caters to, makes the scale of
funding that can potentially be availed through the capital markets much higher compared to the conventional sources.

Significant surge in demand for green bonds; securitized products gaining traction
Bond funding is a popular financing mechanism among conventional energy and infrastructure companies. Over the past three years,
green bonds, which fund renewable energy initiatives, have gained strong momentum in the international debt capital markets.
According to BNEF, green bonds worth a record USD16.6bn have been issued as on 2 June 2014, already higher than issues totaling
USD14bn in 2013. BNEF estimates the total value of green bonds issued in 2014 to reach ~USD40bn, if the current pace is maintained.
While the green bond issuances by government entities (USD1.3bn until 2 June 2014) and supranational banks (USD6.1bn until 2 June
2014) continue to be a reliable source of funding for the corporate and a low-risk investment avenue for investors, green bond
issuances from other sources has increased as well.

Historical Green Bond Issuance by Type (USD bn) and Growth Drivers
20 Project Bonds: Driven by technology
advancement, lower project-related risks
Bond Issuance ($bn)

15 Government Bonds: Issuances from European

nations and developing countries as well
10 Green ABS: Increasing use as a funding avenue
by pooling together numerous smaller projects
5 Corporate issued bonds: Source of liquidity for
corporate, no implementation risk for investor
0 Supranational Bonds: Increasing emphasis on
2008 2009 2010 2011 2012 2013 2014* climate change, renewable energy & transmission
Source: Bloomberg New Energy Finance, Aranca Research
*2014: data as on 2 June, 2014

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Renewable
`` Energy: Growing sources of investment
November 24, 2014

What has been driving the rapid growth in green bonds?

Institutional investors such as pension funds, mutual funds, insurance companies, sovereign wealth funds, and endowments are natural
markets for bonds due to the low-risk profile and the steady nature of returns. Currently, increasing environment awareness has caused
over USD13trn of global assets under management to incorporate ESG (environmental, social and governance) issues into their
investment decisions. With the pricing of many of these bonds being comparable with conventional bonds, investors have the option of
investing in environment-friendly initiatives, without foregoing returns. Additionally, the risk-return profile of many of the issuances has
been attracting attention of mainstream investors as well. The growing interest in the asset class is evident from the fact that many of
the recent green bond issuances have been oversubscribed.

Self-labeled corporate green bonds – leading the boom in green bond market
The proceeds from self-labeled corporate green bonds are used to fund environment-friendly initiatives. These bonds are a recent
phenomenon, with issuances being witnessed from early 2013. The self-labeled corporate green bonds have expanded their presence
rapidly to become one of the major drivers of the surge in green bond issuance over the past year. This year, until 2 June 2014,
corporate green bonds worth nearly USD7.1bn were issued, constituting more than 40% of the total green bonds issued.

Corporate Green Bond Issuances

Amount Issue (USD
Issuer Name Tenor Maturity Date Coupon S&P Rating
mn)

Svenska Cellulosa AB SCA 77 5.00 Feb-19 2.500% A-

Svenska Cellulosa AB SCA 154 5.00 Feb-19 1.596% A-
Skanska Financial Services AB 130 5.00 Aug-19 1.863% NR

Unibail-Rodamco SE 1025 10.00 Feb-24 2.500% A

Vasakronan AB 102 5.00 Mar-19 1.604% NR

Vasakronan AB 55 5.00 Mar-19 2.473% NR

Unilever PLC 414 4.73 Dec-18 2.000% A+

Iberdrola International BV 1037 8.50 Oct-22 2.500% BBB

Vasakronan AB 152 2.50 Oct-16 1.255% NR

Regency Centers LP 250 10.08 Jun-24 3.750% NR

GDF Suez 1640 6.00 May-20 1.375% A

GDF Suez 1777 12.00 May-26 2.375% A

Rikshem AB 15 2.00 May-16 1.149% NR

Vasakronan AB 152 2.50 May-16 1.315% NR

Vasakronan AB 46 2.50 May-16 1.774% NR

Source: Bloomberg, S&P Rating, Aranca Research

Green bonds are turning into an attractive alternate source of funding for corporate issuers, ensuring higher liquidity. Self-labeled
corporate green bonds function in the same way as international and supranational bonds, as their proceeds are used to fund green
initiatives. However, proceeds from these bonds are linked to the balance sheet of the company, thus receiving the credit rating of the
issuer, making these bonds less risky than green project bonds. The yield of a green bond is similar to that of a conventional bond
issued by a company, while attracting a more varied base of investors due to its green nature. In the long term, any pricing or bond
duration advantage that issuers could command on green bonds due to high demand is expected to significantly impact the operational
efficiencies of the issuers and considerably increase the number of issuances, thus expanding the market.

Although the green bond space has witnessed substantial growth, it is still comparatively new and smaller in size in comparison to the
overall bond space. The market has to expand significantly to attain the level of liquidity that could retain institutional investors.
Although the increasing size of issuances over the past few years has been an encouraging sign, the market is still a long way from

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Renewable
`` Energy: Growing sources of investment
November 24, 2014

achieving maturity. Additionally, there is an immediate need to enhance the operational aspects of the green bond market and finalize
the definition and implications of ‘green bond’ classification.

Improved credit ratings, usage of guarantees increase attractiveness of project bond market
Project bonds are secured to fund the development of individual projects and have traditionally been restricted to bank funding, mainly
due to the construction risks involved and the long due-diligence process required to estimate the profitability of the project. However,
with technological advancements lowering the risks associated with project implementation, bond funding has been steadily gaining
popularity in the project financing stage. In 2013, project bonds worth over USD3.1bn were issued, and the total size of project bond
market was estimated at USD7.8bn. Major projects that have been funded through project bonds in the past year are Solar Star PV
Project (by Berkshire Hathaway Energy), in which the issue size was USD1bn (making it the largest project bond issue till date), and
wind farm projects by Exelon (Continental Wind) and Greater Gabbard Offshore OFTO.

Project Bond Issuances – Historical Trend

8% Oaxaca IV, BBB- Oaxaca II, BBB-

7% Baldwin , NAIC 2 Arlington valley, BBB- Solar Star, BBB-

Continental wind, BBB-
Desert Sunlight , BBB- Mount Signal, NR
6% Comber, BBB
Granite Reliable power, BB
Greater Gabbard Offshore
5% Topaz, BBB-
Genesis , A- Link, A-
Coupon

St Clair , BBB Topaz II, BBB

4% Arise AB, NR
Genesis , AAA
Desert Sunlight, AAA
3% Westmill solar co-op, NR
Solar power generation ltd,
Granite Reliable power, AAA NR
2% Renewable financing
Foresight group, NR
company,

1%

0%
Aug-10 Feb-11 Sep-11 Apr-12 Oct-12 May-13 Nov-13 Jun-14 Dec-14

Rating Range : AAA + to A- BBB+ to B- Not Rated

Source: Bloomberg New Energy Finance, Company sources

*Size of the bubble indicates bond issuance size

For issuers, project bonds provide a steady and economic source of funding to meet their capital requirements, with long tenures
averaging more than 20 years, ensuring repayment is scheduled after stabilization of operations. Issuers have started using various
credit enhancement and guarantee mechanisms to enhance the quality of offering, thus boosting investor confidence and lowering the
riskiness of investment. According to a report on Bonds and Climate Change by Climate Bonds initiative and HSBC, 18% of project
bonds achieved AAA rating due to loan guarantees from the US Department of Energy. The USD496mn bond issued to fund the
Greater Gabbard Offshore transmission link in 2013 was the first clean energy bond to use partial guarantee (15%) from the European
Investment Bank (EIB) as a part of the EU’s Project Bond Credit Enhancement program to attract investors. The impact of using rating
instruments is highlighted by the significant pricing difference that the better rated bonds have been able to command historically.

Securitized products, innovative structures provide additional investment opportunities

Green securitized products are one of the newest investment avenues to have emerged in the green bond market, with the first
issuance being witnessed in 2013. The issue proceeds raised so far total USD2.08bn. New funding structures such as green asset-
backed securities (ABS) and international hybrid bonds such as ‘Samurai’ bonds (yen-denominated bonds issued in Tokyo by foreign
companies), and ‘Kangaroo’ bonds (Australian dollar-denominated bonds in Australia by foreign companies) have gained popularity
over the past one year.

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The evolving securitization market is expected to encourage pooling of renewable energy assets and provide funding to small
renewable energy initiatives, which may not have the financial strength to raise funds on their own. This would imply that investors in
securitized products and green bonds that raise funds for multiple projects would have the advantage of diversification across projects.
Additionally, as ABS pools are categorized into several tranches, with each tranche belonging to a different credit category and offering
different returns, securitization caters to a wider investor base. ABS structures are specially expected to benefit small-scale residential
and commercial solar projects as they are too small to use the conventional capital market methods. However, to ensure the continued
success of this asset class, it is imperative to ensure standardization and transparency across product offerings. The market is
expected to expand and witness larger offerings, as the transaction structure and associated risks of the product are understood better.

Yield-oriented structures and positive investor sentiment propel growth of equity capital markets
In 2013, clean energy share prices recovered 54% and more fund raising activities were witnessed through the equity markets. While
overall investments in renewable energy declined 14% from 2012 to 2013, public market investment grew 201% over the same period,
spurred by a rally in clean energy shares and by investors’ increased appetite for funds offering solid yields on portfolios of operating
projects.

The Wilderhill New Energy Global Innovation Index (NEX) comprises 102 clean energy stocks worldwide. Since 2011, for more than
two years, the NEX had been witnessing a decline and trading below the S&P 500 due to policy uncertainties and fears of lack of
demand due to the economic slowdown. However, since mid-2013, NEX has outperformed the S&P 500, with the NEX gaining about
46% from April 2013 to October 2014, while the S&P gained by about 27% at the same time, reflecting the increasing confidence of
retail investors in the sector.

Price Performance of NEX and S&P 500 (2004 - 2014)

350 NEX peak in 2007

Post the decline in
300
2011, NEX has started
250 recovering since 2013

200
150
100
50
-
Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14
NEX (indexed) S&P 500 (indexed)
Source: Bloomberg
Note: Prices rebased to 100 as on September 2004

Innovative YieldCo structure gaining popularity; continued success of listings highlights market potential

Recently, yield-oriented structures of financing termed YieldCos, similar in structure to REITs and MLPs, have gained popularity in
raising funds for renewable energy companies. Under the structure, vehicles holding specific energy generating assets with long-term
contracts in place are listed on exchanges to raise funds, and they propose to pay a constant stream of dividends through the income
realized from these assets. While a few renewable energy companies with YieldCo-like characteristics have been publicly listed for
many years in Canada, the trend of YieldCo listings started with the listing of Greencoat UK Wind, which raised USD415mn in March
2013, with a pledge of 6% annual returns in the form of dividends. Additionally, many YieldCos are given the option of access to
additional assets of the parent company, which could supplement dividend income in the future.

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Not all renewable energy offerings involved specifically created funds, with renewable energy companies such as Silver Spring Network
and BioAmber opting for direct listing in the exchanges. Anemos, a Greece-based renewable energy company, has filed for an IPO,
which would be the first public offering in the country in the past five years.

YieldCo Attractiveness Performance History – Major YieldCos

Investor perspective 300

Regular
Cash Flows
250
Future
Diversificati growth -
on benefits parent 200
company

150
YieldCos

Funding 100
from
Lower cost
diverse
of capital
investor 50
base Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14
Unlock
potential of NRG Yield Pattern TransAlta
assets
Company perspective Terraform Brookfield Abengoa

Source: Aranca Research Source: Bloomberg

*All stocks have been rebased to 100

The increasing viability of renewable energy projects and the promise of steady cash flows have increased the attractiveness of the
sector to investors seeking a safe and steady-yield investment avenue. YieldCos have witnessed significant growth in the market, with
most YieldCos trading at a much higher price than their initial listing price. NRG Yield, spun off by parent NRG Energy Inc. in July 2013,
seems to be leading the trend, having witnessed more than 100% increase in price over its lifetime of trading. Other major YieldCos,
including Pattern and TransAlta, have also witnessed significant price gain. Although credit agencies have raised concerns with the
YieldCo structure, stating that moving a portion of a developer’s reliable source of revenue into another entity may affect the parent’s
credit profile, companies have continued to opt for this mode of fundraising, with 2Q 2014 alone seeing eight clean energy IPOs
(including YieldCos) totaling USD1.1bn in value.

Positive fund-raising scenario witnessed in clean-energy funds

Over the past year, clean energy funds have been able to raise significant financing for various renewable energy projects. The US and
European market witnessed the most fundraising and the initial fund targets were surpassed in many cases, indicating growing demand
for renewable energy investments despite the relatively long investment period (average of 10 years or more). These funds recorded
major inflows from institutional investors, such as pension funds and treasury divisions of banks, indicative of their increasing interest in
the sector.

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Funds raised by major clean energy funds

Fund/Company Amount Raised Period Usage of proceeds

25% shall fund renewable projects in western

DIF Infrastructure III (Dutch Infrastructure Fund ) EUR800mn March 2013
Europe and North America
Targets onshore wind, solar, biomass and small
Clean Energy Fund Europe II (Glennmont Partners) EUR250mn September 2014
hydropower projects.
Environmental Technologies Fund GBP60mn September 2013 Backing SMEs with environmental benefits
Focuses on large-scale agricultural and industrial
Bluefield Solar Income Fund GBP130mn July 2013
solar assets
Construction of up to 400 MW of clean-energy
Nereus Capital Management Fund USD100mn June 2013
capacity in India
Greenfield and brownfield renewable energy and
Armstrong Southeast Asia Clean Energy Fund USD164mn November 2013
energy efficiency investments in South-east Asia
Altus Power America Management USD34mn November 2013 Financing commercial solar plants
SolarCity and Centrica USD124mn September 2013 Commercial and industrial solar plants
Investments in energy infrastructure, such as
biomass-fired power plants, electricity transmission
Copenhagen Infrastructure II Fund EUR1,005mn October 2014
grid and wind power in northern and western
Europe and North America
Source: Bloomberg New Energy Finance, Company Websites, Aranca Research

Lessons from the past: Why the current boom in equity markets seems sustainable
The renewable energy sector witnessed immense growth in the mid-2000s, with the NEX gaining more than 60% in one year (2006–
07). This was followed by a major downturn from 2009 to 2011, mainly as its growth during the period of economic boom was largely
driven by public subsidies and government stimulus programs, which eventually became unsustainable during the period of austerity
post recession. The industry had not yet achieved sufficient growth to sustain itself without government support, which led to a major
drop in investor sentiment at that juncture.

The current boom in equity markets has left investors concerned about the market entering another boom-and-bust cycle. However, the
growth picture this time seems quite different, due to increasing cost-competitiveness and reduced dependency on policy support.
Additionally, renewable energy companies have been looking to avail funding from a more diverse set of investors, lowering the
dependency on government funding. Hence, this time the industry appears to have stronger fundamentals to back the rapid upturn in
investor sentiment and utilize the inflow of funds more efficiently.

Crowd-funding: growing impact of small-scale funding

Crowd-funding too is gaining immense popularity as a mode of investment for the public in renewable energy

Crowd-funding is the practice of funding a project or venture by raising contributions from a large number of people, typically via the
internet. This mode of funding has gained popularity in the recent past, and according to The Crowdfunding Industry Report, total
worldwide crowd-funding volume in 2013 was estimated at USD5.1bn, nearly twice the amount of USD2.7bn raised in 2012, taking the
total funds raised over the past five years to USD10.7bn.

In the context of renewable energy, crowd-funding is becoming a popular way of raising funds in return for a small equity stake and/or
periodic payouts. According to Solarplaza, investors earn an average return of 6% on their investments in renewable crowd-funding
projects. According to their website, Abundance Energy, a UK-based crowd-funding platform, has raised more than GBP6.7mn (c.
USD10.9mn), while Mosaic, a US-based platform, has raised about USD9.9mn until date. In case of crowd-funding, individual investors
get to make their investment decisions after thorough analysis of different options and are aware of the progress made by the project. In
case of equity crowd-funding, investors are involved in the decision making process as well. Additionally, crowd-fund investments are
devoid of any fees, ensuring that the entire profits from the investment are transferred directly to investors.

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Although the risks associated with investing directly in lesser-known private ventures and the dilution effects of equity crowd-funding still
concern investors, crowd-funding has gained significant traction in the renewable energy market, especially in small-scale solar
projects. Crowd-funding acts an easy source of funding for such projects, which are too small to raise funds through debt and equity
capital markets, while also increasing the visibility of the project to investors and prospective customers. It is also quicker to avail and
more economical as no associated costs are involved.

Capital markets – well-positioned to transform into a major financing source for renewable energy
The greatest advantage of capital markets lies in their scale, placing it in a favorable position to respond to the growing
financing needs of the sector

According to the Climate Policy Initiative, globally, institutional investors (including pension funds, insurance companies, sovereign
wealth funds, endowments, foundations, and investment managers, among others) collectively managed assets worth about USD79trn
as of 2010, of which nearly USD52trn is driven by long-term obligations. Adding to it the huge retail equity investor base globally, the
public capital markets have access to enormous amount of funds.

The increasing access to capital markets (both debt and equity) is expected to decrease the cost of capital and increase the liquidity of
funds of renewable energy companies. According to the US National Renewable Energy Laboratory (NREL), the use of capital markets
can lower a project’s levelized cost of energy (LCOE) associated with solar and wind deployment by roughly 8–16%. These new
sources of funds are also expected to decrease the dependency of companies on government policy, banks, and other prevalent
sources of funding, and improve operational efficiencies. The fall in LCOE is expected to increase the price competitiveness of
renewable energy, eventually benefitting the consumers.

Snapshot of the various emerging investment avenues

Parameters Green bonds YieldCo and Equity Crowd-funding

Bonds issued by corporate, Publicly traded funds which own specific Funds raised for a green project or
Description international banks, or government, renewable energy assets, or direct venture from large number of people,
among others, to fund green activities publicly traded companies typically through the Internet

YieldCos pay periodic dividends; capital

Nature of return Periodic returns in the form of coupons gains and occasional dividends for direct
equity investments
 Returns comparable to conventional
bonds
 Project, corporate, and government
Advantages to
bonds, catering to different investor
investor
requirements
 Securitization to provide
diversification benefits
 Relatively illiquid; difficult to exit
Disadvantages to
 Regulatory terms regarding usage of
investor
funds not clearly defined
Source: Aranca Research
 Diversification benefits for YieldCos
 Access to future income through projects
by parent company
 Revenue stream backed by performing
assets; lower risk
 Dependence on general equity and
economic scenario
 Weaker credit profile of parent due to
asset transfer may hamper prospects
Periodic payments or equity capital gains,
based on the type of funding
 Option of direct investment in projects
of interest, and high upside potential
 Option to invest small amounts
 Continuously aware of the performance
of invested projects
 Higher risk of investing in lesser-known
projects
 Requires significant due-diligence

From investors’ perspective, the evolving funding structures offers them the option of gaining exposure to environment-friendly
initiatives without foregoing returns, as they offer returns comparable with conventional avenues of investment. The varieties of
products that have gained popularity recently have different return characteristics, catering to different risk appetites. Capital market
funding mechanisms are more liquid investment options for investors as against private investment vehicles such as private equity and
venture capital, which have long investment tenures and fewer exit options. Additionally, many of the newly emerged structures,
including green ABS, tend to fund a pool of assets, offering investors the benefits of diversification. Capital markets hold immense
potential to transform into a major source of financing for the renewable energy sector, and the initial indications have been very
promising. Going forward, it is necessary to develop well-defined regulatory frameworks and implement standardization in order to
ensure rapid yet sustainable expansion of the markets.

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Renewable
`` Energy: Growing sources of investment
November 24, 2014

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Aranca is an ISO 27001:2013 certified company