Through our work with both renewable energy developers and institutional investors, Leyline Renewable Capital has discovered a growing disconnect between what developers think investors want and what investors actually want when it comes to investing in a renewable energy project. As a result, Leyline interviewed leaders of four leading investment firms to better educate renewable energy developers and enable them to more effectively position their projects for investment.
What is your current portfolio mix of renewable energy projects?
Demessence (CAI):
CAI is looking to balance its investment between three areas: renewable energy, water, and transportation.
Dolitsky (D.E. Shaw):
D.E. Shaw's current portfolio consists exclusively of renewable energy projects with approximately 90 percent coming from solar and 10 percent from wind.
Gandhi (Starwood):
Starwood Energy is currently invested across the renewable technology spectrum, and much of our renewable portfolio is wind and solar; however, we are actively looking at additional opportunities in the biogas and energy storage sectors.
Shemesh (CIM):
CIM's current infrastructure portfolio mix is approximately 40 percent renewables, of which two-thirds is solar and one-third is renewable natural gas.
Has that mix changed over the last 5 years? If so, how?
Gandhi (Starwood):
Five years ago, Starwood's renewable portfolio was primarily wind projects, but as the markets and regulatory environments have evolved, we have been on the forefront of exploring biogas and energy storage investments.
Dolitsky (D.E. Shaw):
D.E. Shaw's portfolio five years ago was closer to an even split between solar and wind; we have since increased our focus on solar and now focused on pairing our solar capacity with storage to prepare for the next wave of growth. D.E. Shaw Renewable Investments (DESRI) management founded the platform with a decade long background in wind development. However, as an organization, our expertise has shifted towards the growing solar industry and the economics for solar continue to improve across the markets we are active.
Shemesh (CIM):
Yes. CIM recently added Renewable Natural Gas to our renewables portfolio due growing demand and continued regulatory support for Renewable Natural Gas in North America.
When does your company invest in a renewable energy project?
Demessence (CAI):
CAI usually invests at Notice-To-Proceed (NTP) or Commercial Operation Date (COD).
Dolitsky (D.E. Shaw):
DESRI has a highly flexible mandate - the "sweet spot" for us is typically to get involved at a medium to late stage of development, once a project already has a power purchase agreement (PPA), interconnection agreement (IA), and site control, but early enough that DESRI has time to optimize the site design and manage the EPC and financing process. We have also invested in earlier stage deals without a PPA, as well as projects mid-construction seeking a long-term owner-operator. Once a project closes tax equity and achieves COD, our value-add diminishes and we to focus less on those opportunities. However, we do have a land sale leaseback platform that we can use as a form of attractive capital to existing solar projects (both construction and operating) - we use this structure across our own portfolio and have had a lot of success boosting returns for other sponsors.
Shemesh (CIM):
CIM tends to target opportunities that are in the later stages of development or beyond.
Gandhi (Starwood):
Starwood Energy has a flexible investment mandate, and we are comfortable investing in early to mid-stage development projects.
Do you have an investment target for individual projects?
Shemesh (CIM):
CIM's target returns for renewable projects are generally in the low teens on a levered basis with a mid-single digits yield. However, depending on the stage of the project and risk profile, this can differ.
Gandhi (Starwood):
Each individual project is evaluated by Starwood on a standalone basis. We look for both the size of the individual opportunity and the size of the pipeline of projects with individual developers.
Dolitsky (D.E. Shaw):
Because DESRI invests at various stages of a project's life - from early development to post-FNTP, our return targets vary considerably with the level of risk. While we are not the cheapest solar capital in the market (hence why we do not focus as much on post-COD assets), we are often highly competitive on assets we can actively manage and add value through design and financing optimization. We also have a relatively small team with a very flat structure, so we can often move more quickly that others on deals with complexity or time constraints. Our cost of capital for solar land acquisitions we believe the tightest in the market thought, targeting mid- to low- single digit returns over a project's life.
Demessence (CAI):
CAI's investment target for individual projects is $100 million, a project being either a single asset or a set of similar assets developed with the same partners. Individual asset investment should not go below $15 million.
What is your strategy of holding onto renewable energy projects once you purchase them? In other words, do you want to remain an asset owner or sell it as soon as possible?
Demessence (CAI):
CAI will remain as asset owner a maximum of 12 years.
Shemesh (CIM):
CIM generally approaches investments on a long-term hold basis but will consider earlier monetization opportunities should they arise.
Gandhi (Starwood):
Starwood looks to develop, construct, own and operate these projects. At the right time, we will selectively exit these investments to maximize value for our investors.
Dolitsky (D.E. Shaw):
D.E. Shaw always acquire assets with the intent to own forever. That said, we often opportunistically explore one-off asset sales or larger portfolio minority interest sales to recycle capital into new development and acquisitions. We do not have any exit requirements or LP return hurdles required in connection with our investments.
What are the most important attributes you're looking for in a renewable energy project (site control, project yield, developer experience, executed offtake agreement, etc.), and why?
Gandhi (Starwood):
Site control, interconnection queue position, and executed off-take agreement are three of the most important items for Starwood. Site control and interconnection queue position help us evaluate the development process, timeline, and cost for the project, and allows us to seek appropriate off-take. An executed off-take agreement is important because we generally believe that if we have a site and we have an off-take we have the internal skillsets and relationships needed to complete development of the project. However, we have many relationships with off-takers across the board and we usually can help developers find offtakes for their projects.
Dolitsky (D.E. Shaw):
The most important issue for D.E. Shaw is an executed offtake agreement, or a late-stage counterparty term sheet with a clear path towards PPA execution. The importance of the others is largely depending on stage of development. We often use our in-house engineering team to alter the design developer's present to us anyways, and likewise have in house expertise to help with sticky development situations.
Demessence (CAI):
While all of the above are generally required, CAI also focus on risks and opportunities associated with the climate crisis and the ways in which they may impact the investment.
Shemesh (CIM):
CIM believes that offtake, availability and consistency of resource/feedstock, regulatory support, and risk-adjusted return/yield are among the most important attributes when analyzing and evaluating a renewable project. We typically require that site control has been obtained and target a project yield of mid-single digits or above, subject to overall risk profile. We believe it is critical to have an experienced development team with a track record of successfully bringing projects to COD. In addition, the quality of the counterparty/end market is vital, and we are flexible when determining the best risk-reward offtake structure. Whether the resource/feedstock is solar radiation, wind or organic matter, CIM seeks consistent quality and availability. Where returns are impacted by regulations, CIM looks for strong continued long-term support.
What is the most common mistake you see from less experienced developers?
Shemesh (CIM):
In CIM's experience, some developers do not fully understand how their commercial decisions during the development process ultimately affect the ability to finance those projects. As each project likely has unique attributes, developers need to consider a tailored approach with the goal of financing the project in mind.
Dolitsky (D.E. Shaw)
Developers often struggle to discern the difference between project issues that can be remediated and binary risk factors that could render a project non-financeable. The latter often needs to be attacked early in the development process and with the assistance of counsel - when these issues present themselves late in the development process, it could be too late or only resolvable through meaningful rework of the development and/or at a large cost (both timing and economics).
Demessence (CAI):
CIA has seen less experienced developers underestimate costs to reach NTP and COD and lack knowledge of the competitive market.
Gandhi (Starwood):
A few key mistakes that Starwood sees developers make include making unreasonable assumptions about major equipment/construction contracts (cost, availability, timeline, etc.) and timelines for development, as well as not being transparent about development challenges. We need the developers to be transparent. We can deal with issues, if we know what they are.
What is the one thing you wished developers paid more attention to during the development phase?
Demessence (CAI):
A high-quality team is essential to the success of a renewable energy project, so CAI encourages developers to prioritize building a strong, experienced, and driven team.
Gandhi (Starwood):
At Starwood, we wish developers would pay more attention to understanding the viability of a project - what is the commercial reasoning behind the project and why would an off-taker be interested in the developer building it.
Dolitsky (D.E. Shaw)
The focus on the minor details is important, especially early. Listening to what people say is often not enough and understanding/verification of all the facts is critical - we often discover issues in later stage development diligence that could have been avoided earlier with proper attention. One area of focus should be state and local taxes - this can be a material value driver for a project and wrapping up abatements or exemptions early can save millions of dollars that become a lost opportunity as the project progresses.
Shemesh (CIM):
CIM aims to work with developers that focus on managing the different, often complex, and interconnected components of the development with the aim of delivering the overall project on time and on budget.
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