The great divide between so-called good and bad energy is disappearing, and the race is on to develop and deploy new energy sources alongside the old (Milken Institute2012). Population growth is one reason why it is forecasted that global energy and new demand will rise by about 30 percent from 2010 to 2040. By 2040, there will be nearly 9 billion people on the planet, up from about 7 billion today.
The world’s economies will continue to grow, but at varying rates. Studies show OECD economies expanding by about 2 percent a year on average through 2040, as the United States, European nations and others gradually recover and return to sustained growth. Non OECD economies will grow much faster, at almost 4.5 percent a year.
This economic growth – and the improved living standards it enables – will require more energy. Experts anticipate global energy demand to be about 30 percent higher in 2040 than in 2010. While that is a significant increase, meaning it will require trillions of dollars in investment and advances in energy technology, growth in energy use would be more than four times that amount were it not for expected gains in energy efficiency across the world’s economies.
Energy and Infrastructure is one of the most secure and high return asset class for investments available today. The development phase of Energy and Infrastructure projects is where the most value is created and where the highest returns are achieved.
There are hundreds, if not thousands of energy and infrastructure projects under development being shopped throughout the world today. Due to the inherent risks, probably not more than a fraction of these will ever be built (Euro-Phoenix Financial Advisors).
The initial development stages of projects are recognized by almost all sector players as the riskiest part of an energy or infrastructure project which keeps even the hardiest of investors. This includes institutional investors, deep pocketed EPC companies and other interested industrial enterprises.
There are challenges at each stage of the development process. The developer must invest into studies that establish the feasibility of the project. The developer must purchase or tie-up the land on which the project will be. He must invest into obtaining the myriad of permits required to build the project. Often there is an off-take and supply agreements to negotiate. Incumbents have often been resistant to negotiate agreements for connecting to the grid—new energy makes their life more complex and costly. There may also be a cost involved in building transmission wires to the grid, as well as connecting to the grid. If the developer stumbles on any single permit or other aspect of the project, total investment in the project may be lost. In other words, there is substantial risk.
The financial details of the energy and infrastructure subsectors embrace a surprising range of topics for most nations, especially those with emerging economies. The effects of population growth and increasingly affluent middle classes create extreme tensions between infrastructure and energy requirements, financing possibilities and the managing of waste, climate change and increasing cost or commodities. (The business of Infrastructure for a sustainable Future. Neil S. Grigg).
Government Support is Tightening
Most important, investment in global new energy and infrastructure is on the sidelines or even in retreat. For instance, certain capital-intensive federal efforts, such as those at the Department of Energy in the US, and other broad government initiatives are being scaled back. In addition, the economic downturn has taken a toll. Governments at the local, state, national, and international levels are seeing massive budget cuts around the world.
Some degree of economic development is necessary for nations to participate in the global economy. Participation can only occur as countries come to terms with their physical environments to build infrastructure to allow internal markets to form and be connected to the outside world. As the Global Competitiveness Report (World Economic forum 2008–2009) pointed out, developed infrastructures reduce the distances between countries, and within countries, and are prerequisites for orderly and sustained economic development through quality roads, rails, ports, telecommunications and electricity grids. Governments and local administrations are looking to private developers to resolve the problems of rapid growth and energy and infrastructure requirements while keeping debt and pollution under control.
Specialized Funds for Development Stage Projects
Incumbent utilities and other exit investors will often pay a substantial premium for energy and infrastructure projects when they are fully permitted and licensed as it adds to their portfolio at a lower perceived risk and will take on construction risk sacrificing the value added during development. Development exits, however typically pay 3 to 5 times the development cost within a short time frame ranging from 6 to 24 months, depending on the technology and region.
The risk of a project development portfolio can be substantially reduced or eliminated by negotiating an exit investor agreement on full permitting and licensing , diversifying the portfolio with a number of projects under development.
Many EPC and Engineering companies are willing to participate in the development phase with the developer with non-cash items but equally valuable studies and designs in exchange for options on the construction phase contracts.
There are a growing number of investment funds that are specialized in this area and can provide developers anywhere from 200.000€ to over 1M€. This funding properly structured and allocated within a Special Purpose Vehicle can get the developer the funding required to get a project to fully permitted and licensed stage and really be investor (construction) ready and either exit at that time with a large capital gain or stay on with a minority interest in the operating asset.