The discount rate of a project (a proxy of cost of capital) is important for all investors. It is a key driver in determining the fair value or market price for projects. However, this data is extremely hard to gather, meaning many investors rely solely on their own experience and advice from valuation experts in evaluating the cost of capital.
The collaborative renewable energy discount survey 2018 between Grant Thornton and Clean Energy Pipeline provides you with the information you need to better understand the market and better evaluate potential investments.
Global search for yield
Some $253 billion was invested in utility scale renewable energy projects globally in 2018, up by 10% from 2017 with wind and solar leading the way in terms of deployment and deal value.
As interest rates remain low and the market becomes more established, it’s a constant hunt for yield by annuity investors, such as pension funds, who require index-linked cash flows for liability matching. With significant capital still looking to find a home, yields in the most established renewable energy markets, such as the UK and Germany, continue to compress and investors are increasingly looking to diversify into new technologies and geographies in search of greater returns.
As such, we have expanded on the success of our 2017 survey to capture investor views on levered and unlevered cost of capital across hydro, solar, onshore wind, offshore wind and biomass projects across 13 major geographies.
Merchant revenues on the rise
In some parts of the world, renewable energy use is reaching what is referred to as grid parity. This means that energy can be generated from renewable sources at a cost that is less than or equal to the price of purchasing it from the electricity grid, which still relies heavily on fossil fuels. A combination of this and falling government subsidies is spurring the development of subsidy-free renewable projects and we are often asked as valuers whether a fully merchant revenue stream should have an impact discount rates. The survey aims to answer some of the most frequently questions.
We have commented on the average levered and unlevered discount rates submitted by respondents, noting that the cost of capital needs to be considered in the context of the various underlying assumptions such as power curves, inflation and project lives, which will vary for all respondents.
Some of the key results observed are:
- the average unlevered discount rate for solar in Europe is down from 6% in 2017 to 5.5% in 2018
- unlevered discount rates in Japan average 4% for solar
- unlevered discount rates in Australia average 5.75% and 7% for solar and onshore wind respectively.
The survey provides a robust insight into each of the renewable energy sources across a number of key markets, keeping as close to funds and transactions as possible.