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Energy investors and Contracts for Difference

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greenenergy

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Investment in the renewables market is growing worldwide as the long-term opportunities presented by the sector continue to be fully recognised.

The Global Trends in Renewable Energy Report 2016 produced by Frankfurt School of Finance & Management, reveals that renewable energy set a record for investment and new capacity added in 2015. Investments reached nearly $286 billion and for the first time, more than fifty percent of all power generation capacity added was from renewables.

Many energy companies are themselves starting to shift away from fossil fuels and towards renewable technologies, such as solar, wind and even tidal power. Alongside this, governments across the world are taking steps to encourage, incentivise - and in some instances force - a switch to renewable energy generation, cementing a clear pathway for the ongoing growth of the sector.

The UK renewables market

The UK has consistently ranked among the top countries globally for new investment in renewables, according to EY’s attractiveness index.

While it may have been a slightly slow burn in the beginning, interest continues to prove strong and is on track to increase over the coming decade. This will in part be due to new innovations being made, prices continuing to drop and targets such as those pledged under the Paris climate change agreement, being extended and actioned.

All of these factors are likely to contribute towards making the sector a viable long-term proposition for investors.

So, what type of investment opportunities are there?

Contracts for Difference (CfD)

In the UK, renewable energy investments are available via several different vehicles, such as renewable investment funds and trusts, and corporate bond portfolios that support renewable projects.

One key area of interest is the government’s Contracts for Difference (CFD) initiative. A Contract for Difference (CFD) is a legally binding contract formed between a low carbon electricity generator and the government (through one of its agencies). The aim of the scheme is to incentivise investment in new low-carbon electricity generation in the UK.

All eligible generators can take part in an CFD auction, with the aim of securing a contract for their renewable project. The first of these auctions was concluded in 2015 and saw contracts worth £315m awarded to 27 schemes, with a total capacity of 2.1 gigawatts.

The second auction closed in April 2017, with 11 winning projects totalling more than 3,3GW of renewable energy projects and worth up to £176 million per year. This round focused far more on “less established” technologies, such as offshore wind, wave and tidal energy.

The benefit of CFDs for energy investors

The key benefit of the CFD scheme for investors is the stability of the revenue stream on offer. Generators will secure payment at a pre-agreed level, called a ‘strike price’. Generators are still exposed to the wholesale market, but if wholesale prices drop below the agreed Strike Price, top up payments are added to bring it up to the value of the Strike Price.

As well as creating a stable revenue stream, the Strike Price rises with inflation, so the returns also increase a little each year.

Recommendations

While the results of any investment are never guaranteed, the UK renewables market continues to present an exciting opportunity for energy investors. Great strides forwards are beginning to be made and as the sector moves from being an emerging field to a better established market place, it’s an area worthy of consideration.


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