There is a growing breed of investors who are more ethically focused, but are frustrated by often lower returns. I investigated the option of investing directly in renewable energy projects and found that a great potential return can be found, that is still aligned with the general ethical investing criteria.
For regular readers, you may have gotten to step 6 of your personal finance plan and know you need to become an investor, realising you can’t beat the market, you have gone with an affordable world-class Investment Management solution or perhaps a D.I.Y. option such as TD Direct Investing.
Now you are driven by perhaps one or a combination of the following:
- The desire to positively impact the world with your investments (Ethically/socially responsible investing)
- Searching for higher returns
- Looking to balance and diversify your portfolio further
Whatever your motivation is, you are now looking at Alternative Investments, which are generally considered anything other than stocks, bonds & cash. The definition of what is ethical can be quite subjective, so I am going to make the assumption that renewable energy projects meet your criteria.
When solar panels in the UK surpassed coal-fired electricity in previously ‘unthinkable’ feat for 6 months earlier this year, I was excited by the positive implications (that was even after the cutting back in Government subsidies). I started exploring the investment opportunity in the UK and I came across several companies, the most promising option being Abundance Investments. They have successfully allowed the “Crowd” to invest in projects across the UK, with generally consistent and realistic returns of 5-%7%. If this can be done in the UK, I started thinking the opportunity in Africa would be even greater.
So I contacted Ken Ross the Technical Director at Terra Firma Solutions in South Africa. He explained to me that in a country which is considered one of the optimum solar energy locations, 77% of the energy needs are derived from coal. With nuclear power being expanded in an effort to cope with the chronic shortages in energy supply. These energy shortages are a significant constraint on investments and economic growth.
According to Ken, projects typically have a target IRR of 20%-25% per year. With a 4-5 year break even point and then 10+ years of returns. The projects become feasible from about a £200k investment. One example structure of a project is to find a high energy user such as a factory or a mall and rent roof space from them, then sell electricity back at a discounted rate. As the solar projects generally offset against diesel usage, they can significantly reduce the Carbon Footprint. The projects are higher risk than those in the UK, with the biggest risk being that the sun doesn’t shine and if that happens, we perhaps have bigger problems then than our return on investment. There are other key project risks such as theft and timing risk, as well as at currency fluctuations. Some of these risks can be insured against or mitigated in other ways, so are not show-stoppers.
What is clear is that there is a new frontier of alternative investment opportunities emerging and renewable energy projects could be at the forefront of these. The question now becomes, how can we make these types of investment opportunities for accessible for people who want to make a positive impact and still get a healthy return?