Defining an investment strategy forms the first step in investment management of renewables. Since the whole market screening depends on it, a clear definition of the investment strategy at the very beginning forms the backbone for an action plan for many years.
The first aspect of investment strategy that should be clarified is the appetite for risk. What is it that leads to investing in renewables? Is it the hope for high returns? Is it to hope for a stable long term investment with lowest possible risk? Is it a mixture of both? Depending on the risk factor, the investor should create a strategy that answers three major questions:
- In which technologies, i.e., whether in wind, solar, biomass, hydropower, or similar;
- in which countries or regions, and
- n which project phase, i.e., development phase, construction phase, operating phase should be invested.
A solar system as an example generally offers a relatively low risk during the construction phase. In contrast, a wind system can become very maintenance intensive in the second half of its service life. An already built project has a significantly lower risk than a project in development. Existing feed-in tariffs, political stability, and the corruption level of a country have a direct influence on the respective country’s risk.
The clearer the three criteria above are defined, the more precise the selection of projects according to the risk profile will be. Investors that plan to run a largely diversified investment portfolio, consisting of projects in different countries, with variable technologies and in different project stages, should establish a financial model for their evaluation that is comparable and works independently of the different project specifics.
This forms the basis for a benchmarking of different SPV’s which are eligible for a potential investment. Despite the current competition on the market, investment manager need to make sure to always carefully run a variety of simulations and compare different scenarios to each other in order to stress test each potential investment at an early stage.
Therefore, we highly recommend to use financial models that have a reviewed and certified calculation method, permitting you to concentrate on the editing of assumptions and analysing the varying outputs rather than needing to review the calculation method itself for each project version.
If you are wondering how investments in renewables can be modelled, structured and analysed in an efficient, comparable and nevertheless reliable manner, feel free to register for a free trial of greenmatch.
With greenmatch you can take the next step, digitalise your investment, asset & portfolio management processes and ensure a professional management of sustainable investments.
