Less need for government support, falling technology costs and ample lower cost capital have led to significant growth in renewable energy. This means that we are getting closer to the tipping point for renewable energy in certain parts of the world which is also referred to as “reaching 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.
Over $300 billion was invested globally in renewable energy projects alone in 2017, with wind and solar leading the way. Many of the investors allocating capital to the sector are the larger funds looking for long-term and stable inflation indexed cash flows. The discount rate (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 causing investors to rely solely on their own experience and advice from valuation experts in evaluating the cost of capital. Hence, we launched a survey to help augment our experience valuing such projects.
More than 100 investors, representing billions of pounds of capital under management, across ten renewable energy markets were asked about their views on levered and unlevered cost of capital across hydro, solar, onshore wind and offshore wind projects. You can access the report here.
Some of the key results are:
- Unlevered discount rates across Europe and North America average 6%, 6.5% and 7.5% for solar, onshore wind and offshore wind respectively;
- Unlevered discount rates in the Nordics average 5% for hydro; and
- Unlevered discount rates in Australia average 6.75% and 7.5% for solar and onshore wind respectively.
Cost of capital needs to be considered in the context of the various underlying assumptions such as power curves, inflation, project lives, etc. which can vary for all projects.
If you would like to discuss our report further with us or hear more about our Valuation and / or Renewable Energy capabilities, we look forward to hearing from you.
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