“Green power” and Clean energy is coming of age to various degrees at a time when government subsidies supporting the clean fuel industry and solar power in particular, may be shrinking. An April 10 Moody’s report looks at various methods of generating power through clean methods through the lens of consistency and financial viability. What matters to astute power grid investors, it turns out, are the same general concerns that smart investors in general: quality of operator, diversification, liquidity and risk mitigation. With government subsidy cuts anticipated, the playing field could become more intense for investors.
Volatility in clean energy generation is a factor
When considering investments in clean energy generators, proven equipment and operators with strong experience are formidable factors along with the contractual protections provided in equipment contracts, the diversification a company has in their power generation portfolio are factors that Moody’s uses to rate renewable energy power investment opportunities.
One factor is consistency, and here solar power generation is considered more stable than wind- or hydro-based methods by a factor of two to four times. Based on a study of 245 operating projects, Moodys researcher Clifford Kim and team find a median standard deviation for power generation variability is less than 5% for solar compared with about 9% for wind and 20% for hydro projects.
“Ultimately, the lower variability means greater revenue certainty since solar PV projects typically are paid only for power delivered under their long-term contracts,” the report said. “The lower annual variability enhances the certainty of cash flow for solar PV projects, an important credit consideration for project financing.”
This is not to say that solar power is the winner across the board, the report noted. While annual variability can be high for hydro power, often dependent on weather, hydro power plants benefit from low short-term volatility, very long asset life of civil infrastructure, greater ability to change power output at the project’s control, and the potential for storage. Hydro plants have long production lives and can enhance grid reliability. These factors enhance the asset type’s attractiveness, with electric utilities that own large hydro generation portfolios, such as Seattle (City of) WA Electric Enterprise or Tacoma Power, WA, being highly rated beneficiaries.
Solar pv projects, Power generation & Solar power – When investing in clean energy, think like a diversified investor
Each method of power generation has idiosyncratic benefits. Solar power benefits from its relative consistency in certain geographic regions and solid state technology with a lack of moving parts. But an important component of the stability mix is diversification.
Wind and hydro-electric plants benefit from wide regional and technology diversification, as a concentration can lead to generation issues across the board if the weather in a given region doesn’t cooperate or a technical failure occurs.
Moody’s, for their part, takes apart the rating equation very much from the perspective of an investment manager using beta market diversification principles. It compartmentalizes each performance driver into a portfolio sleeve and then assesses strength by modeling factors through a variety of technical market environments.
“We see the quality of the operator and owner (or servicers in structured finance transactions), equipment warranties, and meaningful liquidity as important features to help mitigate this statistical tail risk,” they wrote, citing Berkshire Hathaway Energy Company as an example of how addressing problems proactively can mitigate volatility.
As the market environment changes for solar investments, with the reliability of revenue stream coming into play, the investor should take stock of the firm’s total risk management strategy.
Given the weakening credit quality of solar PV manufacturers, the quality of the owner remains an important consideration in the project’s ability to enforce warranty claims or alternatively provide the project with financial support to resolve equipment problems,” Moody’s advised. “Full service operations and maintenance agreements from a creditworthy counterparty or strong insurance coverage are also forms of contractual protections that can shield the project from operating underperformance.”