2019 performance overview
Triodos Renewable Europe Fund performed well in 2019 with a return of 6.1% and additional inflow to EUR 118.5 million. Yet fund manager Vincent Van Haarlem faces a dilemma: “We achieved at the upper end of our target and did so well that we’re a very attractive option. However, the sharp increase of investors in the fund was not equally converted into new investments, so liquidity levels are higher than desired. Accommodating the current amount of inflow will be a challenge in the short-term, but the upside is of course that we can now pursue bigger opportunities.”
Most of the fund’s investments are operational renewable electricity producing assets, but Van Haarlem wants to diversify: “Our impact subthemes are capacity, efficiency and flexibility. Right now, almost all of our investments are in capacity; in producing renewable electricity. But we really want to invest in projects that make a broader contribution to the energy transition and invest in flexibility and efficiency projects that can also diversify our portfolio.”
With that in mind, during the year the fund invested in the SET Fund III, which invests in European early growth-stage companies that provide innovative solutions required for the integration of generation, use, storage and transmission of electricity. During the year a solar farm in France was repowered, and several rooftop solar projects were realised in the Netherlands. A large site was acquired in the Netherlands where a ground mounted solar project is expected to be realised in 2020.
Liquidity and pipeline
The fund’s high liquidity level was triggered by a sharp increase in investor interest. Van Haarlem says that this led to an increase in business development activity and he plans to expand the investment team in 2020. It also means he is looking for strategic solutions.
“One of our ongoing activities with the fund’s portfolio is to look at repowering existing assets. It’s something that doesn’t get much light, but it’s important. Several windfarms in portfolio have been operating for more than 15 years. Together with our partners we’ve been working on the possibility of replacing the old turbines with new, much larger, more productive and efficient ones. After years of preparation we’re all lined up for construction in 2020, starting in the Netherlands with our windfarms in Zeeland.”
Another solution is to identify larger-sized investment opportunities: “In the current economic climate it’s not a bad thing to have a good liquidity buffer, but investors expect us to put entrusted funds at work. Besides supporting developers who wish to scale up, we need to look for significantly larger investments. It’s a different market.”
In addition to the search for larger projects Van Haarlem wants to also continue to support partnerships with solar developers by strengthening the current ones and looking for new partnerships. He says, “Although the individual projects a developer has can vary, our continuous support generates a steady flow of new projects that we can enable.”
The renewable energy market continues to move from a subsidies-based business case to one based on power prices. Relative costs have decreased, and solar in particular has become much cheaper. Governments are increasingly shifting away from fixed tariffs towards market-based incentive schemes, with developers having to indicate how much subsidy they require to realise a project.
“Increasingly large solar projects are already being built without incentive schemes, especially in Southern Europe” says Van Haarlem. “A continued drop in costs of projects has moved these projects to grid parity. Without subsidies these renewable energy projects can still be competitive,” he explains.
“This means that projects need to be financed differently. When they were supported by subsidies, banks had a good dependable forecast of revenues over time. Now there’s a higher level of uncertainty and banks are reducing the amount of debt they are willing to provide. As a result, each project requires more equity as banks can provide alower proportion of total financing of projects. This increases the requirements for investors in equity, like Triodos Renewables Europe Fund, to enable projects.”
Van Haarlem has some very clear goals and from the sounds of it, another busy year ahead. He and his team plan a strategic review to evaluate the appropriateness of the current proposition. He also wants to achieve a significant increase in impact to reduce the liquidity of the fund and invest more in projects that are not power generation based. And he wants to stay on target with performance.
Impact of COVID-19
This interview was conducted on the brink of the World Health Organisation declaring COVID-19 a pandemic, and such does not mention potential impacts.
Every Triodos Investment Management fund has its own mission, investment theme/s and strategy. The correlation and potential impact of COVID-19 on each fund therefore differs.
When asked at the time about the impact on the fund, Van Haarlem says that the big cushion for his fund is its ability to sell power and that Triodos Renewables Europe Fund is a long-term investor: “We will always be able to sell the electricity, it’s just that prices might be lower in the short-term. We have updated our scenarios accordingly. Renewable energy plants are also designed to operate for more than 20 to 30 years, so I don’t think the pandemic is likely to impact significantly on the total value of the fund over time.” The expectation is that the energy transition will push ahead, and governments will to continue to work towards delivering the Paris Agreement CO2 reduction targets.
For more related news and views, insights and economic outlooks regarding COVID-19, visit our dedicated COVID-19 pandemic page on our website.
Visit the fund page on our website for more information about Triodos Renewables Europe Fund.