It's no surprise that renewable energy of all types (solar, wind, and geothermal €” to name the most popular) is drawing enthusiastic investors. When you combine renewable energy's desirable returns with its other positive attributes €” enabling energy independence and creating little to no negative impact on our environment¹ €“ understanding renewable energy's draw to investors is a no-brainer. Based on a poll by Morgan Stanley these investments have a strong emotional appeal².
As we've learned from Jonathan Hoenig's Royalty Review column, when it comes to their portfolios high net worth individuals are interested in absolute return. Mr. Hoenig tells us, The potential for steady income that is uncorrelated with market fluctuations is one of the primary value propositions of royalty investments€¦
The government has also played an important role in stimulating the growth of the renewal energy sector by offering tax credits for renewable energy development. In fact, North American Windpower reported in January 2015, Renewable energy sources€¦provided more new electric generating capacity in 2014 than did nature gas€¦.³ The results of the renewable energy- investor-government love triangle is not just creating wealth in terms of dollars, but it is also generating a wealth of positives that benefit us all. Positives like higher energy production at reduced costs that means that consumers benefit from seeing lower prices for U.S. electrical power. And, renewables are pulling us away from our dependence on fossil fuels and the dark side of their use €“ greenhouse gasses.
Typically renewable energy investing has been home to large corporate investors and investment bankers, with deals in the millions of dollars and returns that lure investments from Google to Buffett, according to Bloomberg. The appeal of these investments, especially solar and wind, is also a draw to smaller organizations, and individuals. In fact, the American Wind Energy Association reported, The US wind industry has recruited nearly $90 billion of private investment into new energy infrastructure over the past 5 years.
Renewable energy investing takes two forms. The first is an individual or company builds a solar or wind farm as a business investment. The second is an investor who wants to buy either the royalty income from the sale of the electricity generated by the farm or the income generated by the land lease for the property that houses the farm. Luckily for investors, renewable energy's stable, long-term cash flows [€¦] attract a variety of capital sources.
Even the U.S. government is getting creative on the financing of wind projects like the Pantex Wind Farm. As noted in the June 2014 NSA press release for the project: Construction of the wind farm was completed this week under a unique finance model, known as an Energy Savings Performance Contract, which allowed Siemens to build PREP (Pantex Renewable Energy Project) with no upfront cost to the taxpayers. Siemens will be paid directly from the value of guaranteed energy savings generated by the turbines, an amount expected to average $2.8 million annually. In essence, Siemens will be paid income similar to a royalty.
The marketplace for investing in royalty income streams is expanding thanks to the new trend of securitizing intellectual property assets. This trend is making royalty investing more accessible to the average investor. To explain this in more detail it's useful to consider this excerpt from WIPO(World Intellectual Property Organization):
Securitization normally refers to the pooling of different financial assets and the issuance of new securities backed by those assets. In principle these assets can be any claims that have reasonably predictable cash flows, or even further receivables that are exclusive. Thus securitization is possible for future royalty payments from licensing a patent, trademark or trade secret, or from music compositions or recording rights of a musician. In fact, one of the most famous securitizations of recent years involved the royalty payments of a rock musician in the USA, namely, Mr. David Bowie. At present, the markets for intellectual property asset-based securities are small, as the universe of buyers and sellers is limited. But if the recent proliferation of Intellectual Property Exchanges on the Internet is an indication, then it is only a matter of time before all concerned will develop greater interest and capacity to use IP assets for financing business start-ups and expansions. As more cash flows are generated by intellectual property, more opportunities will be created for securitization.
Although energy is not considered Intellectual Property, it shares a similarity with IP in that it generates an income stream or royalty that can be sold as a separate entity from the underlying property. Organizations like the Royalty Exchange are pioneering efforts to connect sellers of royalties with investors interested in royalty assets. An added benefit of the services of Royalty Exchange is their auction format allows the property owner to sell the royalty rights to the highest bidder. A recent wind farm auction on Royalty Exchange sold for 42% above the initial asking price due to the bidding activity of multiple investors.
By selling energy farm income as royalties, owners who want to expand the size and production capability of their farm have the option to generate the upfront capital required for the project without taking on additional debt.
Visit Royalty Exchange to learn more about buying and selling royalties.
²North America Windpower; NAW Staff; High Net-Worth Investors Claim All of the Above On Energy, Renewable and Otherwise.
³North American Windpower, NAW Staff; SUN DAY Campaign: Renewables Generated More Electricity Than Natural Gas in 2014