Investing in Sustainable Infra / Renewables (Interview Questions)
I have been in the renewable space for 18 months and am trying to augment my understanding as I interview for new roles. Unfortunately I don't know the answers to the questions that I have asked below and its' a little too late for me to approach my boss about clarifications (I am a manager). Could someone knowledgeable please chime in?
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How do you value early development assets where the only progress to date is that Target has leases / land agreements signed up with land owners? In other words, permitting, interconnection, PPA offtake milestones have not been met yet.
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I understand interconnection queues are long and time consuming and so assets / projects have successfully secured an interconnection permit are even valuable. How do you ascribe value to assets that have cleared the queue but construction is still a few years away?
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I understand the North America (US and Canada) grid is segmented into three regions: Ercot (texas); eastern; western. In a hypothetical: could it ever make sense for the load that is say 100% based in the western region (in every form) to enter into an offtake agreement - either physical or virtual - with a generator based in another region (ercot; eastern)?
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When ppl say LCOE price, are they referring to energy only price? Or only RECs? Or Energy + RECs + Capacity? Or Energy + RECs?
My Philosophical Rant:
Do any of you think RECs and Carbon Credits are scams that there to boost economics of renewable projects? I know there is a market for this shit but seems totally bogus to me. With RECs for instance, it's a certificate that your plant is producing renewable energy. An extreme unrealistic analogy I'd draw is higher education authorities allowing graduates to sell their degrees/certificates to third-parties for some price, and in return, third parties also get to call themselves graduates. But this group didn't get the education, which is really the valuable thing. Conversely, the value of the certificate should not be much / nearly worthless, which we know is not the case
Based on the most helpful WSO content, here are detailed responses to your questions:
Valuing Early Development Assets:
Valuing Assets with Interconnection Permits:
Offtake Agreements Across Grid Regions:
LCOE Price Components:
Philosophical Rant on RECs and Carbon Credits: - Market Mechanisms: RECs and carbon credits are market mechanisms designed to incentivize renewable energy production and reduce carbon emissions. They provide additional revenue streams for renewable projects, making them more economically viable. - Criticism and Perception: There is criticism that these mechanisms can be seen as "greenwashing" or artificially boosting project economics without delivering real environmental benefits. However, they are currently an integral part of the renewable energy market. - Value of Certificates: The value of RECs and carbon credits is derived from regulatory requirements and voluntary market demand. While they may seem like mere certificates, they represent a commitment to renewable energy production and carbon reduction.
For further insights and detailed discussions, you might find the following WSO threads helpful: - Renewable Energy PE Overview - Renewable Energy
If you need more specific information or have additional questions, feel free to ask!
Sources: Renewable Energy PE Overview, Renewable Energy PE Overview, Interview question: How to value Tesla?, Renewables / Energy Transition Primer, Renewable Energy
I'm an AN1 in nat res ib at a boutique (non US) so don't take the below as gospel but from my experience on a couple of renewables deals:
1. Typically these are based on multiples for typical milestones, e.g. 000's per MW for each development stage. E.g. $10k/MW for Land, $20k/MW for Development approval, $50k/MW for grid connection etc. These can be tricky to source given the nature of private markets but advisors/investors should have a rather comprehensive database for these. There can be premiums/discounts depending on the area and risks to development/securing offtake/energy price forecasts etc. They will also be slightly different depending on the type of project i.e., Solar/Wind/BESS/Hydro etc.
2. Same as above - would ascribe some value to the completed stages but would discount it on a relative basis to other projects expected to begin construction sooner.
3. For a physical PPA - they will need to be on the same grid, with the utility company as the intermediary supplying the power. Same with any direct line arrangements such as from a generator straight to a project. Virtual PPA's can be anywhere as essentially it is just a derivative (e.g. exchanging a fixed for variable cash flow) these can take many different forms.
4. Depends, but usually this should be explicitly stated as included/excluded .
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