Written by Sarah Salm and Charles Donovan

While the role of corporations and financial institutions in funding clean energy projects has been well documented, an even larger pool of investable capital – that held by domestic household savers – has been relatively ignored.  Yet retail investors are a potentially significant group of renewable energy investors.  In this research blog, we explore the historical performance of UK “YieldCos”, one of the more straightforward ways for British individual investors to gain exposure to their domestic clean energy sector.

 Why retail investors?

To meet the two-degree warming target established by the Paris Agreement[1], as much as a trillion dollars of annual investment in new clean energy installations will be needed; more than triple the current pace of investment. But where will this new money come from? Surprisingly, individual investors hold half of the financial assets worldwide, whereas banks, pension funds, insurers and sovereign wealth funds cumulatively constitute to the other half. In some countries such as Germany, retail investors already own 46% of the renewable energy generation capacity and therefore represent the largest group of investors (Trend:research & Leuphana Universität Lüneburg, 2013). In other countries, such as Switzerland or the United Kingdom, community participation is a major topic of discussion, but not yet backed by significant investment (Salm & Schmid, 2016).

While individual investors could seek to gain exposure to clean energy through employer-sponsored retirement, large pension funds are not yet significant participants in the market.  Direct equity investment in unlisted infrastructure projects of all types accounted for only 1% of their asset allocation in 2015, and green infrastructure accounted for a tiny fraction of that. Individual savers seeking exposure to clean energy would therefore need to increase portfolio allocation by themselves.

The interest of retail investors in renewable energy investment is often aligned with their identity and individual attitude towards environmental awareness (Bomberg & McEwen, 2012; Rogers et al., 2008; Walker, 2008). There are the local patriots who wish to participate in nearby renewable energy investments. They want to make their contribution for a better tomorrow and see their investment, most preferably solar-photovoltaic and wind onshore capacity, growing in close distance to their residency. Local patriot’s engagement is most likely through locally rooted partners such as local utility companies or energy cooperatives. In contrast, yield investors consider the financial attractiveness as primer reasoning to their renewable energy engagement. Although they show a slight preference for locally rooted partners, a clear emphasis is set on a moderate return. Yield investors are particularly driven by the low interest rates of their bank savings and search for alternatives to avoid a shrinking savings account through nearly negative interest rates (Salm et al., 2016).

How have renewables fared compared to conventional energy?

As an initial point of analysis, we compared the performance of the six listed UK YieldCos in comparison to FTSE Oil & Gas companies. YieldCos in the clean energy sector came to prominence in 2013 with the launch of new issuances in the UK and the United States. A YieldCo is formed by transferring operational power generation assets into a newly incorporated company. The YieldCo then distributes the majority of retained earnings to shareholders in the form of dividends. The model allows investors to gain exposure to a diversified set of operational assets, thereby reducing idiosyncratic risk.

The market capitalisation of the UK YieldCos are in the range between 200 and 700 million GBP.  We therefore set as a comparator six (of the overall 95) FTSE Oil & Gas companies with market capitalisations (market cap) in the same range (see Table 1).

Table 1: Yieldcos and FTSE Oil & Gas companies under investigation, in alphabetical order


The table below shows the cumulative return for each mini-portfolio with a start date of 30/07/2013 and end date of 29/07/2016. 


Figure 1: Cumulative returns of FTSE Oil& Gas and YieldCo stocks since 30/07/2013 (source: author’s construction, based on daily share prices of Thomson Reuthers Datastream) 

What is the outlook for research in this area

A widespread transition from the status quo in the energy sector will only happen if market participants expect capital employed to earns a superior risk-adjusted rate of return. Our initial analysis raises interesting questions about the performance of renewables vs oil & gas in the UK.  We’ll be taking this work further with larger samples and statistical analysis to estimate measures of a risk-adjusted returns.

As a relatively new industry, there is relatively little work that has been carried out to date on risk-adjusted returns in clean energy. With respect to publicly-listed clean energy companies, there have been studies showing a low correlation between oil prices and clean energy stock performance, with the performance of clean energy stocks more tied to technology prices and interest rates (Kumar et al., 2012; Sadorsky, 2012). Asset pricing for clean energy has been addressed by Donovan and Nuñez (2012) who found that investment risk posed by clean energy companies in emerging economies such as China and India were similar to those of broad market indices. 

Researchers including Muñoz et al. (2009) and Kitzing (2014) have employed the Sharpe ratio to optimize the return of public investment in renewable energy technologies. Risk-adjusted returns for conventional versus renewable energy was explored by Wüstenhagen and Menichetti (2012), although they based their argumentation on a conceptual model rather than empirical evidence. An emerging stream of research stream has used choice experiments to estimated required returns in the clean energy sector based on stated levels of risk (Lüthi & Wüstenhagen, 2012; Salm et al., 2016).   A combination of these methods will likely be needed to conclusively address the risk to retail investors from clean energy investing. 

On 14 November, we launch a new Centre for Climate Finance & Investment.  Our goal is to help investors unlock what still can be the greatest economic opportunity of this century: reducing greenhouse gas emission, while increasing the rate of economic growth.  Amongst the world’s top 10 universities, Imperial College London has several outstanding peers with well-established climate and energy research initiatives.  But we are the first to house a climate research centre in its business school, sending an important message that climate investing is no longer a matter of environmental studies, it’s about intelligent investing in a future climate of risk.

Academic References
Bomberg, E., & McEwen, N. (2012). Mobilizing community energy. Energy Policy, 51, 435-444.
Donovan, C., & Nuñez, L. (2012). Figuring what’s fair: The cost of equity capital for renewable energy in emerging markets. Energy Policy, 40, 49-58.
Kumar, S., Managi, S., & Matsuda, A. (2012). Stock prices of clean energy firms, oil and carbon markets: A vector autoregressive analysis. Energy Economics, 34(1), 215-226.
Lüthi, S., & Wüstenhagen, R. (2012). The price of policy risk — Empirical insights from choice experiments with European photovoltaic project developers. Energy Economics, 34(4), 1001-1011.
Muñoz, J. I., Sánchez de la Nieta, A. A., Contreras, J., & Bernal-Agustín, J. L. (2009). Optimal investment portfolio in renewable energy: The Spanish case. Energy Policy, 37(12), 5273-5284.
Rogers, J., Simmons, E., Convery, I., & Weatherall, A. (2008). Public perceptions of opportunities for community-based renewable energy projects. Energy Policy, 36(11), 4217-4226.
Sadorsky, P. (2012). Correlations and volatility spillovers between oil prices and the stock prices of clean energy and technology companies. Energy Economics, 34(1), 248-255.
Salm, S., Hille, S. L., & Wüstenhagen, R. (2016). What are retail investors’ risk-return preferences towards renewable energy projects? A choice experiment in Germany. Energy Policy, 97, 310-320.
Salm, S., & Schmid, B. (2016). Finanzierung von erneuerbaren Energien über Bürgerbeteiligungsmodelle Finanzwirtschaft in der Energiewende (pp. 16-19). Bern: AEE Suisse.
Trend:research, & Leuphana Universität Lüneburg. (2013). Definition und Marktanalyse von Bürgerenergie in Deutschland.   Retrieved 20.09.2016, from http://100-prozent-erneuerbar.de/2013/10/definition-und-marktanalyse-von-burgerenergie-in-deutschland-oktober-2013/.
Walker, G. (2008). What are the barriers and incentives for community-owned means of energy production and use? Energy Policy, 36(12), 4401-4405.
Wüstenhagen, R., & Menichetti, E. (2012). Strategic choices for renewable energy investment: Conceptual framework and opportunities for further research. Energy Policy, 40(0), 1-10.
Wüstenhagen, R., Wolsink, M., & Bürer, M. J. (2007). Social acceptance of renewable energy innovation: An introduction to the concept. Energy Policy, 35(5), 2683-2691.
[1] Under the auspices of the United Nations Framework Convention on Climate Change (UNFCCC), 195 countries negotiated and adopted by consensus a commitment to reduce greenhouse gas emissions at the 21st Conference of Parties (COP 21) held in Paris, France.  The Paris Agreement entered into force on 4 November 2016.