Global, European and UK legislation is laying the groundwork for investors to benefit from putting money into renewable energy, according to specialist merchant bank Climate Change Capital.
Gareth Hughes, one of the founders of CCC and its subsidiary Climate Change Advisory, says although the market dislikes investment risk tied to policies that could be changed as politics change, the issue of climate change and international treaties is unlikely to be reversed.
This is the case despite US central government moves to water down commitments to agreements such as those signed at Kyoto in the past decade.
Where the EU is in agreement, and directives in place are actually starting to bite – such as the one instituting a carbon emissions trading scheme, which went live on 1 January this year - the US is currently caught in a struggle between federal and state governments as to the direction of environmental commitments.
However, with state legislation moving ahead and US multinational corporations increasingly looking to common standards, there is considerable momentum behind commitments to the environment in the US too.
Increasing amounts of investment in new related technologies is going ahead in the US, with energy security seen as the key driver and in the realisation that nuclear power is not a “silver bullet” in the near term, Hughes says.
The climate change link to the issue of energy security of supply means it is not an issue just about renewables such as the wind power targeted by the Ventus VCT in which CCA is involved, but that it is also about issues such as cleaner coal, Hughes says.
The US has many new coal-fired power plants on the way, which will need new technology to mitigate carbon output.
Investment trends through 2005 will also include the link between poverty and environment, carbon trading in the transportation sector, and new technologies to reduce emissions, Hughes says.
Focus will be on hythane, a mix of hydrogen and compressed natural gas, as an intermediary step to totally hydrogen-based solutions – car makers are looking to hydrogen to replace hydrocarbons in the form of petrol and diesel to replace the traditional internal combustion engine.
Efficiencies in the home will attract ongoing attention from so-called energy services companies (ESCOs).
Security of energy supply will be put on the agenda by 2006 in the UK when the country becomes a net importer of energy.
Charles Connor, director CCA and member of the investment management team of the Ventus VCT, says the overall picture regarding investments in environmentally-linked projects helps explain why the merchant bank believes the fund can succeed in its objectives.
Quite apart from offering an alternative in the VCT market other than being just another fund investing in the Alternative Investment Market, the target of investing in small wind farms within the context of a long-term power purchasing agreement (PPA) contract to supply energy to a major ESCO (utility) means there is less risk attached to the sale of the product generated.
And, while the VCT legislation implies investors cannot buy cashflow from, say, utilities, because of the tax breaks offered, Ventus is in a sense doing that by looking to put money into wind farms with the PPA in place.
The VCT’s directors are aiming for an 8p tax-free dividend per share until 2016, although the actual amount may fluctuate from year to year.
Belief in these dividends – although they are not guaranteed - is down to the ability to model cashflow already because of the PPA contract, Connor says, implying better visibility of earnings from the different wind farm projects in which Ventus will invest.IFAonline
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