Investing in clean energy in developing countries: can it pay off?

Private funds continue to be overcautious when it comes to investing in developing countries – particularly in the clean energy sector. For many, the key issues are profitability and security of such investments. Answers on how to tackle these issues most certainly lie in specific cases which can allow us to learn a lot about the reality of the field. Founded in 2004, Aloe Private Equity (APE) is an investment fund specialized in sustainable development. It makes equity investments in companies experiencing strong growth in their business; in 2008 APE made 40% of its investments in the recycling sector, 50% in clean energies (especially run-of-river hydropower) and 10% in sustainable agriculture. A key feature of this investment strategy – which has also allowed APE to set up companies from scratch – is the support it provides to management teams throughout their business development. It is also based on strong social and environmental commitments. All investments are consequently appraised in terms of social responsibility and the principles set out in the United Nations Global Compact1 are systematically complied with – something which its investors appreciate and demand. APE's Limited Partner base spans both family offices in Asia and Europe, banks, insurance companies and international institutions such as the International Finance Corporation (IFC), Swedfund and Proparco. APE is actually the first privately managed third party environmental and climate change fund that the IFC has invested in. APE has offices both in Europe (Paris and London) and Asia (Mumbai and Beijing). Its core expertise resides in building bridges between projects and promoting two-way technology transfers. Asia is obviously interesting for its economic and demographic growth, but also for the prospects for profitability and high-potential business opportunities it offers companies that help preserve natural resources or make them sustainable. This geographical focus, notably on Asia, is reflected by its shareholding. This means that shareholders are not only informed about “local” investment opportunities, they are also keen to contribute to the development of their region. APE currently manages three private equity funds which are all partly or completely located in Asia. This sets it apart from most management teams in the North which are generally overcautious about investing in developing countries – especially when it comes to clean energy – due to the entailed technical, economic, financial and political risks.2 Yet the extremely solid financial situation of the energy producing companies in APE's portfolio demonstrates the high level of profitability these investments can achieve and highlights the positive impacts they have on the development of the local economy.

Targeting economic, social and environmental profitability: the case of Greenko Group in India

Given the steady growth of its young and dynamic population, India offers wonderful opportunities for investors, particularly in infrastructures. Its electricity production capacity in terms of installed capacity remains for example roughly 15% lower (against 17% in 1998) than peak demand. This deficit prevents it from being able to meet sharply rising demand. Still, the country enjoys an enormous and yet unexploited potential for green waste which could be used to produce clean electricity. Using biomass3 is not only an interesting alternative to fossil fuels – which, via thermal power plants, provide roughly ¾ of the country's electricity production – it also creates local jobs for people as waste collectors and operators for electricity generating units. It was in this context that APE set up the company Greenko Group in February 2006 with a EUR 3 million investment from its AEF I fund. It was also heavily involved in designing Greenko and helping it start up – it even chaired the company at one stage and holds a seat at the Board of Directors. The most urgent need was to overhaul and raise the capacity of several biomass-based electricity generating units which were operating well below their nominal capacity. Following several acquisitions, the company went on to build new plants using both biomass and hydropower. APE was convinced by its success and renewed its financial support to Greenko via its AEF II fund. Building on its success, Greenko wished to raise more funds and was listed in November 2007 on the AIM4 market of the London Stock Exchange. This listing allowed it to raise EUR 45 million from new investors. In 2009, it also benefited from a USD 46 million investment from the Global Environment Fund and a GBP 72 million investment from private investors such as TPG, M&G and Blackrock. Greenko has become one of the pure play renewable energy leaders in India thanks to these successive fundraisings. Greenko is constantly growing and its total generating capacity now tops the 120 megawatt (MW) mark. Infrastructure with a total additional capacity of 336 MW is also currently being developed (Table 1). Greenko's activities have a significant impact on local employment and consequently help reverse the tide of rural exodus which plagues modern India. Greenko recruits its staff locally and agricultural waste collection also creates indirect jobs. The company now directly employs over 600 people, generates 2 860 800 megawatt-hours (MWh) annually and reduces CO2 emissions by 1 488 909 tons a year. According to forecasts, these figures could increase fivefold in the next three years. Greenko's share price at mid-March 2010 shows it has increased fourfold in just 12 months, offering investors extremely high returns. APE has played a key role in Greenko's success throughout its expansion by providing it with seed capital, supporting, and allowing it to benefit from its expertise (particularly in turnaround acquisitions and at the time of its initial public offering). Conversely, the funds managed by APE have really benefited from the increase in Greenko's financial value. Indeed, in addition to social and environmental spillover effects, the company provides an extremely high return on investment. The positive effects of this support can also be seen in other contexts or situations – Longmen Group in China is a case in point.

Relying on local skills: the case of Longmen Group in China

Longmen Group is a Chinese producer of non-conventional gas:5 Coal Bed Methane (CBM – a gas present in coal seams). Using gas – which is cleaner than coal – reduces the carbon intensity of China's energy mix. CBM is mainly made up   of methane. It used to be considered as waste, whereas it is fully interchangeable with natural gas and is now recognized as an extremely precious resource. The way it is exploited has been improved thanks to recent technological progress, particularly in the development of prospecting methods – especially seismic prospecting – and drilling techniques. It can be used by both Chinese industries and households. In view of these prospects, APE participated in the creation of Longmen in 2005 and made it possible for the company to enter into negotiations with China United Coal Bed Methane (a public company which holds the exploring, development and production rights for methane in China). The aim was to obtain a 470 km2 concession in Shaanxi Province. An initial agreement was signed in May 2005 thanks to the presence of APE's local partners and the determination of the teams. Other acquisitions have since completed Longmen's reserves which now total nearly 1000 km2 of concessions. After raising USD 45.5 million from investors, the Group is expected to benefit from a new investment of between USD 30 and 50 million which will support its growth. Longmen has consequently proved that it is attractive for investors. The Group very quickly sought to secure the technology required to develop its concessions in the most effective possible manner. APE contributed to this research by identifying American experts and entering into partnership with a Chinese company, Orion, which has exhaustive experience in the CBM drilling sector. Longmen bought shares in Orion which allowed the latter to modernize its prospecting and drilling tools. Longmen is now seeking to secure outlets for its business downstream by launching a gas compression activity for vehicles and its distribution to specialized gas stations.

Different approaches, but similar profits

Investments in clean energy can clearly be economically profitable – Greenko and Longmen are just two examples that prove this. In addition, this equity can provide real social and environmental profitability: it participates in the development of local economies – for example, by generating employment – reduces greenhouse gas emissions, helps diversify the energy mix, etc. The example of Greenko shows that it is possible to successfully launch an activity by improving the output of existing plants that are running below capacity and, at the same time, building new production units. Longmen did not use existing infrastructure, it very rapidly obtained new concessions by relying on local players while making sure it benefited from the expertise it required via local participation (drilling, transport). Clean energy production relies on local expertise in both cases. These investments also help reduce rural exodus and make it possible to develop a direct and indirect economic activity. Finally, they are truly profitable: the two companies were recently set up from scratch and have now reached extremely high values: over USD 100 million for Longmen and double that amount for Greenko. Beyond these two examples, many lessons may be learned from the more symbolic successes. The success of investments would appear to depend on a few recurrent factors. The first is the need to rely on local expertise and network in order to implement and develop activities; moreover, the presence of local players in funds increases their capacity to have access to information and closely follow the activities that are implemented. Fund managers must be extremely reactive and have the capacity to be directly involved in managing and supporting the management teams. Ideally, they will comply with a series of standards or principles in force today (for example those of the Global Compact). Another key to success is unquestionably their capacity to seek, evaluate and enter into partnerships with local players, and their own entrepreneurial instincts and track record.

1 Under the Global Compact, companies pledge to align their operations and strategies with 10 internationally accepted principles concerning human rights, labor standards, environment and the fight against corruption.

2 Read the article on this subject by Duncan Ritchie in this issue of Private Sector and Development.

3 The term biomass covers all organic materials that can become sources of energy. These organic materials are of plant origin and can be seen as a form of solar energy storage, captured and used via the photosynthesis process.

4 Alternative Investment Market (AIM) is a sub-market of the London Stock Exchange which was set up to allow SMEs to raise funds by issuing shares.

5 In order to face the exhaustion of so-called “conventional” gas (easily accessible gas in porous and permeable rocks), there is interest in other less accessible deposits that are called “non-conventional”.

RÉFÉRENCES :

Greenko, 2010. www.greenkogroup.com/business/