Africa is at the forefront of the renewable energy sector. More than $200 billion was invested in renewable energy projects in 2016, particularly in wind and solar, and the market is expected to deliver high growth in investments over the coming decades.
However, valuing renewable energy projects for investors is extremely difficult. The data necessary for establishing the cost of capital is hard to gather but vital for determining the fair value or market price for projects – and this is especially true in Africa.
With this in mind, we launched a survey to gauge investors’ perception of cost of capital in Africa – the Grant Thornton renewable energy discount rate survey summary for Africa in collaboration with Renewables in Africa and Clean Energy Pipeline. Our survey focuses on the three most developed markets for renewable energy technologies in Africa: Kenya, Nigeria and South Africa. We looked at the two fastest growing technologies – onshore wind and ground mount solar – and asked investors one simple question: What most closely matches the discount rate you would expect to see for the following secondary market deals?
How to value renewable energy projects
Renewable energy represents a niche segment of the overall infrastructure asset class. These assets need to be approached slightly differently due to the varying risk return profile associated with long-term incentive schemes, financial leverage, construction/technology risks and input/output price volatility.
Typically, when valuing renewable energy projects, an income approach is utilised. Sometimes, valuers use the capital asset pricing model (‘CAPM’) in determining the appropriate cost of equity and in turn the weighted average cost of capital (‘WACC’). Because some of the risks associated with equities are not present in renewable energy assets, the CAPM model may not always be the most appropriate method to rely on when deriving the appropriate discount rate.
As the pricing for renewable assets is competitive and unique to the specific aspects of the asset, the implied cost of capital (or IRR) from comparable transactions can be a strong indicator for valuing projects. This data is not readily available so we have surveyed investors in trying to obtain the latest view on where cost of capital is across various technologies globally.