29 Jun Lighthouse Infrastructure sees stars lining up for solar investment

Lighthouse Infrastructure is weeks away from closing a $100 million solar fund that channels investment into a sector that managing director Mitchell King expects to attract up to $3 billion of investment a year for the next several decades.

The former Hastings Funds Management director said the fund has “numerous opportunities” in front of it for investing the $100 million, thanks to a combination of factors that have come together to create ideal conditions for investment in solar, whatever the result of the July 2 federal election.

“Whichever way the election goes I think there is bipartisan agreement on the development of a renewables sector, around jobs, mobilising capital, retiring the old fossil-fuel plants over time: that’s a shared vision across both parties,” Mr King said, while acknowledging Labor policy is more aggressive on its emissions targets.

“Institutional investors and other high net worth investors are seeing that stability as an opportunity to access good returns.”

Melbourne-based Lighthouse expects to invest its $100 million in the 12 months after financial close, across a diversified portfolio with different counter parties, originators and suppliers that it has been scouting out for the past three years. It would take equity in some projects, while for others it could extend loans or provide other securities that provide returns for investors. Plants would be underpinned by long-term power purchase agreements, leases or similar contracts, typically lasting 10-20 years.

The fund, which is targeting an internal rate of return of 10 per cent a year after costs, has attracted a range of institutional investors that goes beyond ethical investors as the solar opportunity goes rapidly mainstream, Mr King said. He added the intention was to provide returns not correlated to bond markets or equities, or impacted by Brexit issues.

Flight to defensives

“There’s a flight to defensives, and when you get volatility as we’ve just seen by virtue of different currencies, infrastructure generally is a great place to be,” he said.

Lighthouse sees particular potential for solar projects for commercial and industrial customers, as well as utility-scale plants, as those sectors catch up to the flood of household investment in rooftop solar. It cites forecasts from Bloomberg New Energy Finance that the Australian solar market will grow from 4.1 gigawatts now to about 52 GW by 2040.

Chief investment officer James Hooper said project economics had benefited from significant cost reductions in solar panels over the last four-five years, as well as learnings from plant development in the local market. While those gains may plateau in another year or so, the increasing competitiveness of electricity storage would provide another spur.

“With the onset of storage the effectiveness of solar will increase so the value for dollars invested will increase,” Mr Hooper said. “That’s something we’re excited about in terms of holding a number of solar assets.”

Lighthouse’s fund is closing around the same time as AGL Energy is set to reveal co-investors for its $2 billion-$3 billion renewable energy fund, on which an announcement is expected post the election and which will invest in wind and solar projects. Rival electricity retailing major Origin Energy has also recently backed a new solar project to be built in north Queensland, while the Australian Renewable Energy Agency is due to back solar projects with $100 million of funding later this year.

Mr King said large-scale solar was rapidly reaching a stage where projects were economic without government funds.

“Solar is now able to stand on its own two feet and be a compelling economic proposition,” he said.

Author: Angela Macdonald-Smith, email: amacdonald-smith@afr.com.au.

Article published in today’s (29/06/16) issue of the Australian Financial Review.