In an interview with Climate Spectator editor Giles Parkinson, Moss Capital’s executive director, Martin Rushe, explains the thinking behind the company’s $100 million solar fund, saying that:

– The income fund is the first of its type in Australia, and possible the world.

– Energy users will invest in solar PV as a hedge against rising energy costs.

– Solar PV will be used increasingly in large scale installations on rooftops such as warehouses and shopping centres, and in remote areas as an offset against diesel.

 

Giles Parkinson: Hi Martin, thanks for joining us. On Friday, Moss Capital announced it was launching a $100 million solar fund to invest in solar PV installations for the commercial and industrial scale sectors. Why commercial and industrial, that market doesn’t exist much in solar PV in Australia at the moment?

Martin Rushe: Well, it’s growing very quickly and we are in negotiation now with probably 10 assets which suit that profile, and we see a growing pipeline and we certainly have enough to initiate the fund. To date the focus in Australia has been very much on residential solar which is subject to the vagaries both of market electricity price and state feed in tariff legislation. But the kind of assets that we’re looking at actually are much more stable in their revenue profile because of the PPAs or Power Purchase Agreements that we connect with them. 

GP: And you’re saying then that the people who will be buying these PPAs will be doing so because they see it as a hedge against rising electricity costs and therefore that will offset the cost of installation.

MR: Well, that was certainly one of the key drivers and so, as you guys over at Climate Spectator know, we are in a rising electricity price environment. Not only is it rising, but it’s also volatile, whereas the power that flows from a very inert and stable, large scale solar installation is of fixed price in accounting terms because, generally speaking it comes with a large piece of capital expenditure upfront and with very little input costs. The raw resource is sunshine and it has no input cost. And there are relatively low operations and maintenance costs for the plant. And so, over the depreciable life of the asset the cost of the power output is fixed and so it creates a fixed price power output hedge against rising and volatile electricity prices.

GP: And what sort of prices are people paying for these? Or do you expect them to pay for it?

MR: Well, we actually expect them to be very comparable with their existing on-grid power supply prices and that’s because of the nature of solar. One of the great assets of solar as you know is that solar is distributed. With industrial and commercial installations it can be located in most instances close to the load and so there’s no transmission overhead. And as you know from looking at a standard retail electricity bill, as much as half of your power cost is transmission costs. And so if you can locate the generation source close to the load and cut out the transmission overhead, then the systems in which we are investing can provide electricity use very similar to the existing network charge.

GP: So, saying then that you can install commercial industrial scale solar and not pay any more than you would for grid based electricity for those commercial users?

MR: No. I’m not saying not pay any more, but I am saying that it’s comparable and it’s certainly the case that if you were to take your existing retail electricity price today and you were to fix that price by buying some kind of on market instrument like an electricity swap for instance. That’s going to attract a premium, and if you wanted to fix your home rate at the moment, you would expect to pay a premium rate on the fixed rate too? And if you wanted to fix your power price right now, then you would pay a premium to do that, and it’s certainly very comparable with using solar to fix your power prices.

GP: Are you working with any particular solar manufacturers or distributors or any particular technology, or are you agnostic on this?

MR: Well, we’re working exclusively with solar PV at the moment because solar PV for us is the most proven and the most reliable technology and the purpose of this fund is, and this goes to your first question a little… There’s a lot of opportunity in the market at the moment to be exposed to equity risk and in renewables, but that’s really not what we wanted to do. What we wanted to do was to create an income fund; a fund focused on delivering stable returns to investors and that’s what our fund is about. 

And so, what we’re looking for is not the next best technology. We’re looking for the most reliable technology from the most proven providers and so we use probably three or four technology providers. We’re working with all developers. We’re agnostic in that regard and we very much welcome approaches from all… any and all developers who have projects which we think are suitable.

GP: And now you said you’re talking about a fixed return, so what do you want expect to return to the people who will be investing their money?

MR: Yeah. Our target is 13-15 per cent per year. 

GP: And who do you expect to be raising this $100 million from?

MR: Well, we’re already in conversation with a number of large institutions and there’s strong interest and so It’s a wholesale fund, so it’s only for wholesale investors at this stage. Though we look forward in the future to investigating the possibility for launching a similar retail fund, but institutional investors at this stage; investors who are interested in renewable energy, who are also interested in fixed income.

GP: The pattern of your investment, will you be offering say 30 per cent equity or 20 per cent equity? How do you imagine structuring these deals?

MR: It’s a good question. Primarily we’re a lender and so we provide debt and preferred equity to projects. 

GP: And that’s what you see as the missing link in the solar PV equation?

MR: Well, we do. Because as you know at the moment there is a shortage of credit in the global market and in the Australian market for project finance, and we believe that there are many very credible projects out there which are being held up through the lack of the availability of credit and so we think that we can fill that gap.

GP: And how big do you see the potential of this market?

MR: Well, in Australia we think it’s a huge market and we think that as solar PV prices continue to drop and as electricity prices continue to rise, then it becomes an increasingly compelling proposition and, we think solar has got a very large part to play in the renewable energy future of Australia and we like to think that we’ll be at the forefront of that.

GP: Can you give me an example of the type of projects that you’ve already been looking at? Are they retail and warehouses rooftops, or commercial buildings? 

MR: I can’t give you any specifics unfortunately, we’re interested in a broad spectrum, so you could say from green-field installations and so they might be in remote and regional areas for diesel replacement.

GP: For mines, for instance?

MR: Look, yes, I guess that we’re interested in that kind of installation. At the same time we’re actually negotiating now two assets which are both metropolitan and rooftop, but large scale.

GP: What sort of megawatt capacity are you talking about? 

MR: Well, generally speaking we’re interested in 500 kilowatts and up.

GP: And is this based on a model of something used elsewhere internationally?

MR: No. It’s not. We think there’s a chance that we’re possibly if not the first, then the second or third pure place solar fund in the world, but we’re quite sure that we’re the first income focused solar fund which is not on the technology side, but really rather on the asset side. We’ve built up a good deal of knowledge in the solar space and we think it’s appropriate now that those assets we’ve been working with today are actually incorporated into a fund.

GP: Just briefly tell me how you came into this business then because Moss Capital was established about a year ago? I think you’d been playing in the RECs market, Renewable Energy Certificates?

MR: Yes.

GP: And you have come from Goldman Sachs originally and I think via, or from, the European Space Agency, or the other way around?

MR: Well, I was at Goldmans and then I went to the Space Agency as a scientist and after that I ran a number of my own technology companies as an entrepreneur and latterly in Australia. We are involved in the Solar Flagships program – the bid which we authored on behalf of TRUenergy for the Solar Flagships program was shortlisted – and so for the last two years I’ve been involved in renewables, specifically solar, in Australia.

GP: And that, presumably, has awakened you to this possibility?

MR: Well, we’ve been active in the space on a deal level and now we can see sufficient critical mass in that asset class, and we think the assets lend themselves to an income fund because they’re such stable and inert assets that, you know, if the sun comes up, they generate electricity. You can very scientifically predict the amount of electricity that they generate and if you have a fixed price off take agreement, then you have great surety of the revenue that you’ll generate, so they lend themselves perfectly to an income fund.

GP: And does this have applications to other forms of emerging renewables? Do you see possibilities here in geothermal or wave or wind or biomass.

MR: Well, we’ve done a lot of work and continue to do a lot of work in biomass and we have a number of clients operating in biomass and we feel that there will be an opportunity in the relatively near future for a similar offering, specifically in biomass.

GP: Ok. Thank you very much.

MR: You’re very welcome.