Types of Fixed Income Securities
When the term “fixed income securities” is mentioned, investors immediately conjure up images of bonds in their heads. However, this is a generalization on the part of the investors. In reality, fixed income securities can refer to many different types of securities. As an investor, one must be aware of the wide range of securities […]
Advantages and Disadvantages of Forex Market
Advantages of Forex Market The biggest financial market in the world is the biggest market because it provides some advantages to its participants. Some of the major advantages offered are as follows: Flexibility Forex exchange markets provide traders with a lot of flexibility. This is because there is no restriction on the amount of money […]
How Green Bonds Work?
Stakeholders all over the world are concerned about the irreversible damage being caused to the ecosystem of the earth. There is a common belief amongst people that the natural habitat on planet Earth has been irreversibly damaged. It is true that climate change affects all of us. It is also true that very soon the […]
The Pitfalls of Overvaluation
It is often believed that the role of the investment banker is to sell the company for the highest price. The conventional belief is that the higher the price, the more successful the issue has been. However, over the years, the management of issuing companies, as well as investment bankers, have painfully discovered that a […]
Need for a Uniform and Common Theory of Accounting
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When the word infrastructure project is used, it brings to mind images of bridges, railways, and even ports, which are considered to be essential for any country’s progress. However, this is changing rapidly. A lot of developed as well as developing countries around the world have started focusing extensively on infrastructure projects, which can be considered to be non-conventional. One such field which is seeing a lot of investment is the field of renewable energy. Every year, more and more governments are pledging billions of dollars of investment in this field. This is being done for both environmental as well as financial reasons.
In this article, we will have a closer look at the concept of renewable energy and how it relates to infrastructure investing.
Institutional investors have huge sums of money at their disposal. However, they do not seem to have suitable avenues in the field of infrastructure investing in deploying those funds. Traditional infrastructure projects such as roads, bridges, and railways have become commoditized. There is no special expertise which is required to execute such projects. As a result, the competitive pressures are pushing the bid prices down. Hence, the margins for such projects are also reducing.
On the other hand, renewable energy is still a nascent field. The skillset and knowledge required to execute infrastructure projects related to renewable energy cannot be freely found. Hence, these projects tend to have higher margins. It is, therefore, no surprise that infrastructure funds are queuing up to invest their money in projects related to renewable energy.
Also, renewable energy sources do not have to be more economical in order to be adopted widely. Governments all over the world are fighting the use of fossil fuels as a prime energy source. The common belief is that the usage of fossil fuels has led to carbon emissions, which have been responsible for the increase in the temperature of the earth. Hence, renewable energy is being seen as a greener alternative. A lot of capital is being invested in order to develop technology which will help make renewable energy a more economically viable proposition.
However, the above-mentioned points do not mean that infrastructure projects related to renewable energy do not have any risks. There are many risks that are specific to renewable energy projects. The same has been mentioned below:
Since meaningful amounts of capital cannot be deployed in renewable energy projects, many funds do not find it worthwhile to study the opportunity and understand its pros and cons. This is the reason that infrastructure funds have not traditionally invested large sums of money in renewable energy projects. It has been estimated that renewable energy accounts for only 0.5% of their total portfolio.
Any innovation is happening on a piecemeal basis. This means that the older investments are not rendered obsolete by a change in technology. On the other hand, the renewable energy sector is considered to be a high tech sector. Therefore, the change in technology is quite rapid.
Also, many times, older technologies become completely obsolete after new technology is introduced in the renewable energy sector. For instance, earlier models of batteries used in electric cars are considerably expensive compared to newer models. This was one of the reasons why electric cars were not economically viable.
However, companies like Elon Musk’s Tesla have created low-cost batteries, which have drastically changed the marketplace. Also, earlier models of batteries, as well as the mega factories producing them have been rendered obsolete by this innovation.
For example, Donald Trump has already passed several legislations in the United States, which favor the coal industry at the expense of the renewable energy industry. Institutional investors are afraid that if the governments stop focusing on renewable energy projects, then their cash flows will deviate quite significantly from the projections.
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Usage of Collateralized Debt Obligations (CDO) in Infrastructure Finance
February 12, 2025
