Aegon has established its first ever fund for solar energy, enabling an institutional client to invest in sustainable energy and potentially earn above-average returns in the current low to negative interest-rate environment.
This is one of a number of impact investments made by Aegon Asset Management, which aim to achieve a social or environmental outcome in addition to generating a financial return. In 2015, Aegon Asset Management had EUR 7.6 billion of impact investments.
The US$80 million solar energy fund was set up on behalf of a single unaffiliated client. The now-closed fund is investing in eight solar farms in North Carolina that are operated by FLS Energy, Inc., a solar energy provider that owns and operates solar assets across the United States. Aegon USA Realty Advisors, LLC ("AURA"), a U.S.-based real estate asset manager and member company of Aegon Asset Management, created the fund.
North Carolina is one of many states that have strongly promoted renewable energy in recent years in order to increase renewable energy's share in the state's total energy production from 6% currently to 12.5% by 2021.
Sustainable investment with solid returns
"The creation of our first solar energy fund with FLS is a significant accomplishment," said Sean Creedon, Director of the Community Investments group at AURA.
"The investment is designed to generate an attractive return for AURA's client, while the energy produced by the solar projects in the fund will provide clean, affordable energy to many thousands of homes."
Solar energy is booming in the United States, a promising development in a country with the second-highest energy consumption in the world, after China. Since December 2015, when more than 170 countries, including the US, signed a landmark agreement in Paris to curb global warming, the pressure has been increasing for countries to turn their commitments into bold actions.
Tax credits stimulate renewable energy market
Last December, the US Congress decided to extend the 30% federal tax credit for investments in renewable energy investment for another five years. This tax credit, which had been in place since 2008, has been responsible for much of the growth in solar in recent years, yet it was due to drop back to 10%.
"That decision has really breathed new life into the renewable energy industry," says Creedon.
The 30% tax credit can be claimed on U.S. federal income tax returns by homeowners or businesses that install, develop and/or finance a new solar energy system.
70% reduction in installation costs
According to Tom Kimbis, interim president and general counsel for the Solar Energy Industries Association (SEIA), solar energy in the US is expected to nearly triple in size over the next five years, thanks to the 30% tax credit coupled with the fact that the cost of installing solar energy systems has dropped by more than 70% over the last decade.
Researching and purchasing tax credits and structuring tax-advantaged equities is a business that AURA has specialized in for nearly 30 years through its Community Investments group. Until recently, however, AURA's focus was on tax credits for low-income housing.
Creedon explains how this market works: "States award tax credits to developers in a competitive process. The developers then take those credits and sell them on to investors and use the proceeds to build affordable housing. It's a mature niche market and an excellent example of public-private partnership. Without those tax credits, a lot of affordable housing in America wouldn't be built."
Now, the new solar fund marks the first time that AURA has transferred its longstanding expertise in tax credits for low-income housing to the renewable energy sector.
"We are basically taking the experience we already have, applying it to solar and offering it to the broader market," said Creedon. "Going into solar is a natural extension of what we already do and broadens the spectrum of our responsible investments."
The money contributed to the fund by AURA's client will be invested in FLS's projects. Tax credits and economic benefits produced by the FLS solar projects will pass through to the fund created by AURA and, ultimately, to the client. The tax credits can be used by the client to offset taxes owed, enhancing the client's after-tax return on investment.
"We continue to actively explore additional solar tax equity opportunities on behalf of interested clients," said Creedon. "They can be an attractive option for clients looking to diversify risk and secure attractive tax-advantaged yields while being part of a project with positive environmental impact."