Interview: As a reliable investment proposition in uncertain times, solar is very compelling


Lightsource Renewables, based in the U.K., works alongside Octopus Investments, to develop, own and operate solar installations. With extensive experience in the field, Lee has been involved in the construction and development of projects worth over GBP1 billion, including one of Australia’s first commercial photovoltaic systems. In addition to looking at the solar investment situation below, he also discusses the U.K. industry following its feed-in tariff (FIT) fiasco, and new market opportunities.

How many solar projects have Octopus and Lightsource worked on?

Octopus and Lightsource have delivered a total of 13 large scale sites in the U.K., installing almost 130,000 panels generating a total capacity of over 32 megawatts peak (MWp). We have also recently commenced the rollout of our smaller scale (sub-50 kilowatt peak (kWp)) program.

What do you look for when investing in a solar installation?

Our funds, provided by Octopus, come from retail investors who are investing in products where capital preservation is the key objective. As a result, the solar opportunities we go for are those that offer us the most certainty of achieving this goal, on behalf of the Octopus investors.With the various FIT changes creating uncertainty in the market, this has increasingly meant choosing sites and locations where we can work quickly and with minimum complications, and with landowners who understand these time pressures and have the right attitude to help us deliver.

Why do you think it is a good idea to invest in solar in the U.K., given the lack of support from the government?

In the current economic climate, investors are looking for opportunities which aren’t correlated with the stock market. Many are simply holding cash, but interest rates are very low, so returns are barely keeping up with inflation. We can be certain that the sun will be there tomorrow, and that our panels will generate electricity, and revenue as a result. So as a reliable investment proposition in uncertain times, solar is very compelling.

Is the U.K. market still a viable option for developers after the FIT changes?

Following the most recent round of FIT changes, Octopus and Lightsource crunched the numbers pretty hard to see if we could still make it work. Fortunately, with panel prices coming down and all parties reducing their margins, we have been able to find a model that still delivers on the expectations of Octopus’s investors.

A consortium of companies are taking the U.K. government to court over its decision to move the FIT deadline to December 12. What are your thoughts on this?

I think it is important that somebody questions whether the process that has been followed is right and proper. I couldn’t say what the outcome will be, so we’ve ensured that we, and our investors, are not affected by the result. As I said before, Octopus likes to create certainty for its investors, so our model doesn’t work if it relies on the uncertainty of a legal battle.

Octopus has just closed one tranche of funding at GBP30 million, and opened a second one. Who has committed funds thus far, how big will the second tranche be, and what will the funds be used for?

The Octopus funds are provided by retail investors from all over the U.K. – regular people investing to supplement their pensions, save for a rainy day or reduce their tax liabilities – several thousand of them in fact. The tranche that has just closed will invest in U.K. solar on behalf of these investors. These will mainly be 50 kWp to five MWp sites, predominantly in the South West where the extra sunlight makes the economics better. The next tranche will be about GBP30 million as well, and for that one we’re looking both inside and outside of the U.K.

Which other markets are of interest? What are you plans for them?

Germany, Spain, Italy, France and the U.S. are the most likely locations. In those regions, we will be looking at acquiring both operational assets as well as funding development opportunities. The opportunities will vary in size from portfolios of small scale installations, through to larger plants of up to seven MWp as the FIT structures there support this sort of scale. The goal is to purchase operational assets, or get development sites installed and grid connected by April.Lightsource will manage the project roll out, using a range of engineering, procurement and construction (EPC) contractors in each country. We have an international team consisting of staff from over 14 different nationalities with experience in many of the key solar markets. At this stage, we don’t think we’ll need to open an office overseas, but we’ll be spending a decent amount of time in these countries.

Octopus says it has secured a strong deal pipeline. Please expand.

Octopus and Lightsource had an impressive pipeline of projects before the FIT changes, so when the goalposts moved it was more a case of cherry picking the very best and concentrating on them. In the U.K., we are continuing to work under the FIT program, meaning that the maximum size for any site is five MWp. Our recent focus has been on delivering sub-50 kW portfolios and we are continuing to work with our partners on this model. Consequently, we trimmed the pipeline right down. Now we’ve got hundreds of sites in the pipeline, with new approvals, permits, installations and connections happening almost daily.

How does Lightsource go about selecting its suppliers?

As a long term holder of assets careful attention is paid to the selection of suppliers and partners. Not only do we require experienced partners who have demonstrated the ability to deliver in tight timeframes, but components must be high quality with the ability to deliver over a long period of time. We also look for financial stability and long term relationships to enable us to deliver competitive pricing on the back of repeat business.For our development partners, we seek professional and experienced entities who can demonstrate the ability to deliver an ongoing pipeline of projects which, in return, we are prepared to enter into framework arrangements to provide funding. This provides certainty to of outcomes for the developers and allows both them and us to forward plan our investment and roll out program.

Who are Octopus’ customers?

Interestingly, Octopus pulled together this data to show that solar investors are not ‘City fat cats' or ‘Hedge funds' when this rhetoric was doing the rounds. Octopus’ several thousand solar investors are 54 years old on average, investing an average of GBP30,000 each, but as little as GBP3,000 – that’s less than you can put into an ISA. They range from 22 to 93 years old, and live everywhere from Falmouth in Cornwall, to the Shetland Islands (where incidentally they can’t benefit from installing solar themselves, but can benefit through this type of investment).

What sort of returns can they expect to receive on their solar installations?

As I said before, the way Octopus sets up these funds is with a focus on capital protection. They use tax efficient structures such as Venture Capital Trusts and Enterprise Investment Schemes. These structures allow investors to reclaim income tax, defer capital gains tax or mitigate inheritance tax, and so provide benefit to the investors. These tax benefits, combined with a modest but reliable return from the solar installations themselves, together deliver what the investor needs.

How have the 2011 weak solar market conditions affected both Octopus and Lightsource?

From our perspective it’s not a weak market, it’s simply one where the goalposts keep moving. This means we have to change our plans, or our focus, in order to continue to meet the expectations of our investors. It’s a hassle more than anything, but then it’s an environment where companies like Lightsource and Octopus can thrive. We’re both relatively small and nimble, we work in close partnership and make decisions quickly, plus we’ve got the funds to deploy. As a result, we think we’ve got a great proposition to take into Europe, and expect to carry on this success both inside and outside of the U.K.

What are your strategies for staying successful in such a competitive marketplace?

It’s all about delivering on expectations, and being prepared to adapt to change. Delivery is important – for the Octopus investors, for the landowners, and for all the teams involved with getting these sites up and running. Where so much uncertainty has been created by policy changes, we need to be part of the process that people can rely on. The ability to adapt to change is the other important thing, because there are some things that are out of your direct control, so being able to quickly find a way to deal with them is necessary to deliver on expectations. We’d like to think that our track record of raising investment and deploying sites under tight timelines is proof that we’ve achieved these two things in the U.K., and now we’re going to make sure we carry that on as we move into Europe.

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