Investing in solar funds What to consider when investing in solar power

Various investment products, their characteristics and important facts and figures about investments in solar energy.

Climate-friendly and stable: providers promise investors sunny prospective returns if they invest in solar energy. Funding renewable energies appears attractive to many. Where should solar investments be categorised in the spectrum of sustainable investments? 

Germany is one of the countries that has the most installed solar power systems worldwide. But not everyone has their own roof or space to build a small power plant themselves. Many investors are therefore asking how they can still profit from the energy transition. 

As a result, the number and variety of offers for solar investments is increasing, which makes it confusing for retail investors, especially as transparency often leaves much to be desired: Exactly which assets are invested in? What returns are realistic? How safe is the investment? And what is truly clean energy? 

This article highlights the opportunities and risks of solar funds. It provides clarity on how solar energy funds work and what alternatives there are to invest in the power of the sun.

Photovoltaic (PV) converts incoming sunlight directly into electricity. PV systems are particularly popular in Europe. Three things are needed to convert the power of the sun into usable energy:

1. solar cells that can be combined to form modules and entire photovoltaic systems – and a suitable surface for
2. the power grid, which receives and transports the generated direct current energy with the help of inverters,
3. solar radiation from clouds, but not at night, when there is snow and when the weather is persistently dark
   

Solar thermal energy bundles the warmth of the sunlight to heat a carrier medium (e.g. air, oil or water) and thus drive a turbine to generate electricity. Thermal conversion is more worthwhile in regions with a lot of sun and few clouds, such as the deserts of Africa.

Many countries provide financial support for the production of solar energy. In Germany, the Renewable Energies Act (EEG) has been ensuring since 2002 that electricity from renewable sources has priority for feed-in to the grid and that producers receive remuneration per kilowatt-hour (kWh) fed in. 

For example, investing in photovoltaics has become interesting for both private homeowners with roof space and solar park builders. Although feed-in tariffs have dropped in recent years, an investment in renewables remains attractive. 

It is not only good for your bank account, but also the climate. Every kWh generated with photovoltaics avoids the emission of 615 g of greenhouse gas emissions that would otherwise have been generated in the average German electricity mix with its high share of fossil energy such as oil, coal and gas. With electricity production of 490 TWh in Germany, that makes a big difference. The use of photovoltaics and solar thermal energy in Germany saved 29.2 million net tonnes of greenhouse gas emissions in 2018.¹ Every euro invested therefore contributes to climate change mitigation.

Solar funds allow investors to also invest in photovoltaics without owning their own solar system. With this form of environmental investment, several private individuals and companies generally finance a solar park together. Usually, the modules are located on a larger area and are connected to the grid as one power plant. Individual investors do not therefore need their own land or roof to invest in solar parks. 

A financial investment in solar funds goes into the construction and operation of several solar systems, which can be located in Germany as well as in other countries. The feed-in tariff and the sale of electricity can generate a return. This applies in particular if solar power plants are large and have a long service life – i.e. through economies of scale and long-term investments.

Closed-end solar funds are initially opened when they are launched. Private individuals and companies may pool their money during a specified placement period ("subscription phase"). Investors acquire units in solar parks with their direct corporate investment. These are often limited partnership interests in a joint company, which is organised in the legal form of GmbH & Co. KG (limited partnership with limited liability). 

Many citizen solar parks are also organised in this way: investors become limited partners. As soon as a certain equity ratio has been reached with investors’ individual investments and the planned solar power plant is thus fully financed, the fund will be closed. Further deposits are no longer necessary or possible in such a closed-end fund. 

Closed-end funds are classified as alternative investment funds  (AIFs); the units cannot be traded on the stock exchange. This makes the investment  less speculative, but also less flexible if investors want to take their money back before the contractually agreed, usually long-term holding period. 

Open-end solar funds, on the other hand, are traded on the stock exchange as investment funds. Those who invest in solar energy via an open-end solar fund can buy and sell their units daily. 

Here, investors do not invest specifically in the construction and operation of certain projects such as solar parks, but in equities of companies that are active in the solar industry. This includes manufacturers of solar cells, solar modules and inverters, consultants, service providers, and solar system builders and operators. As share prices may fluctuate in value, a holding period of eight to ten years is recommended, despite the daily tradability.  

The impact on sustainable projects is rather indirect in this form of investment. Buying an exchange-traded security such as this usually does not allow money to flow from the financial to the real economy, but rather to the previous owner of the unit certificates.

If the share price rises, the companies in the fund’s portfolio can obtain loans from banks more easily due to their higher value. However, it is up to them whether they finance truly sustainable projects and business models within the company – there is no transparency towards investors in this regard. 

In addition, you will continue to hold all the common risks of stock market investments in your portfolio.

Anyone who directly participates in the construction and operation of a solar power plant invests in tangible assets. If you choose to do so, you will become an entrepreneur and co-owner of solar parks and actively contribute to the energy transition. 

Photovoltaics delivers clean electricity without greenhouse gas emissions during operation – with ever-decreasing costs. At noon, electricity demand and electricity prices are usually the highest: just when the sun is shining the brightest. The power peaks of the solar systems therefore usually coincide with the peaks in demand on the power grid. 

Overall, demand for electricity will increase – and the need for green energy in particular. Germany has decided to phase out both nuclear power and coal power, and renewable energy is expected to fill the gap. Other countries are also increasingly relying on energy generation from renewable sources in order to become less dependent on expensive oil imports and diesel generators, for example.

The return on solar parks and therefore also on solar funds can be calculated very well: the government-guaranteed feed-in tariff for solar power enables forecasts that are relatively reliable. A fixed amount per kilowatt-hour is remunerated over a term of 20 years. 

The fact that annual fluctuations in solar radiation are rather low also ensures stable income – electricity revenues can therefore be easily predicted.  

As tangible assets, green investments in solar energy are largely independent of capital market fluctuations, inflation, exchange rate risks or economic cycles, especially as the energy generated can primarily be fed into the grid and thus always finds its way to the electricity market. The sophisticated technology is controllable and reliable, which means low maintenance and insurance premiums. 

With all these foundations for a calculation, fund companies can draw up relatively reliable return plans. Solar funds are therefore well-suited as an addition to a diversified portfolio. 

A holding in a solar fund offers good potential returns, but it also poses a significant business risk.

Anyone who wants to invest in solar plants with a closed-end solar fund is taking an entrepreneurial risk.  

Potential risk factors of solar funds include:

The prospectus contains information on economic data such as investment volume, term and earnings prospects, as well as technical data such as capacity and output of solar power systems.

When dealing with solar funds, it is advisable to check the following questions:

If you want to invest in solar energy with a solar fund, you are making an entrepreneurial investment that does not seem very appealing to safety-oriented investors due to its long terms and possibility of total loss. Knowledge is also needed to thoroughly assess potential investments. 

But in principle, solar power is a sustainable form of energy generation. Renewable energies have long since ceased to be referred to as “alternative energies”, as the energy transition itself appears to have no alternative. In terms of climate change and the degradation of nature, clean solar energy is the future. Investors therefore need more and alternative ways to invest sustainably.

As with other investments, the various forms of solar investments also have advantages and disadvantages that investors must assess on a case-by-case basis.

In a solar equity fund, the shares in various companies in the solar industry are bundled into one fund. In such a thematic fund, the risk is more widely spread than when investing in individual equities. 

For actively managed equity funds, fund managers select and weight equities. This saves investors time, but corresponding fees are payable. This type of investment has no influence on the direct expansion of solar parks and other renewable energy sources.

Thematic funds in the area of renewable energy can also act as impact funds that are twice as worthwhile. The word “impact” stands for effect: the funds aim to invest in an impact-oriented manner, with the investment not only flowing into financial products – as is the case with equities or many financial market funds – but also into concrete projects with environmental objectives and demonstrable results. 

For example, a concrete CO₂ savings target is specified for the solar parks in the portfolio of an impact fund. In this way, impact investments combine financial returns with measurable sustainability performance. They are based on the Sustainable Development Goals (SDGs), i.e. the 17 Sustainable Development Goals of the United Nations. 

But the benefits for investors go far beyond a “green conscience”. Impact funds combine a concrete potential impact and the potential earning power of a direct investment with the risk diversification of a fund. 

If such a product is also structured as an open-end fund, investors also benefit from a more flexible selling option, which is not the case in traditional solar funds with direct investment. Thanks to the ability to trade units on every trading day, long terms of the assets, such as solar farms, wind farms and biomass power plants, are no longer an issue. On the contrary – their future strength makes the investment interesting.

With bonds, solar companies receive loans from investors and pay them a fixed interest rate in return. These regular distributions provide planning certainty. 

On the other hand, as a lender, there is less transparency about the performance of the investment. There is often no market for trading bonds, so the financial instrument is relatively inflexible.

When it comes to crowdinvesting, many investors (the "crowd") participate financially in a project – e.g. in the construction of a solar park. The return is usually paid out as interest. It is often possible to invest amounts from as little as 100 euros via online platforms. The contracts between the project company and the investor are often arranged as profit participation certificates or subordinated loans. 

Profit participation rights are securitised in a profit participation certificate: the security entitles investors to participate in profits and proceeds in the event of a dissolution of a company (liquidation). Such contracts can have very different structures in terms of interest, profit distribution, repayment and rights. There is no right to have a say and in the event of insolvency, profit participation right holders are only entitled to receive payment after all other creditors. 

In subordinated loans, investors receive relatively high interest on the loan they grant to the solar project or company. On the other hand, there are relatively high risks – in the event of insolvency, investors are serviced after all other creditors.

In a cooperative, investors become co-entrepreneurs or co-owners through their contribution. These companies are often deeply rooted in their region. Each member has a say, regardless of the amount invested. This has advantages (democratic investment form), but can also lead to protracted coordination processes. An experienced management team is also crucial here.