0°

Investing in tomorrow

Navigating renewable energy opportunities for private equity firms

Nicolas Tinant - EY Luxembourg, Partner, Audit Services | Nano Mamageishvili - EY Luxembourg, Senior Manager © Photo credit: EY

Although energy infrastructure investments have steadily increased worldwide, they fall short of the targets set by the UN and Paris Agreement. To bridge this gap, and due to limitations in government financing, private sector involvement is crucial.

The financial commitment to accelerate the energy transition is substantial. S&P Global predicts an annual USD 700 billion influx into renewable energy investments until 2050, while the International Renewable Energy Agency estimates USD 150 trillion in investment is required by 2050 to fulfill the 1.5°C scenario in the Paris Agreement.1 Private equity investors will play a crucial role in financing the infrastructure sector.

Closing the funding gap

Infrastructure assets under management witnessed an 18.5% surge from 2019 to early 2023, with renewable energy contributing significantly. Renewables sector funds reached USD 104 billion between 2018 and 2022, making up 13.2% of total capital raised by infrastructure funds for the period.2 These figures underscore the colossal investment potential that exists in renewable energy.

In 2022, BlackRock established a “perpetual strategy”,3 involving investments in integrated businesses like utilities and comprehensive renewable energy infrastructure players, assets like data centers, grid digitization technologies, battery storage systems, and adaptable facilities for hydrogen. We also saw the launch of the first-ever clean hydrogen fund by French asset manager Hy24, successfully closing at EUR 2 billion, surpassing its EUR 1.5 billion target.4

What are the investment return challenges and rewards?

Due to longer investment horizons, renewable energy investments risk policy changes occurring before yielding returns, particularly for tariff-setting policies like feed-in tariffs (FITs) and contracts for difference (CfDs), which, while stimulating renewable investments by ensuring prices above the market rate, are subject to periodic revisions, sometimes retroactively.

Other challenges include substantial initial expenses, financing uncertainties, elevated capital costs, and prolonged lead times. The impact of inflation and increasing interest rates is also seeing more value-added strategies, as relying on low-interest credit for enhanced returns becomes less viable.

Yet, recent advancements have opened up economic opportunities: solar panel costs have decreased by over 80% since 2010 (now the most affordable alternative energy source in many regions globally), wind power costs have almost halved in the last decade, and improvements and cost reductions in battery technology have made renewable energy storage feasible.5

On another note, escalating prices for renewable energy power purchase agreements (PPAs), despite obvious challenges, act as a safeguard for returns, especially in high interest rate environments. In the third quarter of 2023, average prices for large-scale solar increased by 28% year on year to €74/MWh, while wind PPA prices went up by 52% to €99/MWh.6 Private equity firms view higher PPA prices as a positive development, while ongoing tax incentives for renewable energy in many jurisdictions are also seen as a bonus.

Future outlook

Renewable energy projects’ financial stability, predictable cash flows, and potential for long-term returns clearly attract private equity investors who are drawn to ESG principles. However, increased market participants pose stiff competition, a challenge for industry players and a crucial factor in investment decisions. In our view, renewable energy assets offer massive investment opportunities for private equity investors with urgent needs, providing high returns and diversification from traditional portfolios. However, enhanced due diligence should still be a driver to source interesting deals at the right price and to offer the expected level of potential for scale up, repurposing or development.

------

1World Energy Investment, 2023
2Infrastructure Investors, 2023
3BlackRock to establish perpetual infrastructure strategy, 2022
4Press release: Hy24 closes world’s largest clean hydrogen infrastructure fund at €2 billion, 2022
5Renewable Power: Sharply Falling Generation Costs, IRENA, 2021
6LevelTen’s European Q3 2023 PPA Price Index Report, 2023