Energy Finances

What drives investors in renewable energy?

Renewables now account for 70% of new worldwide power generation investments, out of $580 billion invested in the sector. While there are encouraging signs for the adoption of alternative fuels and renewables, there is still uncertainty about how the market will evolve during the transition: will these alternative assets’ returns be able to withstand increasing oil and gas prices?

While each investor’s reasons for what whets their interest will differ, it may be possible to identify some regions within the renewable markets which will spark interest across the board. Solar PV prices have plummeted to new lows, installation and capital costs continue to reduce, and the solar power auctions have offered consumers record-low kWh pricing. Wind capacity expansion increased in 2020, with utility-scale offshore wind farms gaining prominence. Green hydrogen is still a pricey goal.

And, while renewable energy generation is gaining popularity, alternative fuel supply is significantly less so; in 2020, 84 percent of the fuel supply investments still were going to oil and gas, 14.5 percent to coal, and only 1.3 percent to low-carbon fuels. There is still a difference in how capital is deployed to support the energy transformation.

According to an IEA and Imperial College analysis, institutional investors will spend $1.6 trillion on renewables projects, with only 1.3 percent of that total going to “pure-play” RE companies, with just below 30% traded on the publicly available assets and approximately 70% traded on privately owned assets. The issue here is that institutional investors are not transparent about their genuine, “green” holdings and their returns. “The breadth and depth of listed capital markets imply they typically operate as a proxy for the rates of return,” the research reads. So, even though we don’t have complete data on the bulk of RE assets, we may use a proxy to estimate a ballpark value.

Institutional actors take a different strategy than venture capital investors and private equity firms; institutional actors have development mandates and long-term pledges to projects; they prioritize long-term outcomes. On the other hand, VCs and PE firms “evaluate the risk portfolio of pre-construction or early-stage assets.” As per Founder of BNRG Renewable, David Maguire, in a recent discussion with the Climate Council, “they normally build up a stake and then sell on the assets of operation once they each reach a key quantum to the drop-down fund or institutional money.”

Before distributing to the institutional asset holders, PE firms would strive to profit from the initial growth period of RE assets. While this makes renewable energy production and deployment easier, it also boosts capital costs over what they should be.