Europe’s renewable energy industry is a dynamic infrastructure market that has evolved over almost a quarter of a century. The sector has grown from a dependence upon government support to a mature and sustainable business with increased private institutional investment.
Many of the first investors in the European renewable energy market were pension funds and other institutional investors looking to match long-term annuity obligations to stable and predictable cash- flows with low or no correlation to other capital markets. Today, as more capital in the renewable sector is flowing to traditional operational assets, investors are exploring opportunities across different sub-sectors of the renewable energy space, moving up the project value chain, to maintain the same level of return. Thanks to increasing efficiencies in construction and technological advances, the cost of providing renewable energy has dropped dramatically. Solar and onshore wind power are now as competitive as traditional power generation. 1
Meeting today’s challenges
The hunt for yield – A major ongoing challenge faced by institutional investors is meeting growing liabilities in a low-yield environment. European jurisdictions have a long history of providing projects with long-term secured revenues via various structures. This combination of long- term fixed revenues combined with long- term contractually fixed operating costs creates the stability of earnings and ultimately the cash-flows most institutional investors seek.
Diversification – Given the fixed revenue and cost structures common to most renewable energy project investments, intermittent generation becomes one of the highest unknowns for revenue generation. The main volatility driver becomes wind and solar irradiation for the duration of the fixed revenues and costs. Low correlation to capital markets stabilises an investor’s portfolio by acting as a diversifier. In fact, some institutional investors are considering a minimum portfolio allocation to renewables to achieve this stabilising effect. 2
Meeting ESG goals – Institutional investors are taking a strong interest in the sustainability profiles of their investments and report to their policyholders and investors on the development of the relevant performance indicators. Renewable energies are among the investments attracting increased interest, as they not only help to meet sustainability goals, but also to achieve the zero-emission targets many investors have set.
Investing with the right partner is key
The institutional investor looking to add stability to a portfolio by making direct investments in renewable energy assets must understand not only the specific national markets and the technology in which they are investing, but they must also have a bottom-up understanding of what drives the return and cash profile of a potential investment.
Successful investing in the industry at such an inflection point requires an active manager that can navigate the many challenges for the future. Implementing Purchase Price Agreements (PPA) in the absence of government support mechanisms and investing along the value chain to optimise return potential make this expertise critical. Given the intense competition for good projects, a manager must also possess and maintain a strong network to source high quality investment opportunities and have the skills to bring those investments to a close.
Key takeaways
– Renewable infrastructure investments have a low correlation to capital markets.
– Renewable energy is the cheapest electricity ever generated at scale.
– The renewable energy sector in Europe is highly resilient in the face of the Covid-19 crisis.
– The renewable sector is in transition to- wards private off-take arrangements.
– The renewable energy sector helps investors achieve their sustainability goals and dis- closure requirements.
1) Gray, M., & Sundaresan., S. (March 2020). How to waste over half a trillion dollars: the economic implications of deflationary renewable energy from coal power investments, pp. 5, 9-10, 18-19. Carbon Tracker Initiative.
2) Bruno.a@peimedia.com (4 June 2020). Should LPs create a dedicated renewables allocation?, PEI Infrastructure Investor, PEI Media Group Ltd.
11. Hoerter, S. (May 2017). Investing in Sustainability; ESG
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