Private Equity

Is Renewable Energy a Viable Investment Option for Private Equity?

Private equity investment in the renewable energy space has increased significantly in the past 5 years. These firms, whether energy specialists or generalists finding a good deal, are increasingly seeing renewable energy as a viable investment option to generate returns and, in particular, are heavily investing in the development and deployment of solar and wind energy projects.

Renewable energy has developed rapidly over the past few years, owing to a mix of technological improvements made by ambitious corporations and hungry startups, lower development costs, and increased government incentives. As a result, private equity investors have found it to be an appealing target for their fund’s portfolio. According to recent PitchBook data, private equity investment in the renewable energy sector reached just shy of $16 billion for 2022, showing a consistent increase over the past 5 years, and a much larger jump before this era.

Private equity firms are drawn to the renewable energy industry for a number of reasons. To begin, renewable energy projects are quite consistent, predictable investments. They are not as volatile in price as fossil fuels, and the costs of renewable energy technologies have been declining in recent years after more consistent innovations were open-sourced. Second, renewable energy projects are frequently eligible for government subsidies and tax breaks, which can provide investors with a consistent source of dividends regardless of performance (see Tesla and their carbon credit sales).

Because of the increased demand for clean energy, private equity firms are also being lured into the renewable energy sector, especially when there are ESG mandates on their funds that aren’t filled by their typically-preferred sectors. The globe is transitioning to a low-carbon economy, and governments are setting aggressive objectives to cut greenhouse gas emissions (regardless of your thoughts on these, even if for the firm’s PR purposes). As a result, companies are under increasing pressure to convert to renewable energy sources, as well as facilitate them for others. As a result, the renewable energy market as a whole has grown rapidly, as has demand for renewable energy projects.

PE firms are investing in renewable energy in many ways, including the acquisition of seasoned renewable energy operators (a corporation that operates and maintains renewable energy assets such as solar or wind farms is known as an operator). Private equity firms can take control of a portfolio of renewable energy assets by acquiring an operator, where they will bring in their own executive team to continue scaling these corporations. Investors may benefit from operators' strong relationships with important parties like utilities and governmental organizations, which is often a deciding factor for who is in charge of the growth behind these investments.

Brookfield Renewable Partners' acquisition of First Solar in 2019 is one example of private equity investment in renewable energy operators (worth noting Brookfield is a specialist investor within the aforementioned industry). Brookfield paid $1.7 billion acquiring a portfolio of utility-scale solar projects, including the Desert Stateline project in California, which is the world's largest solar generating facility.

Another example is Global Infrastructure Partners' acquisition of sPower in 2016, which was valued at $1.6 billion at the time of the acquisition. With a portfolio of solar and wind assets, sPower is one of the largest independent renewable energy operators in the United States. In 2018, sPower was acquired by AES and AIMco for $853 million in cash, as well as $724 million in non-recourse debt.

Because of the stability and predictability of renewable energy projects (disregarding experimental projects), as well as the expanding demand for clean energy, PE firms are drawn to the sector, especially as the government is pressured more to invest in clean sources. These investors prefer to invest in renewable energy operators because it offers them a consistent stream of revenue and control over a portfolio of renewable energy assets. With the world moving toward a “decarbonized” economy and governments establishing aggressive objectives to reduce greenhouse gas emissions, private equity investment in the renewable energy sector is projected to increase in the coming years, although it may not be the most flashy or popular.

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