Crowded market forces recyclers to take risks

There’s no shortage of investor interest in wind and solar farms.


November 4, 2021

Despite Covid-19, total investment in new renewables rose 2% in 2020 to $303.5bn, Bloomberg New Energy Finance has said. This backed 132GW of solar and 73GW of wind.

But fierce competition for renewables assets is a double-edged sword for investors and utilities, which need to recycle capital to grow their portfolios.

On one side, it is good for them that there is no shortage of potential buyers if they want to sell assets or stakes in assets.

But on the other, it is a challenge when those companies want to spend the capital they have raised. The competition helps them as a seller but means they can struggle to find assets when it’s time to buy.

This is why we have looked at the topic in our ‘Equity Recycling’ report following a Wind Investment Boardroom discussion that we held on 16th September, in conjunction with headline sponsor RealPort. Our expert panel said they saw two overarching challenges.

First, buyers of renewables assets need to find ways to negotiate competition in the current crowded market and make a profit; and second, governments must help with unlocking the development and investment needed for the energy transition.

What’s the problem?

Equity recyclers are under pressure because supply and demand are out of balance. Our panellists argued that there is too much capital chasing too few projects. This is making it tough for buyers to find attractive projects when it comes time to invest.

Yet it shouldn’t be like this. The $303.5bn investment in new renewables in 2020 is a huge number, but countries are still falling well short if the world is to hit the goals of the Paris climate agreement from 2015. Ernst & Young said there is a $5.2trn gap for renewables by 2030 if the world is to hit the Paris targets. Investor appetite is huge – but that funding gap will only be filled if there are enough projects to invest in.

That gap could grow even larger if we see new ambitions agreed at the COP26 talks that have kicked off in Glasgow.

Mathias Bimberg, head of infrastructure at Prime Capital, warned that the pipeline of wind developers for companies to invest in is “drying out”, because of problems with permitting and development cycles that are “too long”. He said that politicians need to fix these problems if they are to unlock the investment for the energy transition.

Until they do, companies need to be smart when they look to recycle capital.

How are companies responding?

Fierce competition for renewables assets is forcing buyers to be more creative. For some, this means moving into technologies that are less mature than wind or solar, like green hydrogen or floating wind; investing in other forms of smart infrastructure including e-mobility or health; and getting involved earlier in the development cycle.

These strategies can enable buyers to find opportunities that will be of less interest for passive financial players, and mean higher potential rewards for the extra risk. In some cases, this means investing in development platforms as well as just assets.

Speakers also discussed the dynamics between established and emerging markets, and they had bad news for investors that wanted to find higher returns by deploying capital in ‘emerging markets’.

Luis Arizaga, partner at Exus Management Partners, said that countries in South America, including Brazil, Chile and Mexico, are already mature and that buyers will have to compete with established utilities and investors.

He added that there may be investment opportunities, but only for firms prepared to do their research into the risks they need to take and how to mitigate them. There is little potential for equity recyclers to enter these emerging markets for a quick buck.

Finally, the discussion covered the growing potential for companies to re-power or re-engineer projects. The emergence of this market will also lead to more nuance in how investors assess which operational assets to buy, based on their potential and the stage of their life cycle that they are at. This requires technical expertise.

The opportunities exist, but most companies will find they need to be creative and take risks to grow their portfolios. Many will hope for help from COP26.

Click here to download the full report!

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