Infrastructure or “real assets” or “essential services” are increasingly attractive to global institutional investors, especially pension funds and insurance companies seeking to match long term liabilities with long-duration and often inflation-linked assets like transmission grids, airports, gas pipelines and water networks. Renewable energy projects, a subset of infrastructure which often benefit from long term contracts or tariffs, are also attracting significant institutional investor interest. Renewable energy projects offer many of the attributes of "core" infrastructure assets are increasingly competitive with conventional forms of power generation. Globally, renewables are the fastest growing source of new power generation capacity.
Renewable energy projects are emerging as their own investable asset class for institutional investors. This is not just speculation, but is a fact as evidenced by the strong growth in institutional investor investment in European renewables over the last 12 years.
This paper is based on both proprietary research by Two Lights Energy Advisors, Asper Investment Management and HgCapital tracking institutional equity investment in EU renewable energy projects from 2004 through 30 September 2016 and Bloomberg New Energy Finance data on overall EU renewable energy investment. The research shows that institutional investors are taking a larger share of a maturing to slowing market, and offers insight into how differing investors approach the sector – technology, geography, project stage. The analysis should provide guidance to investors and policy makers.
The highlights of our research are:
- Institutional equity investment in EU renewable projects has increased from less than €300 million per year in 2004 to over €8 billion per year in 2015, a compound annual growth rate exceeding 40%.
- Since 2010 the growth in institutional equity investment in European renewables comes despite falling overall growth in the market. According to Bloomberg New Energy Finance (BNEF), annual investment in EU renewables since 2012 has averaged 18% below the 2011 levels. 2015 saw an uptick in investment, driven by a very high level of M&A activity in existing assets, while construction of new assets continues to lag. The first three quarters of 2016 suggest that investment will fall. This is due primarily to regulatory, political and macro-economic risks in Europe.
- Since 2012, the UK and Germany have accounted for over half of EU renewable energy investment overall, and 60% of institutional equity. The UK alone has averaged over 50% of institutional equity investment in the last three years. This is not surprising given the strong legal and regulatory frameworks and macroeconomic conditions in Europe’s two leading economies.
- To a surprising extent, through 2015 investment remained robust despite ongoing regulatory changes. However, when the changes are substantial and retroactive, or where support for new projects is abruptly removed, new investment comes to a virtual halt, as has been the case in Spain, Italy, Czech Republic, Bulgaria, Romania and Greece. With Brexit and the EU shifting toward auction based systems for renewables, 2016 investment is
- Nearly €30 billion in equity has been invested in EU renewable projects that have a combined debt and equity value in excess of €80 billion.
- Onshore wind, offshore wind and Solar PV account for over 90% of institutional investment, 43%, 27% and 20%, respectively. Offshore wind investment has accelerated dramatically in since 2014.
- The number of active renewable energy investors has increased from less than 10 in 2004 to over 100 today, with direct investment (as opposed to investment through funds) by pension funds, insurance companies and listed “Yieldco” funds the fastest growing sources of new capital.
- The overall and institutional equity investment pace in the EU has fallen in 2016, and is likely to continue to fall. In our opinion this is due the EU’s regulatory and macroeconomic uncertainty, which is resulting in fewer new projects being built; a trend that we expect to continue into 2017 and possibly beyond.
The data sample:
The database was started by the author in 2008 when he was leading the renewable energy team at HgCapital, and where he now serves as a senior advisor. Today the database is jointly maintained by Two Lights Energy Advisors, Asper Investment Management and HgCapital. The database covers institutional equity investments in EU renewable power projects from 2004 through 30 September 2016, and covers over 750 separate transactions by more than 150 financial investors accounting for over €33 billion of equity invested and over €81 billion of Enterprise Value. We have not sought to track every investment by every small family office or insurance company, but we have focussed on the major investors. The investors, listed in the following table, include infrastructure funds, renewable energy funds, private equity funds, hedge funds, the UK Green Investment Bank and direct investors such as pension funds, insurance companies and family offices.
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