The Proliferation of Renewable Energy

December 19, 2019

Source: Vaclav Smil (2017). Energy Transitions: Global and National Perspectives. & BP Statistical Review of World Energy. Source: Vaclav Smil (2017). Energy Transitions: Global and National Perspectives. & BP Statistical Review of World Energy.

As conversations surrounding climate change and responsible investing drive headlines around the globe, investment allocators have warmed up to the idea of committing capital to environmental, social and governance (ESG) vehicles, including renewable energy sources. Driven in some cases by corporate mandates or individuals’ desire to do the right thing for our planet, pension funds, sovereign wealth funds and a broad array of limited partners are searching for ways to drive significant returns, while also generating positive environmental and social results.

Globally, the primary sources of energy are fossil fuels (petroleum, natural gas and coal). However, renewable energy, particularly wind and solar power, is predicted to become the largest source of global power by 2040, driven by economic and environmental concerns. The transition to renewable energy may be occurring faster than planned. According to Michael Milken, who spoke at the Milken Institute Asia Summit in September, “for two-thirds of the world, renewables are cheaper than a significant amount of carbon-based energy, so it isn’t just an argument of environment; it’s now just pure economics.” Further supporting this argument, consumption of biofuels and non-hydroelectric renewable energy sources in the U.S. more than doubled between 2000 and 2018.

Moving to these more environmentally friendly energy sources will require significant capital investment, creating opportunity for investors. Additionally, the notion of utilizing investment to drive positive social and environmental impact is gaining steam. This is evident in the rise of ESG-dedicated funds that provide access to these unique clean energy solutions. Two-thirds of institutional investors and almost half of companies globally have an ESG policy in place. Although it’s still a nascent development, private equity and infrastructure fund managers have evaluated purchasing these types of assets, including solar asset-backed securities, residential solar loan pools, wind farms and solar projects coupled with long-term contractual cash flows. Small-scale distributed solar systems have also raised capital through securitizations, as well as passive and controlling debt and equity investments.

In addition, due to the proliferation of sustainable battery technology, venture-backed companies like Tesla, which recently unveiled its all-electric Cybertruck, have led the way in electric vehicle and mobility innovation. Fellow competitors including Rivian and Faraday Future are also active in the development of electric vehicles and eco-friendly battery technology.

The S&P Global Clean Energy Index, which provides liquid and tradable exposure to 30 companies around the world that are involved in clean energy-related businesses, is up 36.5% year-to-date and 12.3% over the last three years. In private markets, a number of heavyweight private equity managers including Blackstone and Brookfield are targeting infrastructure funds of $20 billion-plus, with more than half of the 2,663 infrastructure deals completed in 2018 globally involving renewable energy assets, up eight percentage points compared with 2017 deals.

Key Takeaway

From an investment perspective, the renewable energy space is relatively young but is gaining momentum among institutional investors including pension funds, sovereign wealth funds, endowments and foundations. There are a number of ways to access the asset class and it will be a fascinating space to watch over the next few years, especially as general partners are able to source unique investment opportunities that produce quality returns and are beneficial to society. Of course, diversification is paramount in selecting high-quality partners and sourcing proprietary deal flow, which will produce the returns limited partners are seeking. Finally, we can look forward to less coal in both our energy supply and stockings this holiday season and in those to come.


Tags: Renewables | Energy | ESG

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