Developing a taste for non-vanilla renewables

As renewables have matured and gone mainstream, investors are going up the risk curve investing in developers rather than individual projects. This shift, however, also requires a change in mindset.

Remember when renewables were considered too risky and too technical for infrastructure investors? That was a long time ago – roughly a decade – and much has changed since.

Not only do renewable energy assets sit comfortably in many infrastructure portfolios, they also lead in attracting the most capital when it comes to sector-specific funds – especially over the past two years.

De-risked and now part of the infrastructure mainstream, they’re oftentimes viewed as “plain vanilla” assets, generating lower returns than they did previously.

As research institute EDHECinfra noted in September when it published its report, The pricing of green infrastructure, past performance is not indicative of future results. The 16 percent 10-year annualised returns green energy projects posted in 2021 were due more “to a temporary phenomenon of excess demand, which the supply side of the market eventually satisfied”, EDHEC Business School associate professor of finance, Noël Amenc wrote.

Indeed it has, considering that in 2021 global renewable energy capacity totalled 1,945GW compared to 312GW in 2010, according to figures from renewables think tank REN21.

So what is an investor to do? The answer is ‘go up the risk curve’. And that’s what we’ve been seeing in the past year, with a growing number of infrastructure GPs backing renewable energy developers rather than individual projects or even platforms.

Just last week, Glennmont Partners announced a partnership with solar developer GreenCo Energy US to develop a 1GW project pipeline, marking the UK firm’s entry into the US market. Other examples include Carlyle launching Telis Energy to develop renewables projects in Europe; DIF Capital Partners investing in Qair, a French IPP and renewables developer with a development pipeline of 25GW; and KGAL acquiring a 50 percent stake in German developer GP Joule Projects, with a view to expanding the company’s project pipeline and its geographic presence.

This is a “natural evolution” as the sector matures, Louisa Yeoman, founding partner of Astrid Advisors, tells us, driven initially at least, by the desire for higher returns.

Luigi Pettinicchio, co-founder and chief executive of Asper Investment Management, adds competition from industrial players, such as oil and gas majors transitioning to cleaner energy, as another motivating factor.

It’s noteworthy that while Infrastructure Investor spoke with Yeoman and Pettinicchio separately, the words “entrepreneur” and “entrepreneurial” came up in both conversations, zeroing in on a fundamental element of this emerging trend.

Backing renewables developers “requires more of a private equity mindset”, Yeoman remarked, including an understanding of engineering, permitting, and everything related to the development process. “It’s a different business model and risk profile to consider,” she warned.

Pettinicchio put it a different way: “Development needs skin in the game. It’s an entrepreneurial activity, not an outsourceable one. So, you either back the developer or just back the project.”

It’s safe to deduce then that past performance when investing in renewables projects is not indicative of future results when backing renewables developers. Going up the risk curve may be a natural evolution for a mature sector but doing so successfully cannot be taken for granted.