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Renewable energy infrastructure

In an extract from the recent Preqin Special Report: Renewable Energy Infrastructure, Preqin provides an overview of the renewable energy industry.

The global transition from reliance on traditional to alternative energy sources is an important political and economic issue, and one that has a significant impact on the infrastructure asset class. In order to stem the effects of climate change, governments around the world have initiated plans to increase green energy investment. However, with public funding often struggling to cope with the high levels of capital needed, a growing number of private renewable energy-focused infrastructure funds have been launched in recent years.

Fundraising

Fundraising for renewable energy funds has remained at a relatively low level in recent years, with the aggregate capital raised by these funds increasing from $1.6bn for funds closed in 2010 to $2.6bn in 2013. However, the number of renewable energy funds reaching a final close more than doubled over this time period, from nine to 21, demonstrating that although more funds are able to successfully reach a final close, they are often attracting less capital from investors. In 2014 so far, seven renewable energy-focused funds have reached a final close, raising an aggregate $1.4bn.

Fund managers raising renewable energy funds have often found it challenging to attract sufficient capital to reach their targets, with the average proportion of target size achieved for such funds remaining below 100% since 2008. In 2014 so far, renewable energy-focused funds have, on average, achieved 87% of their targets. As the industry remains relatively new, the ability for renewable energy investments to produce demonstrable returns is as yet largely unproven, meaning that many investors remain cautious of placing sizeable amounts of capital in funds focusing on the industry. Additionally, many renewable energy funds are spending a considerable length of time on the road, with funds closed in 2013 taking an average of 23 months to reach a final close.

Regionally, Europe has accounted for the largest proportion of aggregate capital raised by renewable energy infrastructure funds closed since 2011, with 88% of capital raised by these funds in 2014 so far focusing on investments in the region. In comparison to other regions, Europe has a relatively developed market for renewable energy, with more established and operational assets than available elsewhere, therefore attracting the bulk of renewable energy investment. However, North America has accounted for a growing proportion of renewable energy capital, increasing from just 6% of capital raised by funds focusing on the region that closed in 2011, to 36% in 2013; however, for funds closed in 2014 so far this has declined to just 2% of capital.

Renewable Energy Transactions

With the growth of the global renewable energy industry, the number of completed deals focusing on this industry has increased in recent years from 244 in 2009 to 357 in 2013, with the reported aggregate deal value also growing from USD20bn to USD28bn over the period. Preqin also produces an estimated deal value, calculated using the total reported value of all deals where this is known, plus the average deal value for transactions where a deal size has not been disclosed. For 2013 this value is USD95bn, compared to a peak of USD132bn for deals completed in 2012. In 2014 so far, 213 renewable energy transactions have been completed at an estimated aggregate deal value of USD63bn, although this is likely to rise as more information becomes available.

Solar and wind power have historically accounted for the vast majority of renewable energy deals. In 2014 so far, 38% and 46% of deals have been solar or wind power transactions respectively, with hydro power accounting for 10%. All of the top 10 deals completed in 2014 to date have been in wind, solar or hydro power industries.
 
The largest renewable energy deal completed in 2014 so far is the approval by the UK government of the Rampion Offshore Wind Farm, owned by E.ON. The installation features up to 175 turbines, each with a capacity of 3-7MWs, to be installed about 13km to 20km away from the Sussex coast in the English Channel. Onshore construction is due to commence in 2015, with the project planned to be completed in phases over the following four years. The total investment into the project was estimated at GBP2bn.

The second largest renewable energy transaction completed in 2014 so far is the USD1.5bn acquisition of Mirfa IWPP by GDF Suez and ADWEA. Mirfa IWPP is a hydro power project comprising a total power capacity of 1,600MW and a seawater desalination capacity of 52.5 MIGD (238,665 m3/day), located 120 km from Abu Dhabi.

The top five fund managers by the number of renewable energy transactions they have completed from 2012 to 2014 so far. Canada-based Fiera Axium Infrastructure is at the top of the list, having completed 38 renewable energy deals in this timeframe, with UK-based InfraRed Capital Partners coming second with 25 completed deals. Four of the top 10 managers are based in Canada and three in the UK, demonstrating the prominence of these two countries within the renewable energy fund management industry.

Recent years have seen growing numbers of institutional investors, most notably pension funds, insurance companies and sovereign wealth funds, investing directly in renewable energy assets. Investors choose to access infrastructure assets directly to have greater control over the direction of their capital and to avoid paying fees to fund managers, although typically this route to market is reserved for larger institutions with the resources and expertise to manage a portfolio of assets. Germany-based asset manager MEAG Munich Ergo Asset Management and Norway-based government agency Norfund are prominent institutional investors; each has undertaken seven renewable energy transactions since 2012.

Alongside fund managers and institutional investors, many other strategic or trade investors seek to invest directly in renewable energy assets. Preqin lists the top 10 strategic investors by the number of renewable energy transactions they have been involved in from 2012 to 2014 so far. At the top of the list is France-based EDF Group, with a significant 61 such deals completed, including the acquisition of Canada-based Merritt Green Biomass Power Plant in July 2014, valued at CAD235m.

Outlook

While 2014 looks set to see a small decline in the number of transactions when compared with 2013, over the medium term, the demand for private sector investment in renewable energy assets globally is only likely to result in the further growth of the sector.
 
This is an excerpt from Infrastructure Spotlight – November 2014. To download the full report, click here.

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