Renewable energy has become much more cost competitive relative to other traditional generation methods
While we know that renewable energy has been buoyed for the past decade by a combination of government subsidies known as Production Tax Credits (PTCs) and Investment Tax Credits (ITCs), it is now clear that these credits served to incentivize and help early players enter the industry and innovate further. PTCs and ITCs were intended to reduce costs to a point where renewable power generation could eventually compete with conventional methods once the subsidies rolled off, which is where we find ourselves today. Furthermore, renewable power assets, as elements of critical infrastructure, have served as defensive assets during this period of volatility – particularly those with long-term power purchase agreements (PPAs) that have contracted cash flows over extended periods of time.
At the intersection of an unnatural ownership base, a high degree of fragmentation, and an industry in transition, there is the robust opportunity for sophisticated players who have specialist experience in this subsector to consolidate these smaller assets at attractive prices. Private capital in the natural resources asset class is well-positioned to finance the acquisition and aggregate in the lower-middle market, where large investors may not be willing to spend the resources.
While many financial markets have benefited from the longest bull run in history following the Global Financial Crisis, much of the real assets sector has been operating in a more challenging environment for the past eight years. Renewable power remains an exception. And, given the aforementioned favorable trends, many of which were well underway prior to the current crisis, it may prove more resilient and more durable than previously thought. Furthermore, it is possible that long-term, patient investors – such as those within private equity – can capitalize on specific inefficiencies that have hindered greater growth in operating performance.
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An industry ripe for continued disruption – a private capital opportunity
With the subsidy incentives and advancements in renewable technology, there has been a wave of capital entering the sector to capitalize on this industry shift, especially at the smaller end of the market. This has resulted in an unnatural ownership base as well as a high degree of fragmentation – not only are these owners unfamiliar with operational best practices in the renewable energy sector, but there are also many of them.At the intersection of an unnatural ownership base, a high degree of fragmentation, and an industry in transition, there is the robust opportunity for sophisticated players who have specialist experience in this subsector to consolidate these smaller assets at attractive prices. Private capital in the natural resources asset class is well-positioned to finance the acquisition and aggregate in the lower-middle market, where large investors may not be willing to spend the resources.
While many financial markets have benefited from the longest bull run in history following the Global Financial Crisis, much of the real assets sector has been operating in a more challenging environment for the past eight years. Renewable power remains an exception. And, given the aforementioned favorable trends, many of which were well underway prior to the current crisis, it may prove more resilient and more durable than previously thought. Furthermore, it is possible that long-term, patient investors – such as those within private equity – can capitalize on specific inefficiencies that have hindered greater growth in operating performance.
US-210720-121643-1