PE to find few inroads in renewable energy

Tim Buckley, a director at the Institute for Energy Economics & Financial Analysis, told AVCJ that private equity will continue to invest in renewable energy as the sector grows, but noted that challenges around intellectual property for technology and deflationary pressures on real infrastructure assets would check the level of participation.

“It’s gaining market share every year, and it’s massively in demand in developing countries, but I would advocate caution,” Buckley said. “It’s like trying to guess what was going to happen with the internet 15 years ago. One in a thousand companies went up a thousand-fold, but 999 went bankrupt.”

The comments followed the release of a report from Bloomberg New Energy Finance that confirmed global investment in the sector was growing over the long term despite a 10% year-on-year decline during the first quarter of 2018 to $61.1 billion. This performance included a substantial increase in private equity investment during the quarter, but the asset class continued to represent less than 5% of total commitments.

The increasing competitiveness of renewables businesses due to lower tariffs, technology advances, and project scaling have resulted in reduced margins for operators across the energy spectrum. At the same time, increasing government R&D in the sector, including a dominant Chinese presence, has been seen as a deterrent to privately owned entrants. 

“It’s the high capital intensity of the renewables energy sector that makes it unsuitable in many respects for private equity,” Buckley added. “The number-one thing the investment landscape needs is more infrastructure funds, but it needs to be spread out not to flood the market. You want to do it gradually to get decent returns and build up expertise.”

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