Renewable energy assets are set to experience a spike in demand from investors, driven by both a desire to make more sustainable investments and their resilience during the pandemic-induced economic downturn.
Global institutional investors plan to almost double their allocations to renewable energy infrastructure, moving from 4.2% to 8.3% in the next five years, according to a new report by Octopus Group.
Based on a survey of institutional investors representing $6.9tn under management, Octopus found that planned investment in renewables from these groups will see approximately $742.5bn move into the sector over the next decade.
The greatest increase is planned in wind and solar power plants, where costs have declined significantly in recent years, the authors of the report noted.
‘Build back better’
‘We are facing two crises of unprecedented scale: the global pandemic and climate change. Covid has radically impacted how we live, how businesses function and has forced governments across the world to act with urgency,’ said Matt Setchell, co-head of Octopus Renewables.
‘Alongside these efforts, it is also critical that the longer-term threat of climate change remains a focus. Covid-19 can be the catalyst to a greener, more sustainable future, if governments, investors, specialist managers and energy companies are willing to work together.’
The results of the survey come at a time when governments around the world look for ways to build back better and drive investments in green infrastructure following the Covid-19 pandemic’s impact on society and the economy.
Boris Johnson announced a 10-point plan last week for a ‘green industrial revolution’ that aims to help eradicate UK’s contribution to climate change by 2050.
As part of the plan, the government will invest £12bn (€13.5bn) to create and support up to 250,000 green jobs in the UK and spur over three times as much private sector investment by 2030.
Meanwhile, across the pond in the US, president-elect Joe Biden has pledged to invest $400bn over 10 years in clean energy and innovation and hold polluters accountable.
However, according to the International Renewable Energy Agency, annual investment in renewables will need to almost triple to $800bn by 2050 to fulfil decarbonisation and climate goals across the world.
Focus on solar
Solar energy will benefit from the increased interest in renewable energy investments, as it is projected to account for 60% of new additions to renewable energy globally by 2025, according to the International Energy Agency.
Whitney Voute, head of investor relations at the US Solar Fund, said the growth of the solar industry in the US is largely driven by cost-competitiveness.
‘Solar is the cheapest form of new build power generation across most of the US, which can help keep electricity costs down even as the country makes an ambitious move toward clean energy and away from fossil fuels.’
Voute said the industry has fared well through the crisis despite initial concerns over whether construction could continue. ‘When we look at the growth of the industry and progress around development, from 2021 to 2025, we expect more than 80GW of development. With oil being so volatile, solar has felt more stable.’
The US Solar fund just announced that all 41 projects in its portfolio are now fully operational and generating revenue, putting the trust on track to pay and cash cover the full target dividend of 5.5 cents per share in 2021.
The trust, which is on a 9.8% premium, has posted a 7.7% share price return over one year, according to the Association of Investment Companies, compared to the Renewable Energy Infrastructure AIC sector’s 0.8%.
Following the recent election outcome, she believes the industry may receive more support in the coming years.
‘Connecting jobs creation to this effort to promote clean energy enhances bipartisan support, especially given the jobs losses during Covid-19. Solar has historically received support from both Republicans and Democrats in large part because of the jobs it creates. With almost 250,000 solar workers in the US in 2019, there are more jobs in solar than in all fossil fuel producers combined,’ she added.
Sun shining in the UK
In the UK, the NextEnergy Solar fund, which published its results for the six-month period ended 30 September on 23 November, said it has performed well despite the uncertain market environment.
The trust, which has £555.7m (€625m) in assets and is trading at a 10.9% premium, said its profit before tax was up from £21.1m (€23.7m) to £23.6m (€26.5m) year-on-year.
At the end of September, ordinary shareholders’ net asset value was £584m (€656m), equivalent to 99.6p per ordinary share, up slightly from the end of March when net asset value was £579m (€651m). The fund’s dividend yield is 6.6% with a 1.2x dividend cover.
‘Solar is now economically viable in the UK without any form of government support,’ said Michael Bonte-Friedheim, CEO of NextEnergy Capital.
He expects the UK to significantly grow its new solar generation capacity over the next few years. Meanwhile, NextEnergy is looking to increase its presence outside the UK as well, with the ability to deploy up to 30% of its gross asset value in other OECD countries.
The trust is looking at markets like the US, Portugal, Spain and Italy, where there are many attractive risk-weighted investment opportunities in solar, Bonte-Friedheim said.
Bonte-Friedheim is also focusing on taking the trust’s subsidy-free portfolio from 64MW to roughly 150MW, as he warned that there is too much capital chasing subsidised solar assets in the UK, which means the prices that buyers are willing to pay are far too high, making growth via acquisitions difficult.