Investing in Renewable Energy could. Decarbonization targets and rising competitiveness relative to conventional power generation drive significant growth and capital inflows for renewable energy generation worldwide. While investor demand compresses returns, inherent risks like power price volatility and regulatory uncertainty persist. This article concisely summarises the main points made during a recent webinar JANA’s Infrastructure team hosted. The webinar covered the overall landscape of renewable infrastructure strategies, the principal risks and returns that equity investors face, and the relative value of different areas within this larger field.
Table of Contents
Opportunities and Risks
Relying less on fossil fuels and more on renewable energy sources is one of the most dramatic shifts. This transformation is evident in both developed and developing economies, from the early announced retirement of coal-fired power reactors in Australia to large-scale solar and wind power initiatives in India and China. The following primary factors have driven significant capital inflows into renewable energy infrastructure: Relying less on fossil fuels and more on renewable energy sources is one of the most dramatic shifts. This transformation is evident in both developed and developing economies, from the early announced retirement of coal-fired power reactors in Australia to large-scale solar and wind power initiatives in India and China. The following primary factors have driven significant capital inflows into renewable energy infrastructure:
- We are growing concerned about climate change.
- Rising competition from fossil fuel power.
- Strong investor and government demand for clean energy and technology developments.
JANA’s infrastructure team closely monitors the environment of the renewable energy infrastructure, who advise clients on global renewable energy co-investments and are in continual contact with top global renewable energy managers. Renewable infrastructure investors have a great chance to profit from the energy shift. A fundamental and quick technological shift impacting the whole power sector adds to the numerous substantial risks already present, including regulatory shifts, political unpredictability, and competitive energy markets. Renewable energy assets are in high demand from investors, which has reduced profits and caused risks to be mispriced. Renewable energy investments should be prioritised by investors due to the risks involved and the downward pressure on returns. Reputable returns can still be achieved after accounting for the risk.
What are the key risks of investing in renewable energy infrastructure?
At this stage in our investigation on investments in renewable energy, we have identified the following major hazards: Political instability and modifications to rules: Australia is one of numerous places where legislation regarding this industry are still in the works, and there is currently no political consensus on how to encourage the spread of renewable energy. Most networks may find it difficult to adapt to distributed solar and wind assets as well as two-way electricity flows. Losses in revenue due to transmission limitations are a real possibility in regions where these assets are situated because of the high demand for grid capacity. Big, unreliable fossil fuel power facilities were also the backbone of most grids.
In the midst of a continuous technological shift, the power industry is experiencing several technological breakthroughs in areas such as smart grids, distributed generation, energy storage, and efficiency improvements. Renewable energy investments face dangers from these, notwithstanding the potential they present to investors.
The equity returns of more recent renewable energy assets are becoming increasingly vulnerable to power price volatility as a result of shorter contracts and higher exposure to competitive power markets. A large portion of the equity returns from these investments used to come from power purchase agreements. According to JANA, investors in the current market tend to underestimate and undervalue this particular risk.
What can investors interested in renewable energy invest in?
In light of the aforementioned dangers and the present renewables price war, infrastructure investors should exercise extreme caution when selecting renewable energy assets. However, from a risk-reward standpoint, there are still certain chances that appear promising. Some of these include –
Funds allocated to renewable energy methods that hedge against power price fluctuations by concentrating on complicated assets in niche markets that can generate high contracted returns.
They took part in hand-picked co-investments in complex, large-scale renewable energy platforms, where the manager enjoys a greater number of value drivers and potential for upside to offset the risk.
You should give your full attention to managers with extensive experience managing electricity assets. The ongoing change in power markets requires teams with extensive commercial and technical understanding.
Invest in power markets run by disciplined individuals aware of the dangers involved; this is business as usual.
Importance of Investing in Renewable Energy
Renewable energy investment is critical for environmental, social, and economic reasons. It decreases carbon emissions, fosters energy security and independence, creates new employment opportunities, and accelerates technological advancements. Additionally, it offers investors the chance to diversify their portfolios while making a positive impact on the environment.
Global Context and Trends in Renewable Investment
The global renewable energy sector has experienced phenomenal growth in the past several years, thanks to increased expenditures from both public and private sources.
Worldwide, governments have committed to reducing greenhouse gas emissions, and businesses and individuals are becoming more aware of the importance of making the transition to renewable energy. As a result of the growing interest in these sources, opportunities for investment in the renewable energy sector have expanded.
Investment Opportunities in Renewable Energy
Solar Power
Photovoltaic Systems
Solar panels convert sunshine into electricity, and investing in such a system entails installing and operating the panels. This technology’s declining cost and rising efficiency have made it an attractive investment opportunity for both large and small businesses.
Concentrated Solar Power
Systems that use concentrated solar power (CSP) concentrate the sun’s rays onto a small area, heating it to a degree where it can produce energy. The major goal of CSP investments is to develop and deploy CSP technology in power facilities that are large enough to serve utilities.
Wind Energy
Onshore Wind Farms
An onshore wind farm investment primarily consists of three parts: designing, building, and operating wind turbines that are situated on land. Due to its declining cost, onshore wind generation is becoming an attractive green investment.
Wind Power Plants Offshore
A wind farm is considered offshore if it is not situated on land. Wind speeds offshore are often stronger and more consistent than those onshore. Consequently, investments in this field encompass creating and installing wind turbines on a massive scale.
Power Generation using Hydroelectricity
Large-Scale Hydropower Plants
Massive hydropower investments include building and maintaining reservoirs and dams that convert the force of flowing water into electrical power. Though they often necessitate substantial funding, these projects have the potential to supply a reliable energy source for the future.
Small-Scale Hydropower Plants
Investments in small-scale hydropower tend to concentrate on designing and constructing less extensive hydroelectric facilities in outlying or rural locations. Clean power generation can become more accessible and inexpensive through these projects, which can benefit communities.
Energy from biomass
Biofuel Production
Biofuel production investments include building and operating facilities to convert biomass into biodiesel and ethanol, including food scraps and specially designated energy crops. Using these fuels in vehicles can help us use less fossil fuel.
Biomass Power Generation
Power plants that generate energy by burning biomass are built and maintained with the help of investments in biomass power generation. This green power option has the potential to both increase energy independence and decrease emissions of greenhouse gases.
Geothermal Energy
Geothermal Power Plants
Building and running facilities that extract thermal energy from deep inside the Earth and convert it into usable electricity is what geothermal power plants are all about. With almost no negative impact on the environment, this renewable energy source provides a reliable supply of power.
Ground-Source
Heat Pumps
A ground-source heat pump is an investment in a system that uses the constant temperature of the Earth to heat or cool a building. These systems are energy efficient and have minimal environmental impact, so both residential and commercial establishments can reap the benefits.
Ocean Energy
Tidal Power
Tidal power investments primarily focus on developing and applying technology that harnesses the energy produced by ocean tides. When implemented in coastal areas, these projects have the potential to provide a consistent and trustworthy supply of renewable energy.
Wave Power
The development and installation of equipment that can convert the energy of ocean waves into electricity is supported by investments in wave power.
Coastal towns and island nations, in particular, stand to benefit from this new technology’s potential as a renewable energy source.
conclusion
Significant financial investments, especially from infrastructure investors, will be required to complete the transition to renewable energy, one of our time’s most noteworthy changes. Although renewable energy investments are attractive, investors must exercise extreme caution due to these assets’ inherent risks and inflated prices.
JANA can collaborate with clients’ teams to elaborate on our perspective on renewable energy infrastructure to help them find investments that complement their portfolios. Fore more information please visit.
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