Initially private equity investors avoided renewable energy projects because they believed the industry was overvalued. Recently, that has changed. Private equity firms are now beginning to better understand the renewables sector and are attracted to renewables’ seemingly large immunity to economic cycles. More importantly, the cost of building a new utility-scale solar or wind farm in developed countries has now dropped below the cost of operating an existing coal plant. Accounting for government tax credits and other energy incentives lowers this cost even further. Wind and solar software and installation has gotten more competitive, driving down costs and the development of more efficient technology.
Every year, Lazard analyzes the cost of different types of energy production using the leveled cost of energy metric (LCOE). This analysis factors in the cost of operations, as well as the cost of debt, to find the smallest dollar amount, per unit of energy for an investor in an energy project to see 12 percent return. The LCOE for coal in 2018 is between $27 and $45 per megawatt. The LCOE for wind is between $29 to $56 – solar ranges from $31 to $44. The LCOE for each project differs based on operation strategy, inputs, and location. Thus, wind farms have different costs depending on turbine structure and off or on shore location.
Moreover, the industry valuation for renewables shows promising multiples. Through a comparable companies’ analysis using benchmarks Macquarie Infrastructure Company, Par Pacific Holdings, Inc., NewMarket Corporation, and Koppers Holdings, the renewables sector has a selected LTM EBITDA of 7.1x and an upside of 25.2%. Traditional power selected LTM EBITDA ranges from 9.0x to 13.0x and has an upside 5.6%. Although renewable energy selected LTM EBITDA is slightly lower than traditional power, its upside reflects the industry recently becoming economical. Further, the industry continues to improve efficiency year over year. Thus, it has a large potential for high growth, an increase in its EBITDA multiple and steady high upside projections within the next decade. The International Renewable Energy Agency has estimated that more than $1T has been invested in renewable energy globally since 2013.
Following this trend, both The Carlyle Group and Brookfield Asset Management bought renewable energy infrastructure businesses this year. The Carlyle group acquired Zephyr Wind Energy, a wind portfolio, as its first of many broad range future investments in renewable energy projects. Carlyle plans to also purchase six wind farms in Northern and Western New York, as well as an operations platform from Noble Environmental Power. Its future investments produce almost one-third of all of New York State’s wind power.
Carlyle also plans to construct brand new wind projects in the coming years. Matt O’Connor, managing director and head of Carlyle Power Partners, emphasizes that they invested in these transactions because they will generate returns as high as any other private equity deal and not because of environmental, social, and governance (ESG) reasons. Although Carlyle shies away from ESG, their investments surely contribute to the growing movement of green initiatives across the globe.
Similarly, Brookfield Asset Management, an alternative asset manager that has $250B in assets under management and an additional $15B managed by its public securities group, recently expanded its energy infrastructure investing business. Brookfield acquired Houston investment adviser Center Coast Capital Holdings. Center Coast Capital manages $4B in assets. “Renewable energy infrastructure investments are really good diversifiers,” says Craig Nobel, Brookfield CEO and CIO of the asset manager’s public securities group. Renewable energy projects have stable cash flows, low correlation to broader markets, and inflation hedge components that make them very attractive to private investors.