PRIVATE MARKETS Q&A

Renewables are proving resilient

2020/5/6
  • BlackRock

Renewable energy was the most active sector in infrastructure investing last year, accounting for more than 50% of transactions, according to IJ Global. How is the market faring amid the disruptions of the COVID-19 pandemic? David Giordano, BlackRock’s Global Head of Renewable Power, gave his assessment as part of our recent Inspecting Infrastructure webcast.

His team manages investments in wind and solar power generation, as well as power distribution and storage assets, across Europe, North America, and the Asia Pacific region. The following is adapted from his conversation with Mark Everitt, Head of Investment Research and Strategy for BlackRock Alternative Investors 

Tell us what you’ve been focusing on across the portfolio.

With our construction projects, we’re paying close attention to potential supply chain and labor disruptions, which thankfully have not been major. To date, over a diversified portfolio, we are seeing only modest impacts to schedule.

As for our operating fleet, these projects are largely operated remotely during normal times, and we continue to see consistent performance. Because we’re providing the essential service of electricity, we’re getting good local support for continued operations across all jurisdictions.

We are monitoring the changes in near-term and longer-term power prices. Renewable power assets typically benefit from being highly contracted, especially in the early years. Therefore, it is important to pay attention to the credit health of the offtakers as well as the forecasts for power prices. For utility scale projects, the counterparties have remained fundamentally strong credits. However, we are watching the impact on our commercial and industrial partners – both as off-takers and as service and warranty providers. 

On the financial front, the capital markets have maintained their support of the renewable power sector, and we have been able to complete several transactions in recent weeks. 

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As the sun still shines and the wind still blows, our assets continue to perform well.

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We speak quite a bit about the resiliency of the renewable power asset class and its benefits as a diversifier in client portfolios, and I think we’re seeing those benefits in the current environment. As the sun still shines and the wind still blows, our assets continue to perform well. 

The case for renewables rests in part on their role in an energy transition. Have recent events changed that?

No, not at all. The collapse in oil prices has obviously been dramatic, but oil is mainly a transport fuel—it generates only a tiny percentage of the world’s electricity. Meanwhile, the structural drivers for the energy transition and the role of renewables in it are still very much in place.

These drivers are mutually reinforcing. First, there’s the electrification of everything. Electricity has become the world’s preferred way of consuming energy, and its 19% share of energy demand is expected to grow to 45% by 2040, according to the International Energy Agency.

At the same time, we’re seeing continued cost declines for renewables.
Solar PV capital costs have fallen by 85% and onshore wind costs by 49% since 2010, according to Bloomberg New Energy Finance. Offshore wind has experienced a 32% cost decline in the last two years alone. Renewables are now cheaper than new coal across more than two thirds of the world. This is why the IEA’s 2040 projection estimates that two thirds of electricity at that point will be generated by renewables.

In short, the global picture is a future of greater reliance on electricity, and greater use of renewables to produce that electricity. And that picture hasn’t changed.

How has the pandemic affected the opportunity set in renewables?

In the near term, we expect increased M&A opportunities as project sponsors look to sell projects, and power purchasers are focused on securing power at attractive prices to satisfy their climate goals, which haven’t changed despite the economic uncertainty.

In the United States we expect to see an extremely active market toward the end of the year. There are a number of projects in the pipeline that will need capital partners to protect development value, and equity capital will have the most flexibility to manage risks and timing. With tax credits rolling off along with local permits and interconnection rights, time will be of the essence for many projects. We are currently in exclusivity on a portfolio of projects for commercial and industrial customers that will need to be done in time to qualify for existing tax benefits.

We are also re-engaging on a large wind opportunity in the US. This was an auction process where the sponsor is now more focused on the ability to complete the transaction.

How do the opportunities look in other parts of the world?

The Asian opportunity remains a core part of our overall global strategy. Bloomberg New Energy Finance projects that 50% of the world’s electricity will be consumed in the APAC region by 2030 and that just over 40% of all new invested capital in the climate infrastructure space will be deployed in the region in the next decade.

In Taiwan, we are working with a developer to secure equity rights in several projects. Taiwan saw over a gigawatt of new solar installations in 2019, which is just the start of their energy transition.

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The Asian opportunity remains a core part of our overall global strategy.

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We are working with two developers in South Korea on projects that will cover onshore wind and solar assets spread across the county. South Korea is also just implementing their feed-in tariff program to facilitate the energy transition, and these projects will benefit from 20-year power purchase agreements.

Europe continues to offer a diverse opportunity set, but you need to be increasingly selective about geographies and sectors. The Nordics and Iberia offer attractive relative value whereas countries like the UK and Germany have recently seen a mismatch between the reduced opportunity set and large flows of domestic capital. Our team has been evaluating both sides of this market dynamic. For example, we are working on completing acquisitions in Portugal, while looking to divest assets in the UK.

David Giordano
Global Head of Renewable Power
Mark Everitt, CFA
Head of Investment Research and Strategy, BlackRock Alternative Investors