Mobilising institutional capital for renewable energy

Institutional Capital: Closing the Energy Transformation Investment Gap |  Energetski portal Srbije

RENEWABLE ENERGY INVESTMENTS

As the global energy transformation progresses, the investment profile of renewable energy is also changing rapidly. The amount of capital invested in renewable energy has grown substantially over the past decade. Capital flows reflect a growing variety of renewable energy sources, the rising clout of emerging markets and a substantial increase in the business models and financial instruments deployed globally to finance or procure renewable power. Even so, the current trends will not deliver results sufficient to meet global climate goals. Meeting those goals requires an urgent scaling up of investment.

Renewable energy investment trends
Annual renewable power capacity additions grew steadily over the past decade The energy transformation is most pronounced in the power sector. Renewable energy power costs, expressed as the global weighted-average levelised cost of electricity (LCOE), decreased
dramatically over the past decade.

Global renewable energy investment excluding large-scale hydro (>50 MW) (left y-axis),
by technology, and renewable energy power capacity additions (right y-axis), 2004-2019

Solar PV and onshore wind take the lead While hydropower still accounts for the largest
share of renewable power capacity (52% of the 2019 cumulative total), solar PV and onshore wind power have accounted for the largest share of annual capacity installations in recent years: 97 GW of solar PV and 55 GW of onshore wind were added in 2019, compared with hydropower’s 13 GW. They have also accounted for the largest share of annual investments. With costs falling rapidly, this trend is expected to continue. Investment in solar PV and onshore wind power grew from 65% of total renewable energy investments in 2004 to about 94% in 2019 (IRENA and CPI, 2020; Frankfurt School-UNEP Centre/ BNEF, 2020). Solar PV investments accounted for about 89% of total solar power investment in 2013-2018, with CSP plants attracting the remaining 11%. In the case of wind power, onshore wind is still dominant, but less so each year – investment in offshore wind as a share of total wind asset finance grew from 10% in 2013 to 20% in 2018.

 Global renewable investment, excl. large-scale hydro (> 50 MW), by region, 2004-2019

Renewable energy investment needs Renewable energy investment trends have generally shown a positive trend over the past 15 years. However, much more needs to be done to fulfill the vast potential of renewable energy and to meet the world’s clean energy pathway, sustainable development goals and climate commitments.

3 Cumulative energy sector investment needs: Planned Energy Scenario and Transforming Energy
Scenario, 2016-2050, USD trillion

INSTITUTIONAL INVESTORS AND RENEWABLES

Although each is distinctive, the four types of institutional investors analysed in this report have common characteristics and show broadly similar trends: strong asset growth over the last decade, fast growth in emerging and developing markets, a search for greater asset diversification and higher yields, and growing regulatory and social scrutiny. Most of the trends favour increased investments in renewables, but to date the great potential for renewable energy investments among institutional investors remains largely underutilised.

Assets under management of institutional investors, USD trillion, 2018-2019 average

Direct investment in projects Institutional investors invested nearly USD 6 billion in renewable energy projects in each of 2017 and 20184 (CPI, 2019). This marks an increase from about USD 2 billion invested in each of 2015 and 2016, though it is still only about 2% of total renewable project investments, which in 2018 amounted to USD 296 billion (Frankfurt School–UNEP Centre.

Number of renewable energy project transactions involving institutional investors, by technology,
2009-Q2 2019

Why raise institutional capital for renewables?
Because of the sheer size of their balance sheets, institutional investors clearly have a fundamental role to play in allocating global capital to sustainable economic sectors. As we have seen, this potential is largely unrealised when it comes to renewables. Activating the institutional capital pool in emerging and developing markets is particularly important for the purpose of financing the growing demand for green power and infrastructure to fuel sustainable economic development. Greater institutional investments in renewable energy can
create a positive feedback loop by increasing the low-cost capital invested in the sector. This would reduce financing costs for the sector as a whole, thus helping to attract other sources of capital.

 Drivers of mobilisation of institutional capital in renewables

Beyond their obvious contribution to the fight against climate change (through provision of clean and sustainable energy), renewables also help sustainable economic development through the buildout of new green infrastructure. The need for additional infrastructure investment is particularly acute in developing and emerging markets because of past underinvestment, growing populations and economies, and the rise of the middle class.
The African Development Bank estimates that Africa’s annual infrastructure needs are in the
range of USD 130-170 billion, with a financing gap of USD 68-108 billion per year.

 Comparison of the levelised cost of utility-scale wind and gas in environments of high and
low financing costs

ACTIONS TO MOBILISE INSTITUTIONAL CAPITAL

Scaling up institutional investment in renewable energy requires a comprehensive effort on multiple fronts. Renewable assets generate significant social and economic benefits, and lower the risks of climate change and adverse regulatory actions. But they also come with their own risks that need to be mitigated. Meanwhile, many institutional investors operate within regulatory frameworks and capital markets that are not conducive to renewable investment. Some institutional investors lack internal capacities required for increased renewable investments. This section discusses the main obstacles to institutional investments in renewables and provides actionable recommendations for how policy makers, public and private providers of capital, institutional investors and other sector stakeholders can overcome them.

 Policy and regulatory actions to mobilise institutional capital

Policies to support renewable energy deployment Domestic and foreign investors consider a wide range of factors when investing in a particular sector in a given country or region.

 Factors affecting investment decisions, share of respondents (percent)

Supporting project pipeline development
With enabling policy frameworks in place and investment vehicles that help channel capital to green solutions, investors still need a continuous pipeline of investable projects. To achieve this, policy makers and providers of public capital can address key barriers through targeted actions that help de-risk renewable energy projects, standardise processes and documentation and mobilise institutional investments through blended finance initiatives.

 Actions to create renewable energy project pipelines

Enhancing internal capacities
Provided that the appropriate policy, regulatory and capital market conditions are present, as well as a sufficient supply of investable projects and desirable investment instruments, renewables can provide the type of returns that fit institutional investors’ needs. To seize such benefits, however, institutional investors may need to put additional efforts to foster the right internal conditions and skills base. By building internal capacity, institutional investors can increase both indirect and direct modes of investment in renewables, across different stages of
the project life cycle.

 Internal actions to be taken by institutional investors

Reaping the benefits: Selected renewable investments by institutional investors
Three examples of projects that benefited from the participation of institutional investors are described below. They illustrate the positive results that can spring forth from the right enabling environment that includes supportive policies, innovative capital market solutions, effective de-risking strategies, efficient support from public capital providers and the existence of strong internal capacities.

The El Naranjal and Del Litoral solar PV projects in Latin America
The El Naranjal and Del Litoral solar photovoltaic (PV) projects are located across a total of
190 hectares of land in the Department of Salto in the northwest of Uruguay. The two projects were acquired by the project sponsor, Atlas Renewable Energy, an independent power generation company with renewable energy projects across Latin America, from SunEdison in 2017 while they were still under construction (Allianz GI, 2018b). The projects have been operating at full capacity since September (El Naranjal) and June (Del Litoral) 2017.

Project structure, El Naranjal and Del Litoral solar PV projects

Participation by a multilateral agency (IDB’s private sector arm) and several risk mitigation
approaches, including:

• Bankable 30-year term power purchase agreements (PPAs) with a stable state-owned electric utility and beneficial terms including fixed price, inflation-adjusted payments over the PPA life, no requirement for minimum power generation and curtailment provisions to compensate renewable producers.

• Aggregation of two projects into one transaction, benefiting from common documentation, due diligence process and a single set of financial, technical and legal advisors.

• Ratings of the B-bonds issued to institutional investors: a senior B-bond (rated Baa3) and a
subordinated B-bond (rated Ba2). In addition, both bonds received a GB1 (Excellent) Green Bond Assessment by Moody’s.

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