RENEWABLE ENERGY INVESTMENT TRENDS

As renewables have become a compelling investment proposition, global investments in
new renewable power have grown from less than USD 50 billion per year in 2004 to around
USD 300 billion per year in recent years (Frankfurt School-UNEP Centre/BNEF, 2019), exceeding
investments in new fossil fuel power by a factor of three in 2018.

Another defining trend of renewable energy investments has been a geographic shift towards
emerging and developing markets, which have been attracting most of the renewable investments each year since 2015, accounting for 63% of 2018 renewable power investments
(Figure 1). Besides China, which attracted 33% of total global renewable energy investments in 2018, other top emerging markets over the past decade include India, Brazil, Mexico, South Africa and Chile (Frankfurt School-UNEP Centre/BNEF, 2019). Nevertheless, many developing and emerging countries in Africa, the Middle East, South-East Asia and South-East Europe still have a largely untapped renewables investment potential.

In addition to the growing technological and geographical diversity, the renewable energy
investment landscape is also witnessing a proliferation of new business models and investment vehicles, which can activate different investors and finance all stages of a renewable asset’s life. Examples include the rise of the green bond market, growing interest in corporate procurement of renewable power and new business models for small-scale renewables such as the pay-as-you-go model.

INSTITUTIONAL INVESTORS AND RENEWABLES

While the institutional investors analysed in IRENA’s study form a heterogenous group,
operating within different sector-specific and national circumstances, they also face several ommon trends.

Growing assets Their global assets are large and growing. While a broader group including asset managers commands assets of well over USD 100 trillion, the group analysed in IRENA’s report (pension plans, insurance companies, sovereign wealth funds, foundations and endowments) manages around USD 85 trillion (Figure 2), which has been growing at an annual rate of around 4-7% over the past decade.

Regional shift Markedly faster growth is occurring in emerging and developing markets. This is due to their growing economies, populations and expansion of pension plan and insurance coverage. Double-digit growth rates have been recorded for pension plans and insurance companies in several countries in Africa, Asia and Latin America. Ten out of 20 African sovereign wealth funds were created since 2010 (Quantum Global, 2017). Such local capital can help bridge local infrastructure funding gaps and support long-term sustainable development.

From the sample of over 5 800 institutional investors and their investments for the past two
decades, 37% of institutional investors have made infrastructure investments, 25% have invested in energy-related funds, while 20% have invested in renewable energy-focused funds and only around 1% have made investments directly in renewable energy projects (Figure 3).

Size effect Institutional investors with renewable energy assets are larger than average. Average assets under management for such investors total USD 30 billion, more than double the average assets under management for institutional investors in the whole sample (USD 12 billion). Furthermore, institutional investors with only direct renewable investments are larger than institutional investors with only indirect investments (USD 34 billion of assets under management versus USD 24 billion). As well, the average deal size increases from USD 199 million to USD 434 million when institutional investors are involved. IRENA’s discussions with institutional investors support hypotheses that larger investors have greater internal capacities for investments in relatively new asset classes like renewables, and that larger transactions are more likely to attract institutional investors as bigger ticket sizes lower the per-unit transaction costs.

Investment amount The number of direct renewable energy projects involving institutional investors has increased over time, from as few as 3 recorded transactions in 2009, to 73 in 2018 and 38 for the first two quarters of 2019 (Figure 4). Over the past decade, institutional investors were involved in 231 renewable energy direct financing transactions. However, this represents only 1.8% of all renewable energy projects in the dataset analysed over the same period. The total annual amount financed by institutional investors was nearly USD 6 billion in each of 2018 and 2017 (CPI, 2019). While this marks an increase from around USD 2 billion invested in each of 2016 and 2015, it represents only around 2% of the total renewable project
investments in 2018.

Technology preference Around 81% of all renewable power deals in which institutional investors took part over the past decade were in wind and solar technologies. This reflects the global technological trend in the renewable power sector as a whole. However, compared to total renewable power investments over the past decade, institutional investors have favoured wind more strongly. For the 2009-2018 period, global investments in solar projects were around 50% of total renewable energy investments, followed by wind which accounted for
39% (Frankfurt School-UNEP Centre/BNEF, 2019). For the same period, considering only renewable project investments involving institutional investors, wind accounted for 45% and solar for 24% of all transactions. This is most likely because wind is a more established renewable technology with larger transaction sizes that attract institutional investors.
In the sample analysed, the average transaction size for a wind project was USD 211 million, compared to USD 124 million for solar.

Investment stage preference Institutional investors exhibit a strong preference for already-operating assets, which help them avoid early-stage risks associated with the structuring and construction stages. Over 75% of all renewable energy deals involving institutional investors during the 2009 to Q2 2019 period were secondary-stage transactions, i.e., investments in already operating assets not requiring further funding, while around 22% were for the construction of new assets (i.e., greenfield stage), and a small portion went to brownfield projects (already operating assets that require improvement or expansion). Investment
vehicles that help such investors channel their assets into already operating projects are therefore important, as is building internal capacities for earlier-stage investments.

Institutional investors could play a more active role in renewable-sector investments and
become a significant contributor to the global capital shift towards low-carbon solutions. Such
a shift will, however, require combined efforts on multiple fronts with active engagement from all stakeholders: policy makers, institutional investors, providers of public capital, capital markets and others.

OPPORTUNITIES FOR ENGAGEMENT

As the only international organisation dedicated solely to renewable energy, IRENA is uniquely positioned to support countries in their transition to a sustainable energy future. IRENA provides analytical guidance and develops solutions for market opportunities, successful business models and financial instruments; supports renewable energy projects throughout
their life cycle; leads the global discourse; connects key stakeholders; and provides a global forum for the exchange of best practices.

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