The Rising Tide of Private Equity in Renewable Energy

Pietro Pedron, Charlotte Elias, Anastasia Nedorezova, and Ottavia Buonaiuto

Introduction

In the last decade, private equity has transformed from a marginal player to a pivotal force in the renewable energy sector, significantly increasing its investments from $1.7 billion in 2012 to a record $26 billion in 2022. The sizable shift towards sustainable and renewable energy sectors reflects a growing recognition of the long-term economic potential and societal benefits of clean energy sources. As a consequence of the escalating climate concerns and governmental commitments to reduce carbon emissions, renewable energy projects have emerged as attractive assets for private equity investors. 

This trend is further fueled by technological advancements in solar, wind, and other renewable technologies, making them more efficient and cost-effective. Additionally, consumer demand for greener energy solutions and the increasing viability of renewable energy infrastructure as a lucrative investment option have encouraged private equity firms to allocate substantial funds to this sector. By investing in renewable energy, private equity is not only capitalizing on the potential for substantial returns but also contributing to the global transition towards a more sustainable energy future.

Overview & Value Drivers

Recent trends in private equity, particularly in the context of renewable energy investments, reveal a dynamic and evolving landscape. The global shift away from oil and gas has presented a clear opportunity for private equity to supply investment capital and help businesses accelerate growth in the energy transition sector. This shift is creating a fertile field for investment, but it also raises complex issues for fund managers in terms of portfolio management. 

The pressure on private equity firms to decarbonize their portfolios increased in 2022, with heightened calls from regulators, consumers, and investors for change. This has made the risks and opportunities within portfolios critical focus areas for fund managers. The race to develop new alternative energy sources and other low-carbon solutions is viewed as a generational opportunity for investment. However, the evolving landscape presents challenges, with the energy transition spanning every sector of the economy and involving both industrial and technological hurdles. The pace and direction of change vary across geographies, and politics often plays a disruptive role.

Despite these challenges, the energy transition space is becoming increasingly attractive to investors. Between 2017 and the first half of 2022, buyout and growth equity funds executed energy transition-related deals totaling around $160 billion, mostly in the renewables and clean industries segments. 

In the first half of 2021, investments in renewable energy projects and companies reached a record $174 billion, supported by record public market financing and venture capital and private equity commitments. This period saw a notable increase in equity offerings by renewable energy companies, with new equity raised on public markets hitting a record high at $28.2 billion, and private equity commitments to renewable energy companies reaching $5.7 billion. Investment in solar projects rose significantly, and wind project investment remained robust, especially in regions like China and Europe. 

Furthermore, the refinancing of renewable energy projects, mergers, acquisitions, and buyouts, known as ‘funds in circulation’, totaled $68.3 billion in the first half of 2021, marking an 18% increase from the previous year. This period witnessed the highest total ever for equity raised on public markets by clean energy companies, indicating a strong investor appetite for sustainable investment opportunities aligned with a net zero future. 

Looking at the drivers of value that encourage private equity investments in renewable energy, it is possible list primarily three:

1. Sustainability and ESG Focus: There’s a growing emphasis on Environmental, Social, and Governance (ESG) factors, driving PE firms to invest in renewable energy as a means to achieve sustainable growth and meet the demands of increasingly ESG-conscious investors​​.
2. Technological Advancements and Efficiency: Innovations in renewable energy technologies, especially in solar and wind, are enhancing efficiency and reducing costs, making renewable energy projects more lucrative and viable for PE investments​​.
3. Market Demand and Growth Potential: The global demand for renewable energy is surging as more countries and businesses commit to reducing carbon emissions. This growing market presents a significant growth potential for PE firms investing in renewable energy projects​​.

In summary, private equity’s role in renewable energy investments is marked by both opportunity and complexity, with a significant increase in capital flow into this sector, reflecting a strong commitment to sustainable and low-carbon solutions.

Regulation

Both the United States and the European Union have implemented government measures aimed at addressing climate issues and promoting investments in renewable energy. Such regulations have led to an increased allocation of private equity funds towards this sector. In particular, the U.S. has introduced the Inflation Reduction Act (IRA), while Europe has established the Renewable Energy Directive.

The Inflation Reduction Act (IRA) of 2022, signed into law by President Biden, marks a significant turning point for the renewable energy industry and, by extension, the private equity sector heavily invested in it. The impact of the IRA on private equity mostly derives from the fact that the act allocates approximately $369 billion toward energy and climate spending, extending and expanding existing tax credits for wind and solar energy, and offering new incentives for technologies like energy storage and clean hydrogen. This injection of funds into the renewable energy sector creates a more favorable investment environment. Private equity firms may find a broader range of attractive investment opportunities, including the development, construction, and operation of renewable energy projects. This increased funding can lead to a surge in project activity, driving demand for private capital. 

Another American piece of legislation significantly encourages private equity investments in renewable energies: the Infrastructure Investment and Jobs Act (Bipartisan Infrastructure Law). Signed in November 2021, this act provides over $1 trillion in public investment, with a core component aimed at accelerating the clean-energy transition and improving electric-power infrastructure reliability and resilience. Approximately $76 billion of the new funding is allocated to energy, with a focus on competitive grants, loan and financing programs for clean energy, electric-grid improvements, carbon capture, and clean-hydrogen development.

The Revised Renewable Energy Directive forms the legal framework for clean energy development across the EU. It supports renewable energy as a key part of the European Green Deal, reducing dependency on external suppliers. The directive’s revisions, especially the ambitious 2030 target for renewable energy, promote investment in various renewable sectors. It introduces measures to facilitate electrification, promote renewable fuels, and streamline permitting processes. For private equity, this directive opens up opportunities for investing in emerging clean energy technologies and projects across the EU, encouraged by the supportive regulatory environment. 

Duke Energy to Sell Utility-Scale Commercial Renewables Business to Brookfield for $2.8 billion

The transaction is expected to bring Duke Energy’s net proceeds of approximately $1.1 billion, which will be used to reorganize the firm’s balance sheet mainly reducing debt issuances. Duke Energy’s main purpose with this deal was to proceed with the strengthen of its regulated businesses that aims to incorporate over 30.000 megawatts of regulated renewable energy by 2035. Duke Energy would have the chance to finalize a complete transition into a purely regulated company with structured investment plans.

Duke Energy chair saw in this relevant deal with Brookfield an extraordinary advantage and the possibility to let the Commercial Renewables’ business grow with the hand of one of the country’s largest renewables energy operators. 

According to the deal’s conditions. Commercial Renewables will receive more than 3.400 megawatts in addition to operations, new project development, and current projects under construction.

Charlotte, N.C. will remain Commercial Renewables businesses headquarter, while there will be a transition regarding employees from Duke Energy to Brookfield, in order to preserve business continuity.

In a significant move towards reshaping its energy portfolio, Duke Energy, a major player in the energy sector, has unveiled plans to sell its unregulated utility-scale Commercial Renewables business to Brookfield Renewable for $2.8 billion. This strategic decision will have far-reaching implications, both for the company and the broader landscape of renewable energy in the United States.

Duke Energy’s primary objective in this transaction is to optimize its financial position, with an anticipated net gain of approximately $1.1 billion. This injection of funds will play a pivotal role in reorganizing the company’s balance sheet, notably reducing debt. The move is strongly tied to Duke Energy’s larger vision of improving its regulated businesses, with a specific focus on incorporating over 30,000 megawatts of regulated renewable energy by 2035. The strategic deployment of the proceeds aims to expedite the company’s transition into a purely regulated entity, backed by meticulously structured investment plans. Morgan Stanley & Co. LLC and Wells Fargo Securities, LLC are serving as financial advisors to Duke Energy, while Skadden, Arps, Slate, Meagher & Flom LLP are serving as legal counsel.

Lynn Good, Duke Energy Chair, President, and CEO, highlighted the strategic significance, stating, “This sale is an important step in our transition into a purely regulated company with significant grid and clean energy investment plans”. He views this deal as an extraordinary advantage, providing the Commercial Renewables business with an opportunity to thrive under the guidance of one of the nation’s largest renewable energy operators, Brookfield Renewable. The agreement encompasses over 3,400 megawatts of utility-scale solar, wind, and battery storage assets, including operational facilities, new project developments, and ongoing projects under construction. Charlotte, N.C. will maintain its position as the headquarters for Commercial Renewables, ensuring a smooth transition as Duke Energy employees move to Brookfield, preserving business continuity and customer relationships.

This strategic shift is not merely a financial manoeuvre; it signifies Duke Energy’s commitment to a future dominated by clean, regulated energy. The deal is poised to close by the end of 2023, pending regulatory approval and customary closing conditions, including regulatory approval by the Federal Energy Regulatory Commission and the expiration of the waiting period under the Hart-Scott-Rodino Act. Duke Energy is also making progress on a separate sale for its distributed energy business, expected to close by year-end 2023. The company’s assertive steps towards financial optimization and clean energy growth underscore its dedication to a sustainable and regulated energy future. For Brookfield, as stated by Connor Teskey, CEO of Brookfield Renewable “with this acquisition, we are adding a scale operating renewable platform with a full suite of in-house capabilities and a proven management team experienced in operations and development…we are also adding to our pipeline of renewable development projects, solidifying our position as one of the largest renewable energy businesses in the U.S. with almost 90,000 megawatts of operating and development assets.”

As Duke Energy embarks on this transformative journey, the impact of this deal extends beyond the boardroom, reaching into the heart of the renewable energy landscape. Duke Energy’s deal with Brookfield Renewable stands as an example of the transformative power of strategic business decisions in shaping a sustainable future. This announcement prompts us to reflect on the broader implications of such decisions and encourages us to envision a future where renewable energy is not just a goal but a tangible reality.