What happens to energy prices if America achieves a carbon-free energy sector? According to a report released June 2020 by the Goldman School of Public Policy out of UC Berkeley, energy prices will decline. Consumers will pay less for electricity than they pay today. The report, titled “2035 The Report, Plummeting Solar, Wind, and Battery Costs Can Accelerate Our Clean Electricity Future”, provides compelling evidence to suggest that a 90% transition to renewable energy infrastructure over the next 15-years will reduce average wholesale power costs.
The cost to produce energy from wind and solar, and the cost to deploy the energy to meet variable demand through storage capacity, is likely to decline as these technologies become more efficient and cheaper to manufacture. By way of analogy, the first personal computers and flat-screen televisions were less efficient and more expensive than the technology we utilize today. Costs have declined dramatically as utilization has increased. Renewable energy technologies are likely to follow a similar pattern.
As costs decline, private equity firms and asset managers are securing capital commitments from institutional investors in order to make investments in renewable energy projects. Restructuring America’s energy infrastructure presents a tremendous investment opportunity for institutional investors seeking to secure compelling risk adjusted returns. Renewable energy investments are outpacing the conventional power sector in terms of project finance investment opportunities, and private equity firms are establishing dedicated renewable energy platforms to develop, construct, own, and operate renewable energy projects.
However, at Blue Rock Renewables we wonder – are institutional investors positioned strategically with their asset managers to navigate the potential risk of declining power costs? If an asset management firm is utilizing an origination strategy of ‘own and operate’, what happens to the investor’s returns in 15 years if the price of power is lower than what was expected? The common equity’s return will be diminished, as there will be less revenue and less cash available for distribution. Are institutional investors appropriately protected in this scenario, and have they developed an origination strategy designed to minimize the downside risk of lower wholesale energy prices?
At Blue Rock, we have developed and employ an origination strategy that looks forward 15-years and aligns our future objectives with today’s market dynamics. We structure investments to protect against downside risk and position our investors for long-term success. Last, we utilize an origination strategy that is not administratively burdensome nor expensive, allowing us to employ a low-cost approach and return more capital to our investors. If you are an institutional investor seeking to make investments in renewable energy projects and would like to learn more, please Contact Us.