In a global market increasingly bereft of yield, how important a role can renewable power infrastructure play for investors? An essential one, especially for those looking for stable long-term income with attractive return potential.
2016 so far has been another remarkable period for financial markets. Global monetary policy remains broadly accommodative—and in some areas more and more so—propelling equity markets ever higher and leaving a record amount of sovereign debt around the world (almost US$12 trillion by midyear) yielding at or below zero (source: Fitch Ratings, as of 6/29/2016).
It’s no wonder then that investor interest has been rising in real assets, which currently provide attractive yield compared to many other financial assets. In particular, renewable power—the fastest growing portion of global infrastructure—has garnered a lot of attention, especially wind and solar. Why renewables? To answer that, one must first understand the changing global energy landscape.
According to the United Nations Environmental Programme, renewable power represented 53.6% of new global generating capacity in 2015. That’s the first time it has represented a majority—in the United States this figure was higher still at 68%. The numbers show wind and solar technologies have made strong inroads into global power grids in recent years, and the trend shows no signs of abating. Renewable energy also leads the way so far this year with 35% of total transactions in global infrastructure (source: Preqin).
What’s powering the rise of renewables
There are a number of drivers behind renewables gaining a bigger share of global electricity generation, and we focus on three of them here:
Money talks. Improved cost competitiveness of solar and wind power in recent years has built a strong economic case alongside the long-standing environmental one. Shown in the chart above, costs have fallen in both solarphotovoltaic power (down 68%) and onshore wind (down 16%) since late 2009, making their unsubsidized electricity generation competitive with fossil fuels in many places.
Positive policy drivers. Governments are setting ambitious targets for renewable sources of power, driven by concerns around long-term climate change. The United Nations Climate Change Conference in Paris late last year strengthened global policy support when, in a historic move, 195 countries pledged to cut, cap or mitigate their carbon footprint.
Corporate power users are now on board. What was once motivated by brand burnishing is now driven by economics, including tax incentives behind clean energy targets. More companies are now directly involved with renewables, entering into long-term purchase agreements that can allow them to manage power price volatility over time. Google, for instance, only recently signed a long-term purchase agreement with BlackRock Real Assets for a construction-ready wind energy project in Norway, which will power its European data centers.
Why invest in renewable power
As part of a broader portfolio, allocating to renewables may offer investors a number of key benefits, including:
Long-term, stable income. Renewable power wind and solar projects receive stable (i.e., contracted) cash flows from the sale of electricity.
Attractive return potential. Operating projects often provide favorable terms when sourced through proprietary channels. Early stage construction projects may offer higher return opportunities at the cost of relatively limited additional risk.
High diversification benefits. Wind and solar project cash flows depend primarily on the availability of wind and sunshine, not economic indicators or central bank policies. That means low correlation with traditional fixed income and equity markets.
A degree of inflation protection. Real asset prices typically rise with inflation, while renewables projects are often further supported by contracts that explicitly link cash flows to inflation.
Of course, investing in renewables does bear some specific risks. Stakes in large, complex assets don’t change ownership fluidly, so it’s important for investors to make sure that the time horizon of an investment matches their own. Also, how much power a project generates (and sells) depends directly on how much resource is available in a given location. More reason you want to be confident in an investment manager’s technical expertise in assessing the availability of wind or sunshine, for example.
We see renewables—and more broadly real assets—as a potentially attractive investment option, and more investors are beginning to see the opportunity. In our 2016 BlackRock survey, more than 50% of our clients say they plan to increase their allocation to real assets this year, more than any other asset class.
David Giordano is Head of the North American Investment Team, BlackRock Renewable Power Group. He contributed to this article.