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Postcrisis, renewable energy giants look to further their dominance

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E.ON's Amrumbank West offshore wind farm in the German North Sea.
Source: E.ON

With the coronavirus pandemic battering economies and financial markets around the world, consolidation in the renewable energy industry is poised to accelerate as deep-pocketed investors look to grab market share from smaller rivals.

Before the pandemic struck, the renewables sector was already being transformed by a flood of money drawn to stable assets in a fast-growing market. The crisis has reinforced investors' view of clean energy infrastructure such as wind and solar plants as safe harbors in the growing storm, but it is also raising questions about the viability of some owners and developers of clean energy projects, according to interviews with more than a dozen analysts and investors.

Utilities, infrastructure companies and other large players with the means to weather the crisis will likely come out of it in a position to tighten their grip on the renewables market in a post-pandemic world, setting the stage for more rapid expansion in the years ahead.

"A bigger company has better access to capital than a lot of small fragmented companies," said Christopher Mansfield, a partner at DIF Capital Partners and head of the firm's renewable energy investments. "I think the capital markets could become more efficient for renewables, which in the past has always been a bit of a bottleneck."

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From financing to supply chains, renewable energy heavyweights such as NextEra Energy Inc., Iberdrola SA and Ørsted A/S "have massive and growing advantages of scale," said Justin Campeau, a portfolio manager at Kayne Anderson Capital Advisors LP.

"In an environment … dictated more by economics than subsidies, and where you have to deliver projects reliably and cheaply and squeeze out a return on that, to be able to bear these advantages allows the bigger scale players to compete very effectively," Campeau said.

NextEra, whose subsidiary NextEra Energy Resources LLC claims to be the top producer of wind and solar power globally, sees the recent market upheaval as a clear opportunity.

"[We] buy cheaper, we build cheaper, we operate cheaper, we have the best development skills in the industry," John Ketchum, president and CEO of NextEra Energy Resources, said April 22 on a conference call with analysts. "Customers, more than anything right now, want confidence and certainty that a project is going to get built. So we are actually seeing more opportunities come our way."

The extent of the shakeout in the renewables industry will depend on the length and severity of the downturn, market participants said.

"Not all companies have the same resilience to get through" a recession, said Allan Marks, a partner at the law firm Milbank LLP who focuses on infrastructure finance. "So what's going to change is that the people who survive this will not be the same people as the ones that went into it."

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A worker atop a turbine at Iberdrola's Maranchón wind farm near Guadalajara, a city in central Spain.
Source: Iberdrola

'Assets of least concern'

The survivors will emerge into an energy landscape fundamentally changed from pre-pandemic conditions, many observers believe.

With economies shuttered, the world will probably see its biggest recorded drop in carbon dioxide emissions this year, and unlike after previous financial crises, emissions from the energy sector might not rebound this time due in part to the continued build-out of renewables.

While the industry faces near-term disruptions as governments try to contain the spread of the virus, "Renewables continue to be the new energy source of choice around the world," and the "increasing investor focus on carbon pre-covid is likely to continue," Goldman Sachs said in an April 15 report.

In a sign of investor support, some renewable energy stocks and investment funds are performing better than the broader market this year.

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"That's a reflection of the relative confidence in the yields of this sector compared to others that are relatively more hit by the pandemic," said Richard Crawford, director of infrastructure at InfraRed Capital Partners, the investment manager for The Renewables Infrastructure Group Ltd., a London-listed renewable energy fund.

In many cases, renewable energy plants sell electricity under fixed-price, long-term contracts, helping to shelter their revenues from immediate economic disruptions.

"I think there's a high potential for renewable assets to come out the other side of this broader crisis as really seen as weathering this fairly significant test on their investment thesis," said Ben Hawkins, senior vice president of infrastructure and renewable resources at Alberta Investment Management Corp., which owns U.S. renewables company Sustainable Power Group LLC through a joint venture with AES Corp. "They seem to be the assets of least concern across many infrastructure investors."

Still, a prolonged economic downturn could dry up power demand, leaving developers struggling to find off-takers, including the corporations that have driven demand for new and unsubsidized renewable power plants. And some wind and solar assets sell at least a portion of their electricity into wholesale markets, so depressed power prices could threaten their revenues.

"I expect the enthusiasm for some of the merchant renewables will be lower, for sure, compared with pre-COVID," Bernstein analyst Deepa Venkateswaran said.

For now, capital is still flowing, according to Omar Nazif, a partner at Latham & Watkins LLP and a member of the law firm's finance department.

"I don't want to say that there's no impact. That's certainly not true," Nazif said. But "there's quite a bit of both acquisition and investment as well as financing activity right now."

One thing nearly everyone agrees on: smaller developers face the greatest risk.

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A solar farm managed by Lightsource BP Renewable Energy Investments Ltd. on the Isle of Wight in the U.K.
Source: Lightsource BP

Big get bigger

Smaller companies will be the first cut off from financing if lenders and tax equity providers pull back, creating potential opportunities for large investors such as Partners Group Holding AG, a private equity firm with $91.13 billion in assets under management at the end of 2019, according to Vittorio Lacagnina, head of business development and private infrastructure at the firm.

"There's definitely scope for more consolidation if this goes on for longer, and the recovery is not smooth," said Axel Thiemann, CEO of Sonnedix Management Services Ltd., a solar project developer owned by JPMorgan Chase & Co. "Well-funded, more established players have potential to stay the course or drive some consolidation with others who have less stable balance sheets."

In addition to "green utilities" and infrastructure companies, private equity firms and sovereign wealth funds were also amassing large positions in the renewables sector before the crisis.

UBS analyst Sam Arie expects the industry to consolidate about a dozen majors that can leverage their size in supply deals and site development in coming years.

Earlier this year, the Canada Pension Plan Investment Board acquired Pattern Energy Group Inc. after the renewable energy company warned shareholders that without a deal, it would be the only developer of its size in the U.S. without a financial sponsor and would have trouble raising low-cost capital.

For Partners Group, which recently bought a majority stake in German renewable energy developer VSB Holding GmbH, such tie-ups are an opportunity to do more than cut checks. "You're able to steer the pipeline of projects to what you think are going to be the best-returning projects, given the situation," Lacagnina said. "And that allows us to enter some of these opportunities with more confidence."

Oil majors have also emerged as big investors in the renewables business in recent years. In December 2019, BP PLC lifted its stake in solar developer Lightsource BP Renewable Energy Investments Ltd., while Italy's Eni SpA bought into Falck Renewables SpA's U.S. business. Oil companies have signaled they remain committed to such investments despite the crisis. Turmoil in the oil market has reinforced the need to diversify, Total SA CEO Patrick Pouyanné said this month, though he said the price shocks may slow investment in low-carbon alternatives.

"[The] pandemic only adds to the challenge for oil in the future," BP CEO Bernard Looney said April 28 on a conference call with analysts. Meanwhile, the renewables sector "continues to attract investment … because of its risk profile and its resilience," Looney said, adding that he is committed "to reimagine energy and to reinvent" BP.

That reinvention will be critical, said Henrik Poulsen, CEO of Ørsted, the world's top wind-farm developer, given how much capital it will take to "transform the global energy system." Ørsted and Iberdrola, the Spanish renewables giant, both said they will continue investing and growing in the face of the economic meltdown.

"We believe financially robust companies that maintain a long-term view on the market are likely to find additional opportunities in the wake of the current crisis," Poulsen told analysts April 29.