Market evolution and technology revolutions are shaping a new power and energy landscape. In this time of upheaval, many actors face the disruption of legacy business models.
As policy and economic drivers challenge conventional generation, actors are increasingly looking to invest in new markets and technologies, giving rise to renewables opportunities for the financial community.
What is driving the investment rationale in renewables?
Economics and politics threaten a bleak future for traditional generation sources. Declining levelized costs of energy (LCOE) and tech-neutral (or tech-specific) auctions, amongst other factors, have helped build the renewables investment case.
For comparison, auction price driven wind and solar projects offer lower internal rate of return-weighted average cost of capital (IRR-WACC) spreads than traditional oil and gas projects, but also offer stable cash-flow profiles. These projects can also often be underpinned by a power purchase agreement or a form of price guarantee.
As we move towards 'merchant' renewables, we will see higher IRR levels but with greater volatility. Strategies to bear that merchant risk, including leveraging trading/hedging capabilities and using hybrid solutions of photovoltaics (PV), wind, and storage can play a part in supporting future returns.
Technology maturation and market consolidation
When looking at the key set of energy technologies driving the market evolution, it is apparent that these technologies are at very different stages of development and offer differing value creation potential.
As an example, when comparing electric vehicles (EVs) to utility-scale PV or offshore wind, we see quite different markets, technology characteristics, and growth drivers: