Many limited partners “are quite fed up” with renewable energy generation projects, according to one placement agent. Ronak Patel, a partner at private markets placement agent Campbell Lutyens, told delegates at a panel at affiliate title Infrastructure Investor‘s Global Investor Offsite Conference that investors are now showing more interest in other infrastructure projects to achieve the energy transition, such as energy efficiency and distributed generation (eg, solar panels).
Of energy transition capital, 90 percent has gone into renewable energy generation over the past six years, said Patel – but renewable energy generation is now becoming less attractive for GPs.
“What people are finding is because there have been some quite big shifts in regimes and the underlying risk profile of projects, today you’re taking much more merchant risk than 10 years ago, when you could benefit from government subsidies.
“The other big thing we see is in transport,” said Patel. “Over Covid, transport’s taken a bit of a beating in terms of the returns, but when you talk about the energy transition, there’s a lot of investment required in the transport sector around electrification and the usage of green gas, and that’s where I think LPs are quite interested to play in.
“But underlying all of this is what the risk-return profile is. People are investing into infrastructure for long-term, stable, robust cashflows.”
Merchant risk is a potential revenue squeeze for an energy developer. A developer could experience future revenue loss if the fixed price that an energy buyer agrees to pay in a 10 or 20-year power purchase agreement does not keep up with a rise in the market rate. Governments used to subsidise these revenue losses to mitigate merchant risk and incentivise developers to build renewable energy projects. But many such subsidies have been withdrawn in recent years, as detailed in this 2019 article by Infrastructure Investor (subscription required).