Renewable energy investments rising by 11 percent annually – KGAL still sees great market potential

Global primary energy demand will grow 40% by 2040, driving the uptrend in renewable energy investments. Europe remains a very attractive market environment.Over the last decade, worldwide investments in renewable energies have increased from USD 112.1 billion in 2006 to USD 286.3 billion in 2015. This equates to an annual growth of 11%. Most of this growth is attributable to investments in solar and wind power. Between 2006 and 2015, the share of these two technologies in annual renewable energy investments rose from 55% to 95%.

Renewable energies as an established segment in the infrastructure asset class

Europe is the world’s second largest market for renewable energy investments after China. Evidence suggests that regulatory adjustments have contributed to the development of the sector, which can now be considered a distinct segment within the infrastructure asset class. Global primary energy demand is expected to grow 40% by 2040. Most of this growth will take place in emerging countries. 1.2 billion people currently still have no access to electricity.

The improving competitiveness of renewable energies is driving the cost of electricity production down. In the political arena, the results of the 21st session of the United Nations Climate Change Conference in Paris (COP21) can be considered a milestone in the fight against global warming. The conference agreed on limiting the rise in the average global surface temperature to under 2°C. In addition, wholesale electricity prices are expected to increase.

Worldwide annual renewable capacity additions expected to double

In view of these developments, the global annual build-out of renewable capacities is expected to double from 150 GW in 2015 to 300 GW in 2040. Overall, an additional USD 12.2 trillion should flow into building new generating capacity by 2040. According to estimates, 65% of this amount should go towards renewable energy investments.

“The share of renewable energies of installed capacity in Europe will increase from currently 45% to 70% in 2040. Solar energy and wind power will be the main drivers of this growth. From a geopolitical perspective, this development will help the European energy market to reduce its reliance on imported fossil fuels as well as its dependence on controversial nuclear power generation,” said Michael Ebner, Managing Director of KGAL Investment Management GmbH with responsibility for infrastructure investments within the KGAL Group.

The growing importance of renewable energies in energy trading is likely to increase price volatility within the electricity market. So-called “power purchase agreements” (PPA) enable large electricity customers to secure long-term conditions with an electricity producer. Many large corporations such as McDonald’s, British Telecom or Deutsche Bahn have already signed long-term PPAs for renewable energy.

Value-add through timed entry along the project value chain

“Many institutional investors have so far kept their distance from the European renewable energy markets. A successful positioning in these evolving markets requires a tailored investment approach,” explained Ebner. While the traditional buy-and-hold approach may be sufficient to achieve attractive long-term returns in many less-developed markets, experience and expertise make it possible to buy into the project value chain at an earlier or later stage in order to create added value for investors. Earlier entry into the value chain means taking on additional project risks during the time period from early development to completion (greenfield investments). The other option is investing later in the project life cycle, through the acquisition and repositioning of operating assets (value-add for mature assets).