Private and public investments in renewable energy sources are poised for serious growth in the next few years, due to a combination of urgent need and growing opportunities.
While the path to limiting global warming to 1.5 degrees Celsius continues to narrow, "clean energy growth is keeping it open," the International Energy Agency said in its September update.
IEA expects a record $1.8 trillion in clean energy investments in 2023 alone, and it needs to be $4.5 trillion each year in less than a decade, to stay on the net-zero pathway, the agency said.
For institutional investors, renewable energy was already on a robust path that could top $2 trillion by 2030, up from $856 billion in 2021.
One of the earliest investors has been the C$575 billion ($421.6 billion) Canada Pension Plan, Toronto. John Graham, president and CEO of CPP Investments, which manages the plan, credited "solid returns" on investments in renewable energy assets and infrastructure for a positive performance in a challenging 2022 market.
CPP investments in green and energy transition assets should reach at least C$130 billion by 2030 from C$67 billion currently, and "what we are doing in renewable assets is a big part of that," said Bill Rogers, head of sustainable energies for CPP Investments. He expects the renewable energy market to stabilize over the next 18 months, after turbulence from energy crises, inflation and more, and for three core renewable energy approaches to dominate: onshore wind, offshore wind and solar.
Other options for long-term investors interested in renewable energy continue to widen, such as alternative green technologies that include clean transportation, hydrogen, biofuels, battery storage and others. Those are more complicated when it comes to predicting revenue streams, but "as an asset class it is going to be interesting for institutional investors," Rogers said, given their long-term horizons.
"We don't need certainty. I think it will start with people with that (patient capital) flexibility but over time it will develop pools of capital. One of the reasons that makes the energy transition exciting is the vast amounts of capital needed," Rogers said.
Exciting is the right word, agrees Mark Dooley, global head of green investments at Macquarie Asset Management.
"We've gone from an asset class where you had to spend a lot of shoe leather, to a market where there is a lot of interest. We have to run pretty hard to keep up with that demand," he said.
Growth of renewable energy offers investing opportunities class, with similar risk/return characteristics, and “as an asset class it is still growing. We see tremendous opportunity for capital formation for people like us, and a growing group of investors,” Dooley said.
That ranges from smaller public pension funds to bigger risk-takers like the $248.2 billion New York City Retirement Systems, whose portfolio exposure to the energy transition is 25%, and Norges Bank Investment Management, whose renewable energy infrastructure strategy for 2025 calls for investing in renewable energy storage and transmission and exploring new markets and technologies. “This is now very much mainstream,” Dooley said.
Next-generation technology like utility-scale battery storage “is right on the cusp. Hydrogen, biogas (and) aviation fuel will all follow on that journey,” he said.
That is quite a different market from even two years ago.
“Many investors are finding now that they need to look at companies that take assets at an early stage. I think there is a gravitation towards opportunities to get that ground-floor return. It does take a bit more patience,” Dooley said.
One limiting factor is the permitting process for new energy infrastructure, but governments are starting to step up to the challenge, said Dooley, who is optimistic “on a lot of levels,” particularly the growing appetite in the corporate world. “This is a revolution we are seeing right before our eyes. That gives us a cause for confidence,” Dooley said.
According to the International Renewable Energy Agency, it will take triple the amount of global renewable power capacity by 2030 to even stay on track toward Paris Agreement carbon targets to address climate change.
It helps that costs of renewable power generation from solar and wind power have been falling dramatically. By 2022, they became cost-competitive with fossil fuels even without financial support, according to the agency.
Also helping are policy changes like the Inflation Reduction Act in the U.S. and the European Parliament’s September decision to raise the renewable energy target to 42.5% of energy use by 2030. G20 countries that account for 80% of global greenhouse gas emissions have also agreed to triple renewable energy capacity by 2030 globally.
A lot has changed in less than a decade, said Brendan Bell, a former Department of Energy official involved in attracting institutional capital to renewable energy projects. Now chief operating officer of Aligned Climate Capital, a decarbonization fund manager, he has seen renewable energy find more asset classes that appeal to investors. With 89% of all power generation last year coming from renewables, “it’s now a much more mature market than it was five to 10 years ago,” he said.
Large pension funds were already there and more endowments are now looking, particularly as there are more products and some track records, said Bell, who expects to see more fund investments with the goal of co-investment.
“The driver has primarily been wind and solar, but we’re starting to see that expand to electric transportation and energy efficiency, and then we’re seeing businesses built around these. This is all creating opportunities for traditional growth, equity and buyout, venture, etc. The broader set of decarbonization sectors are developing a market that is becoming more and more institutional over time,” Bell said.
