Private equity firms invested a record $26 billion in the US renewable energy sector in 2022, up significantly from the $21.5 billion invested in 2021, according to a recent report by the American Investment Council.
The American Investment Council (AIC), a lobbying and research organization representing the private equity and growth capital investment industry, said over the past decade, private capital has poured $136 billion into the cleantech industry across 756 investments, with wind and solar funding alone totaling $16 billion in 2022.
The report also highlighted private equity's interest in helping to upgrade the electricity grid by investing in utility holding companies, since private capital "can make substantial improvements in a short amount of time."
"The majority of what they're doing right now besides wind and solar is probably on the transmission side of things," AIC President and CEO Drew Maloney said in an interview, adding that investors are also interested in nascent technologies like battery storage and nuclear fusion.
A Brookfield Asset Management Ltd. fund, for example, agreed in February to buy another 30% stake in FirstEnergy Corp.'s transmission subsidiary, giving Brookfield Super-Core Infrastructure Partners LP 49.9% ownership. What industry analysts called an "attractive" $3.5 billion, all-cash deal value will enable FirstEnergy to avoid issuing equity for now.
On the generation side, a partnership between independent power producer Invenergy LLC, the Caisse de dépôt et placement du Québec and Blackstone Infrastructure Partners LP announced plans in February to purchase American Electric Power Co. Inc.'s 1,365-MW contracted renewables portfolio for $1.5 billion.
Maloney acknowledged that deal flow and transaction volumes have declined due to tightening credit markets, but noted that federal legislation like the 2022 Inflation Reduction Act and the 2021 bipartisan infrastructure law does counter some of that uncertainty.
"It probably gives comfort ... that there's going to be longer-term support for some of these technologies," he said.
Raising, deploying funds
Brookfield Asset Management recently announced plans for a second large-scale decarbonization fund after Brookfield Global Transition Fund I closed at $15 billion in 2022. The first fund has already purchased Colorado-based independent power producer Scout Clean Energy LLC for $1 billion and Maryland's Standard Solar Inc. for $540 million, and formed a partnership with Canadian miner Cameco Corp. to acquire nuclear services provider Westinghouse Electric Co. LLC in a deal with a $7.9 billion enterprise value.
"We are optimistic that the second fund will both broaden the number of institutional partnerships as well as provide a larger pool of capital to invest alongside, positioning us to continue to execute scale transactions at very attractive risk-adjusted returns," Brookfield Renewable Partners LP CEO Connor Teskey said May 5 during a first-quarter 2023 earnings call.
Reuters reported in 2022 that The Carlyle Group Inc. is also looking to stand up a second renewable energy and sustainability fund with at least $1.6 billion in funding.
ArcLight Capital Partners LLC, a member of the AIC, declined to comment on current fundraising initiatives, but partner Jake Erhard said in an interview that the private equity firm continues to use proceeds from its seventh fund, which closed at $3.4 billion in 2020 and focuses on middle-market opportunities.
ArcLight used some of those funds to launch Infinigen Renewables, which focuses on utility-scale and commercial and industrial solar projects, in 2021 and buy a 185-MW portfolio of operating wind farms in Pennsylvania and Virginia from GlidePath Power Solutions LLC affiliates in 2022.
In January, ArcLight also committed $150 million to affiliate utility-scale battery storage provider Elevate Renewable Energy LLC.
"A big focus of ours is investing in today's operating assets ... and leveraging the entitlement that these assets have: the land, the right of way, the operational footprint and expertise," Erhard said.
ArcLight is also "very disciplined" about bringing long-term contracts to the table instead of pursuing a "build it and they will come model, which really doesn't work for us," he added, particularly given lengthy permitting timelines and backed-up interconnection queues.
Emerging tech deals materialize
Vinson & Elkins LLP attorney Danielle Patterson, who specializes in energy transactions, noted that private equity clients are already taking advantage of newly established federal tax credits for nascent technologies even as developers wait for more clarity on how to use them.
"We are real-time transacting" on green hydrogen and carbon capture, utilization and sequestration deals, Patterson said in an interview. "All of those projects are in the early stage of development. They haven't reached construction financing or tax equity financing yet."
Not all private equity firms are bullish on green hydrogen, though, despite large power producers like Constellation Energy Corp. and NextEra Energy Inc. committing to large-scale projects.
"I don't think there is any golden age of hydrogen coming. There is hype around hydrogen," said KKR & Co. Inc. partner Emmanuel Lagarrigue during the Columbia Global Energy Summit in New York City in April. "This is probably the consequence of thinking too much in supply terms instead of demand and innovation."
ArcLight is not necessarily eyeing green hydrogen production, but may look to potentially be a consumer if the fuel can be generated economically, Erhard said.
Vinson & Elkins' Patterson acknowledged many developers utilizing emerging technologies carry project-on-project risk.
"If you're building a hydrogen production facility and someone else is building the carbon capture or sequestration piece of it, they're completely dependent on each other and they don't have other sources of revenue or offtake," she explained. "That could put a lot of pressure on both projects."
"For all the term sheets and management teams out there, I can't expect they will all be building good and viable projects," Patterson said.
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