New renewable energy developers are unlikely to flood the U.S. public market in 2022, analysts said, despite plenty of investors still looking to pour capital into companies ready to be listed on a Wall Street index.

Two companies proposed initial public offerings in January: D.E. Shaw & Co. LP's independent power producer D.E. Shaw Renewable Investments and REV Renewables Inc., a generation and storage developer owned by LS Power Group and South Korean LNG company SK E&S Co. Ltd. However, the potential for higher interest rates and lower returns on investment remain a major hurdle to public debuts, according to several industry finance experts, along with depressed equity valuations for the sector as a whole.

The number of clean energy companies using special purpose acquisition companies to go public surged in 2020 and 2021. The electric vehicle sector, in particular, gained popularity during the rush for blank-check mergers backed by private equity giants like Apollo Global Management Inc. and even some former oil and gas industry executives.

Some traditional IPOs occurred as well, like AES Corp. and Siemens AG's joint venture battery provider Fluence Energy Inc., which plans to nearly double revenues in 2022 to between $1.1 billion and $1.3 billion.

But while the popularity of SPACs has waned, experts said, an enormous pool of environmental, social and governance-oriented capital continues to chase investments in the energy transition. That leaves private companies to jockey for funds that could help support a traditional public offering.

"Investors are aggressively seeking out to invest in high-growth opportunities, and I expect this will continue," Miles Huq, Ernst & Young LLP partner for strategy and transactions, said in an interview. Huq noted that battery storage holds particular promise, with growth strategies varying among new entrants.

REV Renewables plans to differentiate itself from other battery storage companies by using shorter-term contracts to provide "additional flexibility," enabling the company to make "early and effective siting decisions" as available land for battery storage projects becomes more scarce.

D.E. Shaw Renewable Investments, on the other hand, has a weighted average remaining term of 22 years for power purchase agreements in its portfolio and intends to focus on "Full-Lifecycle Ownership" instead of developing and then selling projects.

Barriers to entry

Macroeconomic uncertainty around interest rates is causing EBITDA multiples to fall for public companies, meaning many will opt to stay private for now as returns on investment trend lower.

"The potential for flipping from quantitative easing to quantitative tightening, that tends to hit the longer-duration names where the cash flows are further out and they're really sensitive to the discount rates, and that just happens to be the vast majority ... of cleantech names," Raymond James equity analyst Graham Price said in an interview.

A significant pick-up in IPO activity, Price added, would require multiples to bounce back. The tax incentives proposed in the Build Back Better package, whether passed by Congress as part of a larger bill or as standalone legislation, could also help, Price said.

Inflation headwinds have also depressed developers' stock prices. Even successful SPAC stories like Fisker Inc. and ChargePoint Holdings Inc. have seen equity values decline alongside struggling EV makers Nikola Corp. and Lordstown Motors Corp.

In the meantime, the barrier to entry for new renewable energy IPOs remains high. D.E. Shaw's independent power producer and REV Renewables already have substantial operating footprints, unlike many of the cleantech firms that linked up with SPACs in 2020 and 2021.

"That will definitely be a requirement for future IPOs unless it's a special case like [Rivian Automotive Inc.]," Price said. "They won't be profitable for many years, but they've got backing from [Amazon.com Inc. and Ford Motor Co.] and a lot of contracts in place."

If 2021 represented a high point for going public, some analysts see the window starting to close for these types of transactions.

"If an IPO is the strategy, the sooner the better," Nick Knapp, senior managing director at CohnReznick Capital Markets Securities LLC, said in an interview. "We're coming off the best M&A year ever, globally, and not just for renewables. At some point that's going to turn, so to me, the best window to do this is 2022 and 2023, and it's anybody's guess what it looks like after that."

Solar consolidation

In the solar industry, instead of new companies going public, sector consolidation could accelerate in 2022 as supply chain constraints "create winners and losers," Wood Mackenzie analyst Michelle Davis said in an interview.

"We expect the top companies in each respective segment to gain market share, especially if they have better access to equipment, if they have longstanding relationships with equipment providers and if they can get that equipment in a more certain timeframe," Davis said.

D.E. Shaw Renewable's prospectus cited concerns over equipment availability as a key risk, given broader industry fallout from federal legislation barring imports from China's Xinjiang region, where polysilicon, a raw material used in most solar modules, is produced, over concerns of alleged labor abuses.

"Other renewable energy companies' attempts to change suppliers in response to this law, withhold release orders or other policy developments could result in shortages, delays and/or price increases that could disrupt our own supply chain or cause our suppliers to renegotiate existing arrangements with us or fail to perform on such obligations," the filing said. "Broader policy uncertainty could also reduce Chinese panel production, affecting supplies and/or prices for panels, regardless of supplier."

The last solar company to complete an IPO was rooftop developer Sunnova Energy International Inc. in 2019. Sunlight Financial Holdings Inc., another residential solar firm, went public in 2021 via an Apollo-backed SPAC.