There is a tremendous push in the private investment community to invest in this space and support energy transition.”
For anyone tracking the future of energy, 2020 is expected to bring a major milestone: Renewables are poised to generate more electricity in the U.S. than coal for the first time over the course of a full year according to the U.S. Energy Information Association (EIA).
Renewable energy, the country’s fastest growing source of electricity generation, will account for 20% of U.S. electrical power, surpassing coal’s 18% share, EIA predicts.
As active practitioners in renewables transactions, V&E partners Kaam Sahely, Danielle Patterson and Peter Marshall, as well as their peers in the firm’s Renewables practice, have witnessed this trend first hand.
Ranked “Band 1” by Chambers USA in the publication’s “Projects: Power & Renewables Transactional” category, V&E’s renewables team focuses on investor clients that are active in financing, acquiring, or disposing of interests in renewable energy projects. A typical transaction might involve an investor with a renewable energy portfolio buying, selling and/or financing multiple projects in a complex transaction.
Sahely, Patterson, and Marshall recently sat down to answer questions about the rise of renewable energy, transactional activity in the renewables space, and the impact of coronavirus on the sector. Here’s what they had to say.
Just a decade ago, coal accounted for about half of the electricity generated in the U.S. What happened?
A confluence of economic and social factors led to the decline of coal.
Over the past ten years, coal has steadily lost market share for a variety of reasons, including rising climate concerns and mounting competition from alternative energy sources. The shale boom, which turned the U.S. into the world’s largest oil producer, created an abundance of natural gas, offering a cleaner and less expensive alternative to coal.
Likewise, advances in technology and falling prices accelerated the growth of renewable energy. The industry benefitted from federal and state policies, including tax credits aimed at encouraging investment. As costs continue to fall, renewable energy is expected to surpass natural gas to become the largest provider of electricity in the country by 2045.
“It’s become much less costly to produce renewable energy,” Patterson said. “At the same time, there is a desire from a social responsibility perspective to invest in a much cleaner asset.”
What impact has the coronavirus pandemic had on the renewable energy industry?
Initially, there were fears that construction of solar and wind projects would be delayed because of supply chain disruptions in China, a leading source of parts and industrial equipment for renewable energy facilities. Over time, those concerns dissipated as the manufacturing chain mostly returned to normal.
Has renewables M&A activity been affected by COVID-19?
Yes. After the crisis hit the U.S. in March, most ongoing M&A activity paused. Economic uncertainty and concern over whether developers would be able to meet construction deadlines and other project milestones made investors wary of moving forward.
Deals have since resumed, and activity has held up relative to other sectors. The reason: In spite of the disruption caused by the pandemic, investors remain committed to what they see as the long-term benefits of renewables.
“The desire of major global investors to participate in this energy evolution is almost insatiable, driving down the cost of capital,” Sahely said.
Developers of clean energy projects often negotiate contracts with offtakers — purchasers of renewable power — securing payments that can extend for 10 to 15 years or longer. As a result, investors see renewables investments as offering stable returns and relatively low risk.
“There is a tremendous push in the private investment community to invest in this space and support energy transition, and that hasn’t changed,” Marshall said.
What lessons can investors in renewables projects learn from the pandemic?
In conducting due diligence, investors need to understand the potential risks the coronavirus pandemic poses that might delay completing a project. That requires reviewing the underlying commercial contracts and the supply chain for each project. Potential coronavirus-related problems should be taken into account when allocating risks in M&A contracts.
“Lawyers should spend time with their clients deciding on the appropriate allocation of coronavirus risks and the related impacts, particularly on the supply chain,” Marshall said.
“We were working with clients on multiple transactions around the time that the pandemic shifted from a regional health crisis into a global socioeconomic crisis and were able to effectively protect those clients from transaction risks related to COVID-19.”
The tax credits that played a big part in the rise of the renewables industry are phasing out. Is that dampening enthusiasm for renewables investments?
“When the tax credits fully phase out, there might be a cyclical impact as people reassess how to model returns and how to finance projects,” Marshall said.
“The good news is that renewables technology is getting better and more efficient,” Patterson added. “There is overall desire and demand to invest in this space. Tax credits are nice and helpful, but they’re not the driving factor anymore.”
As the world pivots from traditional energy sources towards renewables, how is V&E responding?
Long recognized as the world’s leading energy firm, over the years V&E has consistently advised clients that were at the forefront of energy trends.
Today, V&E is a dominant player representing sophisticated investors in renewables transactions, offering clients a comprehensive grasp of clean energy projects, M&A, project finance, and the tax benefits associated with renewables.
“Over the past decade, we have made a concerted effort to develop the preeminent investor-side renewable energy practice,” Sahely said. “Our client base is sophisticated and very active.”
“Wherever the energy industry is moving, that’s where we’re moving,” Patterson added. “We see where our clients want to go, and we want to help them get there.”