European funds look afresh at US

Over the last five years, the US has been one of the world’s most consistent onshore wind markets for growth.

The phased reduction of the wind production tax credit has given certainty to developers, manufacturers and operators who previously only got one or two-year extensions. They responded with investment.

This has helped drive total installed wind capacity in the US from 73GW at the start of 2016 to more than 111GW in the third quarter of 2020. New projects averaging a total of 7.5GW have been completed each year over this period. This has encouraged European utilities such as EDP Renewables, Engie and Iberdrola to step up their expansion plans in the US.

The election of Joe Biden as president may now build on that momentum.

Indeed, we already see indications of a Biden bounce, as investors are drawn to the US by the prospect of a leader who is greener than his predecessor and looks set to offer a stable growth trajectory for renewables.

We saw three such M&A deals last Tuesday as final preparations were being made for Wednesday’s inauguration.

What happened?

London-headquartered fund manager Glennmont Partners, which has €2bn in assets under management and a 1.5GW renewable energy portfolio, was bought by $1.1trn investor Nuveen. Joost Bergsma, managing partner at Glennmont, said the purchase would enable Glennmont to expand into “new geographies in the US and Asia” along with its existing focus on Europe. It has invested in both onshore and offshore wind.

On the same day, London-based fund manager Greencoat Capital bought 24% of an 861MW RWE portfolio of Texan wind farms. Greencoat has €5bn of assets under management and a £2.2bn UK wind fund, as well as assets in the Republic of Ireland in a euro-denominated fund. The acquisition of the stake in the Texan wind farms marked its first move into the US market. The company invests in onshore and offshore wind.

Finally, Aker Horizons bought a 75% stake in Irish developer Mainstream Renewable Power in a deal that valued Mainstream at €1bn. Mainstream, which has developed projects of 6.4GW, has focused on emerging markets in recent years, from Africa to southeast Asia. But Mary Quaney, chief executive of Mainstream, said Aker’s funds meant that it could “deliver a global portfolio of wind and solar”. We expect US projects to feature.

Why do they matter?

Two key themes emerge when analysing these deals.

First, the Glennmont and Greencoat transactions show that the US is a country that no green fund manager can afford to ignore.

Yes, the sector continued to grow despite the world’s biggest ‘Nimby’ being in the White House, but growth under Trump was mainly due to supportive state policies and business demand. He was hardly offering the long-term policy stability that appeals to risk-averse investors.

Now Biden is offering more certainty to investors about a bright future for renewables and they are taking the plunge. The entry of two European fund management giants suggests that we should expect more deals in the US from investors that are traditionally more risk averse.

That should also help developers to unlock the investment they need for their projects. The path ahead is now clearer.

Second, two of these deals show how US renewables is now of more interest to a pool of investors that have traditionally focused on fossil fuels.

Aker and Nuveen both noted that the motivation for their deals was the expansion of their ESG portfolios. This is not a new phenomenon, but it is interesting to see these two deals concluded in quick succession during inauguration week. Coincidence? Maybe. But Biden’s green plans can only encourage global action to tackle the climate crisis.

This theory is backed up by research from DNV GL this week. Fifty-seven percent of senior oil and gas executives surveyed said they expected their companies to step up their investment in renewables in 2021, with 66% saying their firm is actively moving to a less carbon-intensive energy mix. Only 21% will grow investment in oil and gas.

Finally, it is interesting that Mainstream is set to add investments in established markets back into its portfolio mix. Emerging markets may offer high returns, but established markets such as the US can offer both size and stability.

We don’t know whether Biden will live up to his climate promise. For now though, it appears that a dose of normality is heartening investors.

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