Private equity and renewable energy

By | Business
Photo: © Matt Mawson/Corbis

Wind farms recently created a debate within the coalition government, with ministers seemingly in opposite directions about whether to build more of them. Renewable energy as a whole is set to continue providing major employment and investment opportunities, even in the different realm of private equity.

Private equity, including London-based firms such as Terra Firma and HgCapital, seems to be playing its part in supporting the multi-billion pound renewable energy industry.

Firms that have received funding from private equity where institutional investors take stakes in ventures and companies that are absent from the stock exchange account for the employment of around 3 million people in the UK. This is equivalent to some 16 percent of UK private sector employees, according to the British Venture Capital Association.

In the quest for a cleaner environment, and to reduce dependence on fossil fuels such as oil and gas, the UK is aiming to generate 15 percent of all energy produced from renewable sources by 2020, compared with 3 percent in recent years. This area is yet to be properly tapped into and that renewables remains a specific growth area.

The number of onshore wind turbines in the UK is set to more than double in the next few years from its current level of about 3,300. At least it looked that way, until energy minister John Hayes has advocated the abolition of wind turbines imposed on communities. This prompted diffidence about the government’s commitment to continued expansion.Other ministers, including Hayes’ boss Secretary of State for Energy and Climate Change Ed Davey, have been quick to play down the idea that there has been any shifting of policy.

Private equity remains a key part of this equation. Ian Simm, chief executive of London-based Impax, which runs private equity funds as well as funds of quoted companies, points to changing dynamics in the energy industry.

“There is a very significant transformation going on in most parts of the world in the power sector,” he tells The Positive. “There is a huge demand for new ways of creating energy, especially through wind farms. Utilities, which have funded projects in the past, are under pressure. Their balance sheets are stretched. There is a natural role for private equity to step [into].”

Simm acknowledged that wind farms are always far from popular with those living near them, however says this is more a challenge in the UK than elsewhere.

Impax’s private equity investments this year include a wind project in Germany, a country at the forefront of the renewables revolution. It is already producing about 25 percent of its energy from renewable sources.

The long-term nature of renewables projects may actually make them more suited to private equity. Quoted companies in the public gaze and under pressure from shareholders may make decisions designed for short-term gain,contend supporters of private equity.

One indication of just how private equity may get in the renewables sector is a report that Terra Firma is planning a fund of up to $5 billion with a Chinese bank to invest in renewable energy. China has taken over from the United States as the world’s biggest energy user and may therefore offer the most opportunities, say analysts.

Although many remain sceptical about private equity, a new book on the subject, The New Tycoons by Bloomberg News reporter Jason Kelly may support debunking some of the myths. It demonstrates that, although private equity has supported some people in becoming billionaires, it has also provided much-needed funding for businesses that may have otherwise gone under.

How else may private equity owners support in building a greener energy sector?


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