POWER July 2021 - 32

MID-YEAR INDUSTRY FORECAST
Money Makes the Power and
Energy Sectors Go 'Round
If you've seen the musical " Cabaret, " you know that " money makes the world go
'round " in a variety of ways. While it may not indeed make the power and energy
sectors " go 'round, " money does make plants and other projects get built. So, where
is cash flowing into the industry these days?
Aaron Larson
W
hen looking for answers to difficult
questions, the phrase " follow
the money " is often worth
remembering. There is a lot of money
being spent in the power industry, so
following it all can be challenging. Nearly
every day, analysts release new fina ncial
forecasts for one energy-related sector
or another. Many predict unending
growth in wind and solar, and persistent
struggles for the coal and nuclear power
sectors (Figure 1).
The Age of 'Green Finance'
A strong wind blew into the Power &
Energy industry's proverbial sail when
President Biden rolled out his $2 trillion
American Jobs Plan, a program designed
to " create millions of good jobs, rebuild
our country's infrastructure, and position
the United States to out-compete
China. " Among items tucked into the
massive plan is a goal to achieve 100%
carbon-free electricity by 2035. That will
be a tall task, indeed, but if money is ultimately
procured to help make that happen,
companies working in the Power &
Energy industry stand to cash in big.
" The sprint toward net-zero emissions
targets and the resulting need to decarbonize
the energy grid is making Power & Energy
one of the most attractive industries for
investment, and mergers and acquisitions.
To meet global decarbonization goals, the
sources of power and energy will need to
transition from fossil fuels. As such, we are
seeing a drastic reduction in capital chasing
fossil fuel projects, and exponential increases
in investments in renewable and
clean energy generation, " Michael Castellarin,
a managing director with Clairvest, a
private equity management firm based in
Toronto, Canada, told POWER.
Castellarin noted that SPACs (special
purpose acquisition companies) are the
newest source of funding for clean energy
firms. SPACs are shell companies that
list on a stock exchange, and seek to ac32
quire
private firms and take them public.
The Wall Street Journal reported on May
22 that SPACs have agreed to about 35
deals worth nearly $95 billion with clean
energy-related firms since March 2020.
Yet, big companies and deep-pocketed
investors are also heavily involved in the
new " green finance " trend. " To put it in
perspective, assets in environmentally
focused investment funds reached almost
$2 trillion globally in Q1 2021, more
than tripling assets under management
in three years, " Castellarin said.
Fossil-Fueled Projects
In a report released on May 25, Fitch
Ratings, a provider of credit ratings,
commentary, and research, agreed that
private equity deals in solar and wind
projects are growing in scale. Still, the
firm said private equity financing of fossil
fuel assets has dwarfed that of renewables
over the past decade.
At least some of the deals have been
driven by pressure placed on public companies
and financial institutions from
activist investors who want them to
divest fossil fuel assets. Private companies
and private equity firms are less exposed
to these trends, the report says,
but they aren't fully insulated and many
limited partner institutional investors are
pushing for greater adoption of environmental,
social, and governance (ESG)
principles in investment practices.
" There's a growing trend towards
listed companies or investors opting to
divest from fossil fuel or carbon intensive
assets. Comparatively little focus is
on who purchases these assets-private
equity and state-owned enterprises will
generally have fewer incentives to reduce
emissions than their public counterparts, "
David McNeil, director with
Fitch Ratings, said in the report.
Analysis conducted by researchers at
the University of Oxford found that financial
institutions are de-risking renewable
projects and increasing the risk ratings
on coal projects, as measured through
loan spread changes over the past 20
years. Loan spreads are the interest rate
charged by banks to reflect the riskiness
of the company or project that is being
lent to. Banks apply a higher spread to
riskier loans, as there is a greater probability
that the borrower will default and
not pay them back. Therefore, a decrease
in loan spreads shows an increase in
creditworthiness,
which reduces the
costs for companies to finance their operations
or invest in new projects.
The Oxford academics compared data
from 2007-2010 with data from 2017-
1. The economic cost competitiveness of generating technologies favors combined cycle gas
turbine (CCGT), wind, and solar photovoltaic (PV) technology over coal and nuclear for units coming
online in 2026. The charts here show levelized avoided cost of electricity (LACE) on the vertical
axis and levelized cost of electricity (LCOE) on the horizontal axis, according to Annual Energy
Outlook 2021 reference case projections. Source: U.S. Energy Information Administration
www.powermag.com
POWER | July 2021
http://www.powermag.com
POWER July 2021

Table of Contents for the Digital Edition of POWER July 2021
