Renewable Energy Gaining Steam

Renewable energy has been gaining steam for many reasons, as have the investment opportunities in the space. Ketul Sakhpara, portfolio manager and research analyst, Franklin Real Asset Advisors, outlines the three main drivers of interest, and where his team sees potential. You might be surprised to learn how emerging markets in particular are ramping up renewable energy.

Generating energy from renewable sources offers a number of benefits, including reducing our dependence on fossil fuels and diversifying our fuel sources. At the same time, it offers local governments a boost from associated property taxes which help fund schools, parks and emergency services like firefighters and police.

Most renewable power plants are built after a fixed-price power purchase agreement (PPA) is signed for 10-20 years with a utility or a government-owned entity. Some PPAs also have inflation-linked revenue escalators. This eliminates most of the risk to the top line of the investment.

Moreover, solar and wind power plants have very low operational and maintenance costs and zero fuel costs compared with conventional power plants such as coal, gas or nuclear. This can shield customers from unpredictable future power price increases and is a significant benefit for investors, since it eliminates the remaining major risk factors on returns from an investment in power plants. Hence, we think the renewables space is very well suited for infrastructure investors.

There are many factors driving renewable investments, but we see three main ones.

  1. Decline of costs.
  2. Regulatory support in the form of tax credits and state-level mandates.
  3. Increasing awareness and push for sustainability.

Each of these individual drivers is supportive, but when the effects of all three are combined, we think the impact is exponential. On the investment side, we rarely see such a confluence of factors. When the world’s largest economy is in the process of changing its source of fuel for power production, the potential opportunities are great in our view.