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Illustration: Annelise Capossela/Axios

Private equity is pouring billions into renewable energy assets — it’s what LPs want, it’s what society demands and it’s what the world needs. But the classic private equity dilemma has surfaced: too much money chasing too few deals.

Why it matters: With heated competition for deals, prices for prime wind and solar power assets are getting bid up — and return expectations, in many cases, are coming down.

Zoom out: Private equity raised $52 billion to invest in renewable energy in 2020, a record — and this year is on pace to top that, according to Preqin.

  • Since 2010, these funds have generated a median net internal rate of return of 8%.

State of play: “Now you have every LP, ranging from true LPs to people on the street, wanting what they invest in to be green," says Kaam Sahely, partner in Vinson & Elkins' energy transactions and projects practice.

  • Corporates, especially those in the legacy energy space that are angling to transition, are increasingly throwing their weight around in clean energy-related auctions.
  • The influx of investor interest at the project level has "changed the economics and made it tough for [an auction] winner to really pencil in that return," says Michael Joyce, also a partner in Vinson's energy practice.

Case in point: For a strong portfolio of wind assets, the list of bidders in an auction might include “10 insurance companies, 20 infrastructure funds, 27 sovereign wealth funds and 20 strategics,” Sahely says.

Between the lines: Many LPs nowadays get that the returns generated in renewables may not be what they typically expect from a PE investment, he adds.

  • They take the view that "'I need to invest in this area. Everybody's demanding it. I demand it. And I'm okay with a lower return profile,'" Sahely says.
  • On the plus side, the booming marketplace also means there are exit opportunities aplenty.

The big picture: Funds that can cast a wider net for assets are doing just that.

  • This money goes to earlier stage projects, or the parts makers that feed into renewable projects, or the electric vehicle ecosystem, Carl Fleming, partner at McDermott, Will & Emery, tells Axios.
  • Investors are stretching into looking for companies "that make the screw, that holds the battery, that goes in the EV car," he says.

The bottom line: The onslaught of investor interest has undoubtedly made some assets more expensive.

  • But it's also helped create a more sophisticated market for companies and projects that need funding — from early-stage venture capital to private equity investors willing to step in at different points in a company's growth, says Rob Day, co-founder at Spring Lane Capital.

Go deeper

Ben Geman, author of Generate
Oct 22, 2021 - Energy & Environment

The economic spillover from high energy prices

The 6 megawatt Stanton Solar Farm outside of Orlando, Florida. Photo: Paul Hennessy/SOPA Images/LightRocket via Getty Images

The World Bank and International Monetary Fund are out with fresh warnings about the energy commodity run-up, but both also see some relief ahead.

Driving the news: The IMF, in a post on Thursday, projects prices will moderate in the coming months, but also says, "uncertainty remains high and small demand shocks could trigger fresh price spikes."

"Atmospheric river" swings Northern California from drought to flood

Satellite view of the bomb cyclone swirling off the coast of the Pacific Northwest and the atmospheric river affecting California on Oct. 24. Photo: CIRA/RAMMB

A series of powerful "atmospheric river" storms are delivering historic amounts of rainfall across parts of drought-stricken California and the Pacific Northwest.

Why it matters: The atmospheric river, packing large amounts of moisture, was causing Northern California to whiplash from drought to flood, as it slowly moved south overnight. It's triggered widespread power outages, flooding and mudslides.

In photos: Drought-ravaged California lashed by major storm

Workers try to divert water into drains as rain pours down on Oct. 24 in Marin City, California. Photo: Justin Sullivan/Getty Images

A major storm system was pummeling Northern California and parts of the Pacific Northwest with heavy rains overnight.

The big picture: "Atmospheric river" storms, associated with a record-strong "bomb cyclone" offshore from the Pacific Northwest, have brought flooding and mudslides to parts of California that were razed by recent wildfires and in severe drought. It's also caused widespread power outages in California and Washington state.