June 26, 2020

Five Takeaways: What’s New in Energy Private Equity? Trends and Developments in a Shifting Investment Landscape - McDermott Will & Emery

Seth Doughty, Christopher Gladbach, Edward Zaelke

McDermott Will & Emery

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OVERVIEW

McDermott recently hosted Andrew Ellenbogen of EIG Partners and Jeff Hunter of Apollo Global Management for a lively discussion about the trends and developments in today’s shifting investment landscape.

Below are key takeaways from this week’s webinar.

IN DEPTH

The most impactful changes in energy investment over the last decade have been the drop in natural gas prices, the decrease in the cost of capital for renewable investments and the increase in renewable capacity factors (and a dramatic decrease in equipment pricing).
As the energy market has become crowded for traditional operating assets, some investors are seeking opportunities in non-traditional spaces, such as investing in non-traditional technologies (such as solar plus storage or offshore wind) or investing in service providers or construction companies.
In search of returns, some investors are continuing to take a greater amount of merchant risk or development risk than they previously would have accepted, and some investors are investing in platforms rather than projects.
There are smart investments in power to be made in areas with higher barriers to entry (if you can make reasonable projections on the regulatory environment). For example, California peaking resources have provided interesting opportunities in recent years. Larger returns come from taking thoughtful positions on the market and taking carefully analyzed risks.
Prudent investors pay attention to intrinsic risks of power investments, including risks that the market may not be pricing correctly. A successful investment in power assets requires realistic (and conservative) estimates of both basis risk and the merchant tail (and a view on back-end electricity prices).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.