The energy transition represents a long-term structural change led by new technologies, improved economics and changing social norms. However, recent and pending policy initiatives are likely to lead to an acceleration in the pace of change. Notably, net-zero carbon policies are set to become a global norm over the course of 2021. Today, nearly half of global emissions are covered by climate neutrality targets, to be achieved by 2050 – 2060, and with the inauguration of U.S. President Joe Biden, who has rejoined the Paris Agreement on climate, the majority of global carbon emissions will be covered (about 60%). This sets the world on course for a “green energy revolution.”
Take Europe as a case-in-point: We estimate that the continent needs about 2,500 gigawatts (GW) of renewables by 2050, up from roughly 300 GW today. For every 1 GW of renewables assets developed, you need about a €1 billion capex outlay—meaning that Europe alone will require about €2.2 trillion of investments. Hence, we expect global renewable developers to benefit from unprecedented growth for well over a decade.
European utilities are particularly well positioned to capture value accrued from this global and substantial investment opportunity. Thanks to their early-mover advantage, eight out of the 10 largest global renewable developers are European. However, the industry is still fragmented—nearly 75% of the market, globally, is composed of smaller and medium-sized players—and we see clear scale advantages in developing renewables. In this context, we anticipate:
- A surge in consolidations across the sector
- Acceleration of capital restructuring measures, including meaningful asset rotation
- Wider use of hybrids instruments to fund and capitalize on a growing global addressable market
Economies of scale are particularly prevalent due to the following:
- Lower installation costs: Larger parks mean the installation costs per megawatt tend to be lower
- A larger pipeline of projects: This helps maximize the potential for conversion into actual megawatts
- Lower procurement costs, thanks to larger volumes and centralized global procurement functions
- Optimized processes, give a wide range of experience
- Lower operating and maintenance costs: Teams can be mobile and deployed across several locations
- Access to capital
To conclude, we continue to favor deeply discounted senior and subordinated bonds and expect the European electric utility subsectors to feature a multitude of highly rewarding investment opportunities for years to come.