Renewable energy has emerged as a significant sector within the UK infrastructure industry over recent years. Preqin’s Infrastructure Online service features extensive information on over 375 renewable energy deals completed in the UK since 2008 for an estimated aggregate deal value of $124bn, representing approximately a quarter of all completed deals in the UK over this period.
The number of UK renewable energy deals completed annually increased rapidly from 32 transactions completed in 2010 to 110 completed deals in 2014. During the same period, estimated aggregate deal value nearly doubled from $11bn to $20.6bn. As technology improved, costs for renewable energy projects declined, which has led to the reduction in average deal size from approximately $343mn in 2010 to $187mn in 2014.
Recent cuts by the UK Government in renewable energy subsidies, especially in onshore wind and solar energy, coupled with tax breaks for oil and gas, may have sent concerning signals to investors in renewable energy. There have been just 32 UK-based renewable energy deals reported in 2015 so far, with a corresponding reduction in estimated aggregate deal value. Given the long-term nature of infrastructure projects and the complexities involved, a clear and stable long-term policy framework is required. Without a stable investment climate, investors may start to look toward other regions, particularly India, which has recently announced their commitment to renewable energy.
Additionally, the shift in the UK Government’s energy policy towards nuclear energy may also have led to a reduction in deal flow. The recent deal to build a new nuclear power plant at Hinkley point supports this, and also sets up a wider UK partnership to develop new nuclear power stations at Sizewell and Bradwell.
Nevertheless, enduring concerns regarding climate change and population growth means that renewable energy will continue to play a critical role in satisfying the UK’s energy security and decarbonization needs. The cost of renewable energy could decline further as markets mature and companies increasingly take advantage of economies of scale, indicating that assets could be sustained in the face of subsidy cuts. Regulatory factors such as the UK Climate Change Act and EU targets, including producing 20% of the nation’s total energy from renewable sources by 2020, means that the UK renewable energy infrastructure sector is likely to remain a key sector for fund managers and investors in 2015 and beyond.