Jack Wasserman
Duncan Hale
Private investors have been excluded from infrastructure investment in the past. But renewable energy now offers new opportunities both in terms of return and risk management.
For over 200 years the world has relied upon fossil fuels for its energy needs. With the emergence of cheap and reliable renewables, we are watching a monumental shift in sourcing our energy. The energy transition presents an immense opportunity for individual investors.
Decarbonisation, until recently, has been the main driver of renewable energy expansion globally. But de-globalisation and the need for greater energy security for the largest energy consuming nations has added to the urgency in the past two years. Crucially, the boom of Artificial Intelligence (AI) is driving an exponential increase in energy demand to power data centres globally. Renewable energy has also seen a dramatic improvement in affordability, making it highly competitive with fossil fuels and increasingly the most cost-effective form of energy generation.
A record of over $570 billion was invested in renewable energy infrastructure in 2023 alone, a sum expected to grow to $1.5 trillion per year by 2030, according to IRENA data.
Individual investors have historically struggled to participate in new investment sectors, especially those that required long-term infrastructure investment. Changes in regulation, as well as innovation in investment funds and technology, mean individual investors can now participate in the same opportunities as governments and large institutional investors.
Investor demand has also shifted, and individuals are now actively looking to allocate to private markets and energy transition related infrastructure specifically. The Schroders Global Investment Insight Survey of 2,830 investors found 31% of investors have an allocation of 10-20% in private markets. Almost half (45%) rank renewable infrastructure in the top three asset classes they want to increase exposure to (1).
Here we explore how these investments might fit into a private client’s portfolio by addressing the key considerations of risk, return and impact.
Renewable energy for private investors: returns
A typical operational renewable energy investment portfolio in the developed world – run by our team – is expected to deliver returns of 8.5-10% per annum on a buy-and-hold basis (2). This is in line with listed equities. Schroders’ research suggests equities, subject to market cap and geographical focus, are forecast to deliver a range of 6-8% gross returns per annum (p.a.) over the next 30 years (3).
Additionally, when we consider the adjacent technologies required to decarbonise an economy we see opportunities to deliver greater returns for investors. For example: green hydrogen for heavy industry; short-duration battery energy storage systems; the electrification of heat or cooling as well as the electrification of transport – all provide the opportunity for higher cashflows today. Capital values should also improve over time as they become part of the accepted investment universe.
Renewable energies: risk management
While the returns from renewable energy are attractive, it is the way that these returns are generated that makes the asset class so well-aligned to private investors.
Like all assets, investing into renewable energy exposes individuals to risks. Returns are effectively the payment for taking these risks. Renewable energy infrastructure exposes members to risks they otherwise would not have in their portfolio. These different risk “premia” deliver diversification. Below we detail some of those risks and how they impact portfolio behaviour.
• Inflation – Renewable energy returns are often explicitly linked to inflation via payment streams (which are often government-backed or supported) that can have mechanistic links to local inflation. Being positively exposed to inflation is a critical benefit when investing into renewables, as it helps to maintain the real purchasing power of a portfolio.
• Positive power price risk – Power producing assets like renewable energy benefit from higher energy prices. In contrast, listed equities and corporate bonds are typically negatively impacted by power price rises. This was demonstrated throughout 2022, where high energy prices didn’t just impact the “cost-of-living crisis”, but also negatively impacted businesses. In contrast, renewable energy portfolios benefited from the rising power prices and assisted in them delivering strong cashflows and returns.
• Resource/weather risk - Wind and solar radiation are diversifying to other risks in an investor’s portfolio. While predicting the weather next week or a month from today is challenging, over a 30-year asset life this is much more predictable. Our data shows wind to exhibit a 2% standard deviation of outcomes over a 10-year period (4). Solar’s standard deviation is even lower.
• Technology - These risks are specific to the technology, and deliver another source of risk premium to investors. For example, the operational considerations of a biomass plant vary significantly to a wind farm or hydrogen plant. Again, the key benefit to investors of this risk premia is the diversification to a wider portfolio.
• Geography/policy – The combination of climate change, energy security concerns globally and affordability of renewables is driving policy and regulation to support an accelerated energy transition, resulting in a green subsidy race. Significant legislation such as the Inflation Reduction Act (IRA) in the US or the European Green Deal Industrial plan provide a framework for investment and gives investors confidence of global political support. In the US, while Donald Trump has suggested ending economic support for the clean energy sector, the economic benefits and cost savings associated with the IRA may prove too powerful for him to unilaterally dismantle it. Repealing green tax incentives would demand Congressional backing, which may be challenging due to the substantial economic advantages the IRA has generated in Trump strongholds.
These return drivers and risk premia should deliver robust diversification, particularly where investors are heavily exposed to publicly listed equities.
Renewable energy provided much-needed diversification in 2023/2024 for those institutional investors which have already made investments in this area.
Meeting the need for positive impact in investment
While the economic case for energy transition investing is undeniable, there are also important sustainability and impact benefits. Private investors increasingly expect their investments to contribute to climate solutions rather than just avoiding harm.
Renewable energy and energy transition-aligned infrastructures can tangibly be measured in green electrons produced and homes and/or electric vehicles powered. This makes the contribution of these assets towards a net zero economy clear. It is also clear that investing in this sustainable asset class goes beyond the structural environmental benefits of clean energy generation and requires a sustainable approach to the community and local biodiversity.
2022 brought all three of these points into clear focus for investors; public markets provided limited shelter from the market volatility as both inflation and energy prices spiked. There is today, however, a broader choice of investment solutions available; from listed investment trusts and semi liquid private markets vehicles to traditional closed ended limited partnerships, private asset investments are delivering better outcomes while addressing the impacts of climate change in structures appropriate for a wider set of investors.
[1] Global Investors Insights Survey 2024: an independent online survey of 2,830 investors in 31 different locations across EMEA, UK, US, Asia Pacific, Latin America, between June and July 2024.
[2] Schroders Greencoat forecast. There is no guarantee that forecasted figures will be achieved. Buy and hold IRRs assume no exit and zero terminal value for investments over the expected life of the asset (which is generally between 25-40 years).
[3] Long-run asset class performance: 30-year return forecasts (2025–53)
[4] Schroders Greencoat 2024
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