How private equity can fund the fight against climate change

Melting ice in the ocean.

There's opportunity in 'doing the right thing'. Image: Unsplash

Jennifer Wong
Research Analyst, Private Investments - Impact, Glenmede Trust Company
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Technological advances in wind and solar now make renewable energy cost-competitive with traditional forms of energy generation. However, despite decreasing costs, renewables have not reached grid parity in most developed markets. Grid parity occurs when a source of energy can generate power at a cost less than or equal to the price of power from the electricity grid. Within renewable energy, grid parity is achieved when the cost of building renewable energy plants is equal to or less than conventional forms of energy, such as fossil fuels. In an effort to increase investment into renewables, governments have offered subsidies to those building wind and solar plants.

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As shown in Figure A, new construction of alternative energy plants — wind, solar or hydro — is now cost-competitive with existing conventional generation, especially with government subsidies.

Figure A: Regional variation in levelized cost of electricity for new generation resources entering service in 2023 (2018 $/MWh). The levelized cost of electricity is the net present value of the unit-cost of electrical energy over the lifetime of a generating plant. CCS stands for 'Carbon Capture and Sequestration'. CC Gas means 'Combined Cycle Gas'
Figure A: Regional variation in levelized cost of electricity for new generation resources entering service in 2023 (2018 $/MWh). The levelized cost of electricity is the net present value of the unit-cost of electrical energy over the lifetime of a generating plant. CCS stands for 'Carbon Capture and Sequestration'. CC Gas means 'Combined Cycle Gas' Image: US Energy Information Administration

Given the lack of existing power infrastructure, renewables have reached grid parity in many emerging markets. This allows private investors to build large-scale renewable power plants at competitive rates without government subsidies. Development of large, utility-scale renewable energy generation in emerging markets is a potentially lucrative trend, as the cost of energy is comparable to conventional sources, while cash flows are often transparent due to long-term power purchase agreements, and competition is still relatively limited.

Equally formidable is the rise of decentralized renewable power technology. While the number of people living without access to electricity has dipped below the 1 billion mark, many still do live without electricity, predominately in emerging markets, and many are not connected to a traditional grid. Technology now allows for the rise of community grids, microgrids and decentralized solar systems, which have the potential to bypass the need for traditional electricity distribution and transmission.

Additionally, rapid technological advancements in battery storage, metering infrastructure, sensors and monitoring data will need to occur before widespread adoption of renewable energy. However, these developments also offer potential areas of opportunity for investment.

Renewable energy and the associated service areas are only one sub-sector within sustainability and energy access. Increasingly, capital is also invested in businesses with a sustainability or resource-efficiency angle, as investors and business owners recognize the opportunity to reduce costs and enhance operational efficiency.

One example of this sort of business is DocuSign, a company that enables the electronic signing of documents, decreasing paper usage and thereby contributing towards a more sustainable economy. After the company went public last year, its share price grew from $39.73 at the April 2018 IPO to a high of $63.95 in mid-June 2018. Similarly, TemperPack is a company that produces compostable and recyclable packaging and insulation materials. The company recently raised $22.5 million to fund expansion, reflecting investor belief that companies generating plastic waste will seek more eco-friendly solutions.

From funding the technological advancements behind renewable energy to backing the rise of electric vehicles and innovative ways to tackle sustainability and resource efficiency, private equity provides capital at scale with more patient time horizons than the rest of the capital markets. Investors who are able to take the illiquidity risk of the private markets could play a large part in this fight.

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