Opportunities to invest in hydropower in Europe are likely to increase over the next few years, a new report by alternative asset manager Aquila Capital suggests.
The report, which follows the launch of the Aquila European Hydropower Fund, the world’s first dedicated European hydropower fund for institutional investors, says that hydropower provides strongest diversification in renewables portfolios, while suggesting that hydro plants are beginning to be sold as energy suppliers offset losses in other sectors.
Despite accounting for an average of 15% of the world’s total energy mix and two-thirds of the capacity produced by renewable sources, institutional investor exposure to hydropower is currently significantly lower than wind power and photovoltaic. Research commissioned by Aquila Capital showed that currently just 7% of European institutional investors have any exposure to hydropower, compared with 37% to photovoltaic and 29% to wind power investments.
The new study, Real Assets – Hydropower Investments, suggests this situation is about to change. While hydro plants are mostly owned by large and medium-sized energy suppliers, several of these firms are selling their hydro assets in order to offset losses incurred by their exposure to the gas sector, caused by falling electricity prices.
Furthermore, some firms are also selling regional hydro plants as they consolidate their businesses to improve efficiency and focus on their core operations.
The report argues that institutional appetite for hydropower will grow as investors increasingly recognise the benefits of building a diversified portfolio of renewable energy assets. Typical correlation coefficients to other renewable energy investments such as wind power and photovoltaics are low. The long-term, stable cash flows produced by hydropower are also uncoupled from wider financial markets, providing diversification versus traditional asset classes such as equities and bonds.
Aquila Capital’s study shows that in Europe, institutional investors prefer to buy existing plants. While less established markets such as Asia and Africa still have an expansion potential of 77% and 91% respectively, the majority of institutional investors are reluctant to bear the country-specific risks in these regions such as poor infrastructure and politic and regulatory uncertainty.
"Since 2009, we have acquired over 55 hydro plants in Europe for our investor base, giving us an edge in sourcing and assessing potential opportunities," said Oldrik Verloop, Co-Head of Hydro at Aquila Capital. "As investors are looking to diversify their infrastructure holdings, operational run-of-river hydropower plants in Europe are complementary to many investment portfolios. Our recently launched Aquila European Hydropower Fund will co-invest in hydropower assets with our partners, among which is APG, Europe´s largest pension fund."
The Aquila European Hydropower Fund was launched in May this year. It is a regulated fund structure in which the responsibility for sourcing and managing the assets is delegated to a dedicated team of hydropower experts. It offers a solution for institutional investors who wish to obtain preferred access to a balanced and diversified portfolio of European hydropower assets. Its objective is to deliver an IRR of 7-9% after local taxes and fees and long-term stable cash yields, low volatility and independence from traditional asset classes and government subsidies.
