Shaw Joins KKR Buying Cleaner Energy Rivals Won’t Touch: Energy


Hedge funds and private equity firms from D.E. Shaw & Co. to KKR & Co. (KKR) are ramping up their investments in renewable energy projects.

D.E. Shaw, the $30 billion hedge fund manager, bought stakes in five California solar plants in July and is co-developing a wind farm off Rhode Island’s coast. KKR has completed five clean-energy deals in three years, and Altus Power America Management LLC announced a joint venture Feb. 4 to develop $150 million of commercial solar projects.

What’s driving this are projections of stable yields of 8 percent to 10 percent in the next few years — better than most corporate bonds. Wind farms and industrial-scale solar plants typically have decades-long deals, known as power-purchase agreements, to sell electricity to utilities. D.E. Shaw is betting those contracts make renewable energy as safe and reliable as, say, conventional utility bonds have always been regarded, said Bryan Martin, a managing director at the New York-based firm.

Only a minority of investors understand that such contracts with investment-grade utilities or cities “are capable of providing a steady income stream comparable to high-quality corporate bonds,” Martin said by e-mail.

Investment-grade corporate bonds returned an annualized 5.8 percent since the end of 2010 through Feb. 14 of this year, according to the Bank of America Merrill Lynch U.S. Corporate Index.

David E. Shaw, a researcher in computational biochemistry who founded the firm bearing his name in 1988, was appointed to the President’s Council of Advisors on Science and Technology by Bill Clinton and later by Barack Obama.

Soundest Deals

Many investors haven’t developed the expertise to identify the soundest deals. Or they’re put off by the seemingly countervailing forces that are buffeting the renewable-power industry. While total global backing for renewable energy last year, at $254 billion, was down 12 percent from 2012 — the second such annual decline, according to data compiled by Bloomberg — installed capacity continues to grow rapidly.

Developers are forecast to install as much as 42 gigawatts of solar power in 2013, up 39 percent from the prior year. In the U.S., they were expected to add 4.3 gigawatts last year alone, according to the Solar Energy Industries Association, up 27 percent, including a record amount of residential rooftop systems. A gigawatt of solar supplies about 165,000 U.S. homes.

Traditional financing such as bank loans, the biggest source of funding for clean power, slipped 15 percent last year to $133 billion. That’s in part because waning government subsidies are a growing concern for most investors, Bloomberg New Energy Finance said in a Jan. 15 report. Backing from venture capital and private equity companies declined 30 percent to $4.4 billion.

Young Industry

Clean power is a young industry. It ramped up in a serious way only from 2004, after Germany rolled out a national subsidy program. There’s little doubt the program has worked. The country has more solar capacity than anywhere else, about 35.5 gigawatts, almost triple that of the U.S.

In the U.S., President Barack Obama provided about $9 billion in stimulus funds for solar and wind power starting in 2009. That helped spur a surge in industry-scale renewable power projects, including the 845-megawattCaithness Shepherds Flat wind farm, which went into operation in Oregon in September 2012, and the 290-megawatt Agua Caliente solar farm under construction in Arizona.

Such successes, and the robust growth of rooftop solar that has rapidly transformed itself into a mainstream technology for many Americans, isn’t enough to ease concerns of all investors.

Spanish Blow-out

“Renewable energy investment and debt vehicles are relatively new, and some investors may be uncomfortable with that,” said Stefan Linder, a Bloomberg New Energy Finance analyst. “Many investors are hesitant to be involved in a first-of-a-kind deal, but might be happy to do a 10th-of-a-kind deal, assuming that the first nine were successful.”

There have certainly been ups and downs. In Spain, for example, the government introduced in 2007 an incentive program to encourage wider use of solar power by guaranteeing above-market rates for the electricity. Higher-than-expected installation made the program too costly, leading to retroactive rate cuts. Companies that borrowed funds to build power plants had expected to pay the debt with the government-promised rates, and were left scrambling to deal with new policies. Many investors who bought slices of those projects have been burned.

8%-10% Returns

For some investment firms with experience in solar and wind, the returns are more than sufficient compared with the risk. Altus, based in Old Greenwich, Connecticut, was founded in 2009 by veterans from Cohen & Co. and American International Group Inc. to develop and own rooftop solar systems on schools, warehouses and other commercial structures including ESPN’s Bristol, Connecticut, headquarters. Altus projects that its rooftop projects will beat the average corporate bonds.

“We’ll be able to earn 8 to 10 percent for the next few years,” Altus co-founder Tom Athan said in an interview. “At some point they may be 5 or 6 percent because the market perception of that risk is going to come down to reality, and realize that it’s not really a 10 percent risk — it’s more like a 5 percent risk.”

The power-purchase deals that anchor the investments are as reliable as the buyers’ credit, said Ravi Gupta, a senior member of KKR’s infrastructure team.

Contract Crucial

KKR agreed in November to buy six solar farms in California and Arizona with Google Inc. in a deal worth $400 million. The private equity firm announced last February the purchase of three solar projects in Canada, and in 2011 it invested in four other California solar plants. It’s also invested In Spain’s T-Solar Global SA and Sorgenia SpA wind farms in France.

“The contract is critically important, and the creditworthiness of the counterparty is critically important,” Gupta said in a telephone interview.

For Raj Prabhu, chief executive officer of Mercom Capital Group LLC, an Austin, Texas-based research and consulting firm, this is all part of a learning curve. “The market’s still trying to digest how to evaluate the risk of investing in clean energy,” he said. “For mainstream investors, it’s still a little new. But the market understands the potential of this, and we’re going to see more deals.”