EDHEC: Investors now pay the “green premium” for renewable energies | New
Renewable energy investments have outpaced ‘basic’ infrastructure over the past decade, but investors should expect future returns to be more in line with expectations, according to business school EDHEC and its firm benchmarking and infrastructure analysis EDHEC Infrastructure Institute.
A report, The Pricing of Green Infrastructure, finds that the historical outperformance of wind and solar projects is “largely the result of temporary excess demand for these assets”, which has driven up asset prices and lower interest rates. actualization.
Authors Noël Amenc, associate professor of finance at EDHEC Business School, and Frédéric Blanc-Brude, director of EDHECinfra, argue that there is no “persistent ‘green’ risk factor premium whose investors in green infrastructure projects could benefit in the long run”. .
Instead, they see the emergence of a “green price premium” that investors are willing to pay to increase their exposure to the asset class.
The report sought to examine the impact that increased investor appetite for low-carbon energy investments would have on realized performance and expected returns.
According to IPE Real Assets’ latest survey of institutional infrastructure investors, solar and wind power were the top two infrastructure sub-sectors for investors when looking for new investments.
The EDHEC report shows that in 2011, green energy projects were expected to generate returns of around 8%, while brown energy projects were expected to generate around 9%. Over the next decade, their 10-year annualized returns both exceeded those projections, generating 16% and 17% respectively.
But while the two sectors appear to have outperformed to a similar degree, the authors say their realized returns “in fact correspond to very different economic fundamentals.”
The good performance of green electricity can be explained by “a significant compression of yields” and the corresponding capital gains, in particular between 2012 and 2015. Conversely, the performance of brown electricity was more drawn by cash returns and less by the compression of returns.
“Indeed, unlike other infrastructure investments, brown energy investments have seen a slight increase in their expected returns since 2018,” Blanc-Brude said.
“Therefore, we find that the performance impact of such shifts in demand for green and brown investments cannot be equated with the emergence of a new ‘green’ asset pricing risk factor. Instead, demand shocks have led to relatively high realized performance in the green power market, but also lower expected returns.
Amenc added: “Going forward, as excess demand for green power investment is gradually met by additional supply of green power assets and effective green power allocations become significant. , our findings suggest that realized and expected returns from green energy investments can be expected to converge.
“Such convergence, which reflects a long-term price equilibrium, leads us to conclude that there is no reason for the superior performance of green infrastructure investments to continue.
“The so-called ‘green premium’ observed in the past does not correspond to the remuneration of a higher risk factor but rather to a temporary phenomenon of excess demand, which the supply of the market ended up satisfying.”