Investing in European hydropower

News that a Dutch pension fund asset manager and an alternative investment manager have formed a partnership to invest a targeted €500 million in the acquisition and development of European hydro plants signals a major shift in the perception of hydropower as an investment class.

In one of the largest investments in this sector, APG Asset Management commissioned Hamburg-based Aquila Capital to establish an investment vehicle dedicated to hydropower infrastructure. The fund aims to make investments in operational plants as well as develop new greenfield projects across Europe and is focusing on run-of-river projects with a rated capacity below 5 MW.

Under the terms of the deal, privately held Aquila Capital will provide the operational management of the hydropower assets as well as portfolio management services while APG is fronting the cash.

With APG committing €250 million to the venture, the total enterprise value of the investments is projected to amount to up to €500 million, considering the capability to use of debt financing, the funds backers say.

Geographically, the group is focused on assets in Norway and Scandinavia as well as the Balkans and Turkey — see the latest edition of HRW — Hydro Review Worldwide for more on the Turkish hydropower sector.

Outlining the strategy behind the move, APG points out that investment yields for hydro in Europe in Europe are currently in the high single digits depending on a variety of factors, such as the location of the plants, electricity prices, construction and regulatory risks involved. However, hydropower has a much higher efficiency ratio than all other major sources of energy, in particular when compared with other kinds of renewable energies. For example, plants based on wind power have an efficiency ratio of approximately 50% and solar power generation sits at around 20%, but hydropower is able to achieve an impressive efficiency ratio of up to 95%. Furthermore, from a sustainability perspective, hydropower is one of the most environmentally friendly sources available, a statement from the venture says.

Indeed, Patrick Kanters, Managing Director Global Real Estate & Infrastructure at APG outlined the attractions for institutional investors, saying: “Hydropower is the most efficient of all main energy sources and ticks the right boxes for us in terms of the risk return profile and the high cash flow visibility, as well as its strong sustainability profile.”

Oldrik Verloop, responsible for the partnership at Aquila Capital, echoed Kanters, saying: “Hydropower is an attractive proposition for investors looking for stable long-term inflation protected yields to match pension liabilities.”

Speaking to HRW, Verloop said Aquila began investing in hydropower in 2008 — the company was founded in 2001 — and has already acquired assets in Norway and Turkey. “We look at those types of projects from an investor perspective,” says Verloop. He explains that the larger institutional investor base in Europe is looking to diversify their exposure in real assets to hydropower. Many already have exposure to PV or onshore wind and hydropower is a good diversifier in such a portfolio.

A major influence on the strategy to invest in the sector has been the privatisation of utilities, he adds, noting that currently many utilities are consolidating their balance sheet and are focusing more on the electricity itself rather than the generating capabilities. This then offers opportunities to investors which have a long-term investment horizon.

Looking ahead, Verloop sees considerable scope for investment in European hydropower assets: “We see the capacity in the coming five years to invest more than the €500 million,” says Verloop, adding: “The market is large enough in Europe to allocate those types of volumes, the point is that you won’t have one project to which you can commit, let’s say, €200 million. You have several smaller projects. That means that you’re not dependent on one regulatory environment or one type of pricing structure.”

And overall, Verloop is optimistic that more institutional investment resources will find their way into the European hydropower sector: “As I think the market is opening up, people get more comfortable with it just as you’ve seen with solar PV or for onshore or offshore wind people and investors and, let’s say, the supporting agents such as banks or development organisations and also the regulatory frameworks, as they mature I think there’s a definite growing interest to go into the asset class in Europe.”

With institutional investors – those risk averse big money players looking for a stable long-term return on investment — backing European hydropower the APG-Aquila tie-in suggests that there is considerable scope for further investment in hydropower development.

As Roman Rosslenbroich, Co-Founder and CEO at Aquila Capital, says, the move “should give a strong boost to the hydropower renewable energy industry in Europe.”

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David Appleyard formerly was the Chief Editor, HRW-Hydro Review Worldwide.

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