Private equity investors are charging into the electricity sector
The energy transition and artificial intelligence (AI) boom are fueling steady growth in power consumption, along with a strong appetite for investment in renewables.
Until recently, deindustrialization and improvements in energy efficiency had largely cancelled out new sources of electricity demand growth in developed economies. But a structural shift is in motion that is likely to see demand grow for the foreseeable future.
“After two decades of almost no growth in electricity consumption, the Western world is returning to a growth that is driven this time by electrification of mobility and heating, as well as the explosion of data centers,” said Roman Boner, CFA, Senior Portfolio Manager at Robeco.
Global electricity consumption increased by 4.3% in 2024, nearly twice the annual average over the preceding decade – and it looks set to maintain this higher level of growth over the next few years, according to the International Energy Agency (IEA).
The demands of power-hungry data centers, in particular, could squeeze the electricity market, noted Boner. “Data centers come in with an urgent need of additional electricity and they’re not very price-sensitive,” he said. “So, they’re going to put pressure on outdated grids and make an already tight power market even tighter, leading to higher prices.”
Ever on the look-out for structural growth opportunities, private equity (PE) firms are increasingly investing in both traditional and renewable power providers. Their primary focus, however, is renewables, which make up the lion’s share of their energy assets, according to BloombergNEF.
Despite the overall decline in PE investment in 2023 and 2024, investment in renewables kept expanding (see Figure 1).
Powering ahead
PE generally invests in companies with high growth potential. Although renewables accounted for one-third of global electricity generation in 2024 – with nuclear contributing another 9% – they contributed most of the increase between 2019 and 2024. The IEA expects them also to meet around 90% of demand growth out to 2027 (see Figure 2).
The reason is simple: compared to fossil-fuel powered plants, renewables are generally more cost-effective.
For solar photovoltaic (PV) plants, the global levelized cost of electricity (LCOE) – effectively the price at which a power plant breaks even – was 56% less than that of fossil fuel-fired alternatives in 2023. By comparison, the LCOE for solar PV plants in 2010 was 414% more than fossil fuel facilities.
Lefteris Strakosias, Investment Director, New Energy, at alternative asset manager Gresham House, said that ongoing technological improvements in renewables equipment could keep costs coming down. “Solar panels, wind turbines and batteries continue to deliver better yields and greater efficiency with each generation.”
On the other hand, “coal, nuclear and gas have already gone through that cycle and there are not many more efficiencies to gain,” he said.
Another advantage of renewables and associated infrastructure is that they require considerably shorter lead times for development than fossil fuel power plants and can be developed and implemented incrementally in response to changing market conditions.
For example, battery storage can be deployed in relatively “bite-sized” pieces,” said Igor Makar, Member of Management, Private Infrastructure, at Partners Group. “You can moderate that as you see power markets evolving.”
“You can build one, then maybe you see the cost has come down and build the next one larger,” he said. “Or you might see that volatility has come down and decide to withhold further deployment. So, you can revise your strategy over time, and that’s really helpful.”
Experience counts
Makar stressed the importance of having an experienced management team in assessing and reacting to market changes. “If regulations are stable, that helps a lot in knowing what your revenue streams are likely to be,” he said. Still, there will inevitably be times when it is difficult to predict how things will shape up. “That’s why it’s important to have a management team that has its finger on the pulse of the market,” he added.
It’s also important to glean broader market insights, said Makar. Ahead of a recent power sector investment, his firm consulted with former executives from energy utilities and related firms. “That allowed us to really formulate a clear thesis on what type of company we wanted to acquire.”
As private equity firms and investors become more familiar with renewable power assets, they’ve grown more confident in getting involved at earlier stages of projects – including taking on development and construction risk, said Strakosias.
“Investing during the construction phase is a high-risk, high-reward strategy,” he said. “We’ve reached the point where, in general, they’re comfortable doing that, compared to five or ten years ago, when a lot of institutional investors would only acquire operational assets.”
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