• Hydropower provides strongest diversification in renewables portfolios, report says
  • Hydro plants are beginning to be sold as energy suppliers offset losses in other sectors
  • Report follows launch of the Aquila European Hydropower Fund 1, the world’s first dedicated European hydropower fund for institutional investors

Institutional investors may have additional opportunities to increase their allocation to European hydropower over the coming years as the limited secondary market in existing hydro plants begins to open up and the benefits of having a diversified exposure to renewables are better recognised, according to a new report by Aquila Capital, one of Europe’s leading independent alternative asset managers. 

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. Indeed, researchcommissioned 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. 

Yet according to Aquila Capital’s study, Real Assets – Hydropower Investments, this 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. 

According to Aquila Capital’s research as aforementioned, over half (52%) of institutional investors are committed to diversifying or increasing the size of their exposure to renewable energy.

Oldrik Verloop, Co-Head of Hydro at Aquila Capital, commented: “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. 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, the world’s first dedicated European hydropower fund for institutional investors, 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.

  • Sources:
  • 1 The official name of the Fund is Aquila Capital European Hydropower Fund S.A., SICAV-SIF

About Aquila Capital

Established in 2001, Aquila Capital is committed to provide institutional investors worldwide with alternative investment solutions in real assets, financial and private markets. Applying a multi-disciplinary investment approach, Aquila Capital’s range of alternative investments is managed by dedicated specialists in their respective asset classes and underpinned by an infrastructure that combines strong operations, stringent corporate governance and a successful track record. Aquila Capital has been dedicated to develop alternative investment solutions since its establishment. Over 200 professionals across eight offices globally are working across the whole value chain of alternative investments to generate stable, positive returns for investors.

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