December 5, 2021
Brookfield Renewable Partners L.P.
On the road with management
Our view: We recently hosted meetings with Wyatt Hartley (CFO) and Robin Kooyman (IR). We came away feeling more confident that Brookfield Renewable (BEP) can manage through (or even benefit from) inflationary pressures. Its hydro and pump storage portfolio provides a strategic advantage in offering energy transition solutions, supporting its ability to earn a 12–15% return on equity capital deployed.
Key points:
Inflation a headwind for some, a tailwind for others. Inflation is typically a headwind for renewable developers. However, we believe it could be incrementally positive to BEP. With respect to BEP’s operating assets, 70% of contracts have some inflation indexation, leading to higher cash flows. Regarding advanced projects under development, management locks in the project costs close to the time PPAs are signed, limiting the variability in the project economics. Finally, for earlier-stage projects, the PPA prices are increased to reflect higher project costs. With respect to solar PV panels, management expects a significant increase in polysilicon supply in China to lead to lower solar panel prices and better availability.
Gaining momentum as an energy transition service provider.
Management is bullish on distributed generation (DG), positioning the company as a one-stop shop for decarbonization solutions. BEP has recently expanded its DG footprint in the U.S., Europe, and Latin America. On the utility-scale side, BEP has locked in a number of contracts with corporations to decarbonize their electricity usage, including JPMorgan Chase (over 500 branches in New York state) and Amazon (newbuild solar opportunities globally). We expect BEP to announce additional partnerships that lead to long-term corporate PPAs for new developments.
Hydro and pump storage assets becoming more strategic. BEP can leverage its international hydro portfolio to backstop wind and solar facilities to provide 24/7 green energy to corporate offtakers globally. BEP also owns several hydro pump storage facilities, and its U.K. facility generated record one-day profits in September 2021 that far outpaced previous records. The hydro and pump storage assets have also been generating higher revenues for ancillary services.
Robust value-creation cycle. Management continues to guide toward a return of 12–15% on equity capital deployed ($1.0–1.2 billion annually) through leveraging its deep operational capabilities, ability to execute quickly, scale, and access to capital. Once the assets are derisked, management expects the assets in developed countries to re-rate to 5–6% in an asset sale, crystalizing value.
Keeping up with emerging technologies. Although BEP generally does not make material investments in early-stage technologies, it is making a small investment in green hydrogen (20 MW electrolyzer) in Quebec (long-term contracted) that would be powered by its hydro facility and produce 425,000 GJ of green hydrogen annually. The company is also opportunistically adding battery storage at sites that make economic sense.