Why Institutional Investors Are Partnering with EPCs to Accelerate the Energy Transition

As the U.S. power markets undergo some of the largest investments in modern history, finding a competitive advantage in deploying capital becomes critical. There is a surplus of great projects being developed every day, yet only a limited amount of capital available to build said projects. As competition intensifies and margins race to zero, energy investment funds are increasingly seeking ways to give their projects an edge over the competition. By partnering with an Engineering, Procurement, and Construction (EPC) firm, institutional investors can analyze many projects much more efficiently and select those that maximize returns wisely.

The Energy Project Ecosystem

EPCs work directly with many developers that are looking to sell their projects to institutional investors or independent power producers. These projects are constantly being evaluated by EPCs for pricing and their viability in the marketplace. As institutional investors look to put capital to work to help accelerate the energy transition, sorting through the many gigawatts of projects in the interconnection queue would be costly and may not be a valuable use of your team's time.

Leveraging the accessibility and flexibility of an EPC can prove invaluable. Putting an entire team together to find, build, and commercialize energy projects can be limiting as you build out your portfolio because all of the pieces can integrate more seamlessly with an EPC’s involvement. It doesn’t have to stop at finding the best project with the highest Internal Rate of Return (IRR) and matching the institutional investor's risk tolerance; it can extend to finding the right operations and maintenance (O&M) and asset managing firm to ensure your energy project runs optimally when you build your team that will eventually take over and run the project or portfolio of projects before the investors exit in the future. While the diagram below may show how all of the cash is flowing between the entities, what is not shown are the offtakers, which can be a tolling agreement with a trading firm, an industrial customer, or a utility.

Pricing Risk and Commoditizing Battery Storage

One of the biggest price risks in any energy project is the cost of equipment or commodity volatility, such as lithium for battery storage. However, as more and more projects are built, equipment costs like battery storage will become commoditized, and the lowest cost supplier, after you factor in quality, will prevail. Thus, the biggest controllable risk one can argue is the cost of the EPC services. Since the equipment costs will essentially become the same across the board, the cost to construct your project will become more and more of a competitive advantage—the type of competitive advantage institutional investors are looking for.

Many investors have admitted they were caught flat-footed at the beginning of the energy transition because EPC costs were homing in low during the M&A phase and ending up much higher during the negotiation phase.

Finding the Right Energy Projects

As mentioned earlier, EPCs collaborate with many developers on a daily basis and have great insight into a project's cost to construct. One of the biggest roles an EPC loves to play is matchmaker. Having seen what’s under the hood, EPCs know which projects are right for which investors based on their risk profiles. Sorting through the interconnection queue is definitely an operation, but having insight into what the most uncertain cost will be is the difference if investors are able to exit at a high or low multiple in the future.

A Portfolio Approach

As your portfolio starts to expand during the energy transition, your fund may want to start originating your projects from scratch. While not all EPCs have the ability on their staff to perform the necessary studies for a complete interconnection or maybe not have an economic analysis capability, we here at RavenVolt do perform these tasks in-house and will help institutional investors grow their portfolio along the way, limiting the need to have this skillset in-house or at the portfolio company level. While acquiring through M&A is always an approach, many will want to maximize returns, given the time allotted.

Conclusion and Joining the Energy Project Ecosystem

As the energy landscape evolves, the opportunities for institutional investors, independent power producers (IPPs), developers, and offtakers continue to expand. If you belong to one of these groups and are eager to leverage your position in the expanding energy project ecosystem, the time to act is now. Our integrated approach with EPC partnerships streamlines processes, enhances efficiency, and maximizes the profitability of each project. By collaborating with us, you gain access to a wealth of expertise and a portfolio of potential projects that are ripe for development and ready to meet the market's growing demand.

We understand the complexities and the competitive nature of the energy market, and we are here to facilitate your entry or expansion within this sector. Whether you are looking to invest, develop, or manage energy projects, our team is equipped to support your goals with strategic insights and technical expertise. Do not miss out on the opportunity to make a significant impact in the energy transition. Reach out today to learn more about how we can work together to achieve remarkable outcomes in the energy project ecosystem.