Brookfield Renewable Partners: Asset Classes Are Changing (NYSE:BEP)

Introduction

Per my July article, Brookfield Renewable Partners (NYSE:BEPC) (NYSE:BEP) continues to add renewable assets. My thesis is that they have a knack for understanding the economics of different types of energy asset classes at different times. They were overwhelmingly reliant on hydro assets through 2016 but substantial wind and utility-scale solar assets have been added since that time as the demand and the economics for these other asset classes have improved. Looking forward, more wind and solar assets will be added as the economics continue to improve and demand increases from considerations such as data centers.

GWh

Per the consolidated renewable long-term average (“LTA”) GWh overview numbers over the years, hydro has been fairly stable since 2016. Meanwhile, wind and utility-scale solar have been increasing prodigiously since that time:

*Unlike the renewable chart above from overview numbers, the Annualized Consolidated Long-term Average Generation table in the 4Q23 supplemental has an entry for “sustainable solutions” whose 2023 contribution was 966 GWh.

We see hydro GWh above jumped in 2016 and the 4Q16 supplemental says Brookfield purchased the Isagen hydro portfolio in January 2016 amounting to a 10,600 GWh contribution from Colombia. Wind more than doubled from 1,590 GWh in 2016 to 3,592 GWh in 2017. It was also the year when utility solar got on the map with 1,511 GWh. One of the reasons I like to look at GWh as opposed to MW capacity is because capacity factors vary across asset classes. Looking at the consolidated renewable numbers for 2023, we get a capacity factor of (38,095GWh*1,000)/(365*24*8,275MW) for hydro which comes to 53%. Using the same framework, we get 37% for wind and 25% for utility-scale solar.

The annualized proportionate LTA generation numbers are significantly lower than the above consolidated renewable LTA generation numbers. Comparing annualized proportionate LTA GWh to annualized consolidated LTA GWh, we see Brookfield owns a higher percentage of the consolidated hydro assets than other asset classes. Brookfield’s proportions are as follows:

Hydro: 52%% or 19,936 GWh/38,095 GWh

Wind: 27% or 9,680 GWh/35,760 GWh

Utility-scale Solar: 27% or 4,177 GWh/15,212 GWh

Distributed energy & storage: 33% or 991 GWh/2,989 GWh

Sustainable solutions: 4% or 40 GWh/966 GWh

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Total: 37% or 34,804 GWh/93,022 GWh

Revenue And FFO

Seeing as BEP’s proportionate hydro GWh is more than double the proportionate GWh of wind and other types of energy, BEP’s proportionate revenue from hydro is much higher than other types of energy:

It’s remarkable the way the proportionate funds from operations (“FFO”) numbers have changed since 2012 when hydro was the overwhelming majority. Per the 2023 investor day presentation, there was less diversity with geography and asset classes back in 2012 when 28% of FFO was from Brazil hydro. By 2022 we see Brazil hydro fell to 10% of FFO:

Hydro continues to lose dominance with respect to FFO. The combined hydro figure of $624 million was down to 43% of the $1,452 million pre-corporate subtotal in 2023.

Looking Ahead

Per the September 2023 investor day presentation, utility solar is more than half of the pipeline. It is also noteworthy how Asia-Pacific is well represented:

Contracted data center demand fed by solar and wind assets continues to increase. Per comments from BEP US CEO Stephen Gallagher in the 4Q23 call, BEP already has 22 TWh of annual generation contracted to corporate customers and this should double to 44 TWh by 2028 (emphasis added):

It is widely estimated that global electricity consumption from data centers will increase to approximately 10% of total electricity demand by 2030, up from approximately 2% today. To put this in context, this means that to satisfy the needs of data centers alone, which doesn’t factor in the penetration of EVs or broader electrification, additional generation capacity will be required equivalent to the size of the current US grid. Currently we have approximately 22 terawatt hours per year of generation contracted to corporate customers, representing approximately 30% of our total contract volumes, over double the volumes contracted to these types of customers 5 years ago. Based on our existing development pipeline, we expect contracted generation to corporate customers to double again by 2028, to approximately 44 terawatt hours per year, or 45% of our contracted volumes.

BN has a 45% interest in BEP and BN CEO Bruce Flatt repeated the message about electricity consumption from data centers in his 4Q23 letter. Specifically, he repeated the point about electricity consumption from data centers going from 2% of total electricity demand today to 10% by 2030 (emphasis added):

Major cloud computing firms predominantly operate on clean energy and are rapidly moving towards their goal of 100% clean energy usage. Their consumption has grown by about 50% annually in recent years, making them the largest and fastest growing consumers of green power worldwide. The accelerating global trend of digitalization was already driving a step change in data center and electricity needs, but the power-intensive nature of AI is amplifying energy demand.

Interest rates today are higher than they were 2 years ago and the stock hasn’t done well. The 4Q23 supplemental shows this was $596 million for unitholders and $647 million for non-controlling interests in 2022. This went up in 2023 to $745 million and $915 million, respectively. Despite this, FFO increased from $1,005 million in 2022 to $1,095 million in 2023. Forward-looking investors should keep an eye on interest expenses and FFO.

US investors should be careful about the K-1 implications with BEP and consider looking at BEPC as an alternative.

Disclaimer: Any material in this article should not be relied on as a formal investment recommendation. Never buy a stock without doing your own thorough research.