The global energy transition to cleaner power sources is a massive market opportunity. Renewable-energy leader Brookfield Renewable (BEP 1.08%) (BEPC 0.80%) estimates that it will take a more than $100 trillion investment over the next 30 years to advance a lower carbon future. That megatrend will power steady growth for Brookfield for years to come.
Within this megatrend are many smaller yet still sizable opportunities. One emerging high-return investment opportunity for the company is wind repowering projects. Brookfield discussed its most recent project and why it sees so much potential in repowerings in its second-quarter shareholder letter.
Making a big windfarm even better
Brookfield Renewable recently bought the Shepherds Flat wind farm in Oregon. It paid $700 million for the 845-megawatt project -- one of the largest onshore wind projects in the country -- that sold all its power to a high-quality customer. That made it an excellent fit as the wind farm will generate stable cash flow to help support its high dividend yield. However, that steady cash flow profile wasn't the primary reason Brookfield bought this project. It saw the opportunity to generate even more renewable energy from the wind farm by repowering the turbines.
CEO Connor Teskey highlighted this project in the company's second-quarter shareholder letter. He noted that the company commenced the repowering of Shepherds Flat in June, which is one of the largest repowering projects in the world. He wrote that the company: "will replace the turbine hardware with longer rotors and more efficient equipment while maintaining the rest of the infrastructure. This is expected to increase production by approximately 25%, generating 400-gigawatt hours of additional clean energy annually, while meaningfully extending the asset's useful life." He further noted that "by the time we complete the repowering by the end of 2022, it is expected that 320 turbines will have been retrofitted with almost 130 meter rotors and other technologically advanced equipment, as we continue to deliver power and receive revenues under the power purchase agreement."
By working on the turbines one at a time, Shepherds Flat will experience minimal disruption, allowing the project to continue generating power and cash flow. This approach is very cost-effective. Teskey said that the repowering project "costs only a fraction of a comparable greenfield project." Because of that, Brookfield won't need to invest any additional equity into the project as it can layer on incremental debt supported by the higher production capacity. As a result, Brookfield envisions "generating attractive mid-to-high teens returns on this investment."
A model for the future
Brookfield sees a massive market opportunity for wind repowering. Teskey wrote that "With an estimated 200 gigawatts of global wind capacity reaching 15 years of age within the next five years, the global market for repowerings is large -- Shepherds Flat is by no means the only opportunity -- and is only one segment where we continue to grow our business at attractive returns." While most modern wind farms have a useful life of 25 to 30 years, technology has advanced so much in recent years that it often makes financial sense to repower them earlier in their life cycle. That's why Brookfield sees such a huge opportunity ahead in repowering facilities as they reach 15 years of operations.
The company plans to leverage its expertise -- including relationships with equipment suppliers, financing partners, and power purchasers -- and global scale to capitalize on additional large-scale repowering opportunities. It can execute projects across its existing portfolio and acquire projects with repowering in mind, like Shepherds Flat. It believes this strategy will provide another way to generate attractive returns for its investors.
Another opportunity to create shareholder value
Brookfield Renewable has a long history of growing shareholder value by making attractive investments, which is why it's one of the best dividend stocks in the renewable energy sector. It sees an abundance of opportunities ahead amid the energy transition, including the potential to repower more wind farms. These projects enable the company to produce more power from existing facilities for a fraction of the cost of building a new one. As a result, these investments can generate excellent returns for Brookfield's shareholders while providing more clean power for the global economy, making them win-win opportunities.