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Where Will Brookfield Renewable Partners L.P. Be in 5 Years?

Reuben Gregg Brewer, The Motley Fool

As its name implies, Brookfield Renewable Partners L.P. (NYSE: BEP) is focused on owning assets that produce clean, renewable energy. That's a sweet spot right now as the world increasingly looks to shift from carbon-based fuels toward options that don't contribute much less to global warming. Add in Brookfield's fat 6.8% yield, and not only do investors get to claim green credentials, they can also collect a generous stream of income.

That said, Brookfield Renewable Partners is about to go through a notable change that you should be aware of before you jump aboard.

What it looks like today

The core of Brookfield Renewable Partners' business is water. Hydroelectric facilities produce around 80% of the partnership's funds from operations (FFO). The technology behind these facilities is well understood and highly reliable. They provide important base-load power, essentially generating electricity on a continual basis. The partnership's hydroelectric footprint provides a truly solid foundation to the business.

Two people carrying a solar panel

Image source: Getty Images

The only problem is that you can't put a hydroelectric power plant just anywhere. And, as you might expect, most of the really good locations have already been used. To put a number on that, Brookfield estimates that $1.5 trillion has been spent on renewable power over the last five years -- but only 17% of that sum went to hydro power. This is not a growth business, with the partnership basically stuck looking for opportunistic investments.

Which is where the rest of the portfolio comes into play. The other 20% of FFO comes largely from wind and solar farms. Of the $1.5 trillion spent on renewable power over the last five years, roughly 47% was put toward solar, with 35% focused on wind. But these two clean energy sources only account for 10% or so of the global power supply. (For reference, hydro is around 17%.) Solar and wind are where the growth is, and Brookfield's management expects that growth to span decades.

Getting from here to there

So one very big question for Brookfield Renewable Power investors to think about is, "How will the partnership grow its business along with the growth in renewable power?" The obvious answer is that it has to invest in solar and wind. Which is exactly why, in 2017, it bought all of TerraForm Global and a controlling stake in TerraForm Power. It further added to its investment in TerraForm Power in 2018.

These two businesses brought with them a portfolio of non-hydro investments, largely in solar. That helped to diversify Brookfield Renewable Power's operations by both increasing its reach in solar and wind, and also expanding the partnership into new geographic regions. Which, over the long-term, should help it find more levers to pull in support of long-term growth.

A man standing with wind turbines in the background

Image source: Getty Images

The first year or so after these investments was focused on getting to know the new businesses and preparing them for growth in the years ahead. That should start to really show up in 2019. In fact, Brookfield Renewable Partners believes it has good visibility on its growth over the next five years, with the goal of increasing FFO by between 6% and 11% a year over the span. The distribution will likely grow in line with FFO.

The foundation of that growth will be contractual price hikes (1% to 2%) and operational improvements at existing assets (2% to 4%). But the real kicker (3% to 5%) will come from Brookfield's development pipeline, most of which is solar and wind. It has wind farms on tap in Europe, Columbia, and Brazil, and solar projects planned for North America and China. This is what should interest investors, with the percentage of FFO that comes from these non-hydro sources the key metric to watch. Although there are some hydro opportunities, the real growth at Brookfield Renewable Partners will be in solar and wind.

Five years from today

Although hydroelectric power will remain the core of Brookfield Renewable Powers' portfolio for many years, solar and wind investments have become increasingly important for growth. Exactly what the generating portfolio looks like in five years is hard to predict, but what's easy to see is the trend you need to monitor: increasing solar and wind investment. The financial contribution from these power sources is set to grow and, in fact, needs to grow if the partnership is to reach its financial goals. In five years, solar and wind should be much more important to Brookfield Renewable Partners' top and bottom lines. Monitor these, and you'll have a good idea of just how well the partnership is performing.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.