Getting Dirty Before You Get Clean: Institutional Investment in Fossil Fuels and the Green Transition

Abstract

This paper shows that fossil fuel assets provide valuable opportunities for renewable development, and PE firms are better able to identify and realize these opportunities. Using the intensity of sunlight that falls on fossil fuel plants as an exogenous measure of solar investment opportunity and the passage of the investment tax credit that made solar generation commercially attractive, I find that PE firms are more likely to acquire fossil plants that provide higher solar investment opportunities after solar generation becomes viable. PE acquisition of fossil fuel power plants is followed by an 8% higher likelihood of solar development and a 10% increase in the number of solar plants in the same county. This increase comes from institutional investment in solar energy, specifically from the investors related to the PE owners of fossil plants. These findings contradict the notion that PE firms adversely affect the environment, and suggest that regulations prohibiting PE investment in fossil fuels may unintentionally prevent clean energy financing and impede the green transition. 

Keywords: environment, private equity, energy, green transition