Investors and the clean energy revolution
The UK invested nearly £8bn in renewable energy projects in 2018 amid the ongoing push to create a cleaner and greener future for power generation across the country – writes William Argent, Fund Manager, Gravis Clean Energy Fund and Associate Director
We are among the countries leading the charge in many areas of the clean energy revolution with wind and solar projects receiving solid government subsidies and industry investment, and we appear to be already reaping the rewards.
UK wind energy generation hit a new high back in February, according to National Grid data, and on a single day provided more than a third (36%) of Britain’s electricity demand. This is a good example of how the nation’s energy mix is shifting towards renewable sources of generation.
‘the nation’s energy mix is shifting towards renewable sources of generation’
Supporting clean energy generation will be vital as the world transitions towards a lower carbon economy and away from its reliance on fossil fuels..
This growth has opened up a new world of investment opportunity that allows funds such as Gravis’ specialist Clean Energy Fund to access a broad range of investible opportunities.
Wind and solar are often considered key in the battle to reduce fossil fuel consumption, but there are a broad range of opportunities available to investors from offshore wind projects to hydroelectric power and anaerobic digestion that many may not yet be aware of.
One area in which we expect to see significant growth within the renewable space is the need for energy storage solutions – most typically in the form of battery technology.
Wind and solar generate a volatile and intermittent supply of power for obvious reasons, and as renewables capacity grows this is having an increasing impact on the National Grid in terms of its ability to balance supply and demand.
Developing effective ways of storing energy is a critical step in harnessing the potential of renewable energy supply; effectively storing energy generated when conditions are suitable or when demand for electricity is lower in order to deploy it during periods of lower output or when demand is high. This dynamic underpins the investment opportunity in energy storage.
‘Renewable energy has become a crucial infrastructure sector in its own right as the effects of climate change become more evident’
Our dependence on the National Grid maintaining a continuous supply of energy was thrown into the spotlight in August, when two large generators disconnected from the UK power system almost simultaneously. It effectively withdrew some 1.3 gigawatts (GW) of electricity generation from the grid within minutes, just as the Friday rush hour was getting underway.
Needless to say, the subsequent energy blackout caused chaos for thousands, with stories of commuters held on trains for hours and a hospital left without power. The episode highlighted the need for greater investment into our energy infrastructure, in particular into battery storage solutions which can hold back surplus energy to be deployed to maintain or boost supply to meet demand.
The growing need for sufficient battery storage offers an interesting opportunity within the broader UK infrastructure sector for investors. Not only can investing in energy infrastructure offer the chance to diversify returns away from those of traditional asset classes, it also provides the chance for investors to support vital projects which will secure future continuity of power supplies to the nation.
There are a number of options available to those interested in the space. Investors can opt to invest directly in companies that own and develop battery storage assets exclusively, of which there are two listed in the UK – Gresham House Energy Storage and Gore Street Energy Storage. These offer direct exposure to the growing demand for battery solutions.
‘highlighted the need for greater investment into our energy infrastructure, in particular into battery storage solutions’
Many existing generators of renewable energy are also beginning to incorporate battery storage solutions into both existing and new projects, so it will likely become a more significant component of the companies’ asset bases. The Renewable Infrastructure Group is a good example.
A growing number of fund management companies also offer products that invest in the renewable energy space on behalf of their investors. The Gravis Clean Energy fund invests in a portfolio of companies, providing exposure to large projects such as wind farms and battery storage and aims to secure steady returns from them.
Some of the largest and most long-term opportunities are within investment in companies that own operational renewable energy assets, but there is also a growing opportunity set to invest in companies that play a part in the broader theme of ‘cleaner energy’.
There are an increasing number of thematic opportunities to consider including companies operating in the renewable energy supply chain, for example, or those that develop energy efficiency technologies. Wind turbine manufacturers, solar module manufacturers and developers of carbon neutral properties would all fit into this category. There are many opportunities in this growing market, but the Gravis Clean Energy fund’s exposure here is small owing to our focus on income generation and the increased economic sensitivity within this group.
The greater potential for more stable returns are in the operational assets responsible for the generation of renewable energy. Renewable energy projects such as solar parks and wind farms typically benefit from long-term, contracted cash flows often with an element of government-backed subsidy.
Broadly speaking, governments are behind the development of the renewable energy industry as part of efforts to reduce reliance on fossil fuels and support a clear ‘green agenda’. The noise around climate change and the risk it poses to the planet has reached fever-pitch and pressure on the UK Government to take action is increasing by the day. However, much more needs to be done to maintain progress.
Public demand for action to tackle climate change is high, and while the UK Government has been vocal in its targets for reducing greenhouse gas emissions, actual progress has fallen way behind what is needed.
‘climate change and the risk it poses to the planet has reached fever-pitch and pressure on the UK Government to take action is increasing by the day’
One of Theresa May’s outgoing pledges was to make the UK the first major economy to legislate to bring greenhouse gas emissions down to net-zero by 2050, yet the Government’s own projections demonstrate that its policies and plans are insufficient to meet the fourth or fifth carbon budgets (covering 2023-2027 and 2028-2032).
The independent Committee on Climate Change (CCC) laid bare the lack of action in a Progress Report published in July which found just one of the 25 policy actions it recommended in 2018 had been delivered one year on. Ten did not show even partial progress.
The mismatch between Government rhetoric and action is clear, with the CCC saying there is ‘limited evidence’ that the current administration is taking the emissions issue ‘sufficiently seriously’.
In some areas, there has been progress. The transition to renewable energy means that work to reduce emissions from power generation is producing solid results. While it still falls short of what is needed to hit the Government’s net-zero commitment by 2050, it has meant that Britain went for two consecutive weeks in May without burning coal for power.
The success of offshore wind – which is set to deliver at least a third of UK electricity requirements by 2030 – is evidence of what can be achieved when good policy is enacted. Yet, ten years since the passing of the Climate Change Act, there is still no serious plan for decarbonising UK heating systems, or improving energy efficiency in residential properties. Much more support is needed if the country is to make any realistic progress towards its climate change goals.
‘UK government needs to step up and take greater action, and quickly, to incentivise innovation and investment into the sector in order to bring about actual changes’
Average temperatures could rise by 4° or more by 2100 if current trends continue, the CCC says. The UK government needs to step up and take greater action, and quickly, to incentivise innovation and investment into the sector in order to bring about actual changes.
Tougher targets do not themselves reduce emissions, and while the aim of ‘carbon neutral’ is laudable, real action needs to be taken for it to become a reality in our lifetime.
Nonetheless, the transition away from conventional forms of power supply and towards cleaner forms of generation is a structural trend that will last long into the future. The transition does pose challenges in terms of harnessing the power generated by intermittent sources such as wind or solar and maintaining continuity of supply, but the rapid development of the battery storage sector could well prove to the best hope we have of keeping the lights on in the decades to come.
The scale of renewable and cleaner energy development across the globe should provide a bigger pool of assets and expand the universe of investment opportunity available. Risks do exist of course; such as the sector’s reliance on government support and counter-party risk present in long-term power purchase agreements – the mechanism through which generators sell their output.
On balance, however, we believe there are many attractive opportunities within this growing sector and investors can target investment towards companies operating in the more utility-like renewable energy generation space, those developing new technologies to facilitate the transition towards a more sustainable, lower carbon world or a combination of both.
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