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Key trends driving the renewable energy market

2 April 2020

Investing in renewables is no longer a novelty. The sector has now proven it can offer stable, asset backed diversified returns to investors, which are non-correlated with liquid, public markets and can help reduce overall portfolio volatility.

Here we look at some of the global dimensions affecting the renewable energy market and what investments in clean energy can offer private investors.

First, we’ll focus on those changes which have been taking place.

Clean energy technology has now come of age

Global adoption of the clean energy agenda has driven significant efficiencies in technology. More and more governments have signed up to targets for carbon neutrality by 2050. Blue chip global corporates, such as Google and Apple, are also demonstrating their commitment to green energy by signing long term power purchase agreements (PPAs) to secure energy from sustainable sources.

This attitudinal shift and the corresponding action taken has helped to transform the power sector by speeding up advances in technology. Wind turbines and solar panels are now more efficient than ever before. Significantly, their manufacturing and building costs have decreased to the point where renewable energy is now cost competitive with conventional power generators in most locations (source: Capital Dynamics).

Advancements in battery storage

One of the last remaining barriers to renewable energies viably replacing traditional power generators - that of energy storage - has almost been overcome.

Battery storage allows wind and solar power-generators to store energy rather than dispatch it to the grid as soon as it is generated.
Improvements in battery technology have been aided by the fast-growing electric vehicle market.

Huge demand has driven innovation and forced down battery prices 87% - from $1,100 per kilowatt-hour in 2010 to $156/kWh in 2019 (source: Bloomberg). Falling prices are expected to continue, with the milestone price of $100/kwh thought achievable in the next three to five years.

Decentralised power supply

Batteries also decentralise the energy supply meaning that small-scale generators can supply direct to end consumers. This means that large industrial companies can enter into direct power purchase agreements with clean energy generators, serving the dual purpose of cutting their electricity bills and reducing their carbon footprint.

The total cumulative capacity of battery storage planning applications has soared from nearly 6,900 megawatts (MW) a year ago to over 10,500MW today – enough to fully charge over a million electric vehicles. The number of applications to build battery storage projects in the UK is continuing to increase rapidly (source: renewableuk).

These changes in technology and the overall market growth continue to throw off many opportunities for private clients to invest in renewables.

What can investments in renewables offer investors?

Investments in clean energy infrastructure offer a differentiated strategy from investing in conventional bond and equity investments. It is an asset-backed strategy (i.e. there is a physical energy generation site or energy storage facility) which can deliver both long term, stable infrastructure cashflows and capital appreciation, traditionally available to institutional investors.

Income returns are often contracted and provide fixed revenue streams over a medium to long term period, generating predictable levels of return with low volatility, with the benefit of asset value appreciation in the longer term.

Investing in renewable energy

Investors in renewable energy are entering a rapidly growing and politically supported market, with an increasing number of market participants globally. As a result, there are many mainstream renewable infrastructure funds offered by the large global investment managers. However, we are looking for something different.

We are seeking clean energy specialist investment managers with an edge over the herd. As a result, we are focusing on investment opportunities in this sector where the target returns are higher than the conventional institutional style energy infrastructure funds at return levels closer to c11-12% IRR, while still maintaining low volatility.

Our selection process will only focus on specialist fund management teams with evidential expertise and experience, as well as robust performance track records in the clean energy infrastructure space.

How is investing in renewables affected by Covid-19?

In the short-term, it is reasonable to expect some uncertainty across most asset classes, including renewables, although not to the same extent as the volatility experienced in the liquid public markets. The expectation will be a short term refocus of priorities, for example, we might expect businesses to concentrate on self-preservation in the immediate near term, making cost savings and preserving cash flow rather than securing a PPA with a sustainable energy generator. However, the green agenda remains and the pressure to comply will continue to grow globally.

A global recession may also be coming, but the renewables asset class, with stable fixed revenues, provides long term inflation and downside protection in an uncertain environment.

The renewables and climate change focus is here to stay, the current challenge of a global pandemic may mean the transition slips a bit, but it is not going away as the economics have moved too far. Renewable energy and the opportunities for investors are ideally placed for potentially unsurmountable growth.

Lorna Robertson, Head of Funds
April 2020

Sources

1. Capital Dynamics: Three key dimensions impacting the renewable energy market
2. https://about.bnef.com/blog/battery-pack-prices-fall-as-market-ramps-up-with-market-average-at-156-kwh-in-2019/
3. https://www.renewableuk.com/news/479977/New-research-shows-massive-growth-in-energy-storage-projects.htm 02 December 2019

 Russell O'Connor
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