There is a relentless momentum for investors of all types to include responsible investments as part of their diversified and balanced portfolio. Renewable energy provides a ready-made opportunity to satisfy such an appetite, and with this market growing, there are a number of fascinating key trends and opportunities developing across the globe.
If you have been to an energy or infrastructure conference recently, it's likely that you have been struck by the amount of exposure given to environmental, social and governance (ESG) issues. There has been a dramatic increase in the number of investors who are visibly taking into account the ethical and sustainability considerations that underpin their investments and terms such as responsible investing and ESG have become buzzwords for investors of all types.
What's in it for investors?
- Committing to ESG criteria and ensuring long-term returns are not mutually exclusive. Investment bank UBS has commented that sustainable investment returns are comparable to conventional ones.
- ESG criteria can be helpful in identifying additional long-term risks associated with an investment. For example, climate change was identified as one of the key macro risks to portfolios globally in a 2019 PWC survey. Investments in areas with negative environmental impact may suffer from regulatory interventions or the costs associated with environmental damage.
- Being associated with the violation of social or governance issues may lead to considerable reputational damage. Investors are experiencing a stronger demand for ethical investments, particularly from so-called Millennials.
By investing responsibly, investors do not just want to be good, they are targeting sustainable long-term returns, reducing risks for their core business and improving their public reputation.
Responsible investing and renewable energy
Renewable projects not only fulfill the relevant ESG criteria but they can also provide long-term stable returns. Moreover, as the technology becomes more and more reliable and the cost of renewable projects continues to decrease, they can be cheaper than conventional power generation, as demonstrated by a number of trailblazing projects in the Nordics.
In this article, we look at some of the key emerging trends for renewable projects and potential investment opportunities.
While Europe continues to provide new offshore wind opportunities, some of the most exciting developments are in countries where offshore wind has not had much historical precedent, notably the US, Taiwan and Japan:
- The US, according to the Department of Energy, had a total project pipeline of 25,434MW of offshore wind energy as of June 2018, much of which is on the east coast. These include some of the largest opportunities anywhere in the world. DLA Piper is advising bidders in several of these projects. Each of them will require extensive capital commitments and fundraising, providing a huge pool of investment opportunities in a country that most investors are familiar with.
- Taiwan has seen some of the most rapid execution of a concerted offshore wind policy. In 2018, a total of 5,500MW was awarded to 16 offshore wind projects under the first process of its kind in Taiwan. While this represents an impressive level of progress, there have been a number of recent issues relating to how the Taiwanese government subsidies may operate and Ørsted, the major Danish offshore wind developer, temporarily paused its activities on two Taiwanese projects because of the lack of certainty on this very issue. Whilst have decided to progress these projects, developers and investors alike will be keen to monitor developments in Taiwan to understand whether the projects can be structured to entice third-party investors.
- Japan's attempts at building an offshore wind capability have long been hampered by the climatic and topographic conditions, grid capacity and legal and regulatory complexities. However, the drive by the Japanese government to decarbonize its economy by 2050 and reduce the lead-time and complexity around permitting, combined with the evolution of floating offshore wind technology (see below), could be the key to unlocking Japan's offshore wind potential. The Japanese government is expected to release invitations for tenders to the market for the development of offshore wind sites by the end of summer 2019, and international players will be keen to explore opportunities by partnering with major Japanese conglomerates.
Floating technology is the use of wind turbines or solar panels on floating platforms to take advantage of favorable climatic conditions or a lack of available land. Floating offshore wind could be a potential game-changer for countries, such as Japan, where the waters are too deep to be able to accommodate fixed bottom turbines. A 2018 World Bank report found that the floating solar market is at the same point in its development that the land-based solar market was in 2000, with a similar potential for growth. China has become the biggest player and the only country to deliver large-scale projects, with parts of south and south-east Asia having been identified as key opportunities. For example, in January 2019, Bangladesh announced the development of two floating solar plants with the backing of the Asian Development Fund.
While the technological advancements in floating projects are exciting, the sector remains relatively young, with a number of issues that need to be overcome, including: a lack of track record; the projects being in countries which would be new for the typical renewable energy investor; and the smaller scale of the projects, which might make them unattractive unless they were bundled up into larger portfolios.
For the last few years, battery storage has been heralded as a turning point in the energy sector. Battery storage creates the ability to store power at times of excess and release it at times of deficit and high demand, which is critical to balancing supply and demand in the power system. As renewable energy production can fluctuate and be intermittent at different times, battery storage has the potential to allow a more graduated and controlled release of energy. Although the development of the market has been patchy across the globe, some countries have been at the forefront of sector, most notably the US and Australia.
DLA Piper advised Macquarie Group in securing funding from CIT Bank to fund a USD200 million portfolio of storage systems in California, and also advised the Australian Renewable Energy Agency (ARENA), a government agency, on the funding of two 2018 battery projects which will deliver 55MW of power and can provide approximately 80MW of energy storage capacity.
With costs continuing to fall, combined with the growth of the electric vehicle (EV) and smart cities market, the battery storage market could make renewable energy investments even more attractive by reducing overall costs and giving more flexibility as to when energy is deployed. That said, while the markets such as EV charging remain in their infancy, they are more likely to attract private equity money rather than the traditional energy and infrastructure funds that require more stable and predictable cash flows.
Future challenges and opportunities
As the demand for responsible investing is higher than ever, the market for investors is extremely competitive. This means that there is a lot of money chasing a relatively small number of deals – particularly in mature markets – leaving many investors empty-handed or with smaller renewables portfolios than they would like. Solutions for investors may come from making investments that carry more risk (e.g. due to new geographies or technologies or because the investor is willing to invest during development and construction). For example, DLA Piper recently advised Credit Suisse Energy Infrastructure Partners (CSEIP) on two deals in which they took construction risk: firstly, a fund managed by CSEIP acquired a minority stake in the 1,000MW Fosen Wind farm in Norway, which will be the largest onshore wind project in Europe once completed. This was followed by another fund managed by CSEIP investing as an 80% stakeholder in the 475MW Nysäter wind farm in Sweden, which was the largest onshore wind deal to close in 2018.
There is huge appetite for investing responsibly in renewable energy and a strong pipeline of deals worldwide, but the market conditions favor larger experienced investors (or pooled smaller investors) or asset managers with specialist expertise that can truly capitalize on some of the new market developments happening across the globe. While smaller investors might be being crowded out, emerging technology such as floating solar might provide further opportunities.