- $40 trillion investment needed to reach 2050 net zero objective
- UK policy uncertainty “risks becoming very damaging to inward investment”
As world leaders come together for COP27 in Egypt, delegates will be focused on reducing emissions and helping countries tackle climate change.
Today, the Association of Investment Companies (AIC) held a media webinar on how renewable energy infrastructure investment companies can help mitigate global climate change and how governments are approaching higher energy prices.
We spoke to Richard Lum, Co-Manager of VH Global Sustainable Energy Opportunities, Michael Sieg, Co-Manager of ThomasLloyd Energy Impact Trust and Jonathan Maxwell, Manager of SDCL Energy Efficiency Income. Their comments are collated alongside views from Ross Driver, Co-Lead Fund Manager of Foresight Solar Fund, Tom Williams, Investment Manager of Downing Renewables & Infrastructure and Jonathan Hick, Fund Manager of Triple Point Energy Transition.
These investment companies are among the 22 members of the AIC’s Renewable Energy Infrastructure sector. Since the launch of the first company in the sector, Greencoat UK Wind, in March 2013, it has grown to manage £17.3 billion of assets1.
Why do we need more renewable energy infrastructure?
Richard Lum, Co-Manager of VH Global Sustainable Energy Opportunities, said: “The International Energy Agency expects that close to $40 trillion of investment in sustainable energy infrastructure is required between 2020 and 2040 to fund the transition to net zero. We believe this is a conservative estimate and does not incorporate further investment in a changing energy system, with electrification claiming a greater share of the final energy mix.”
Michael Sieg, Co-Manager of ThomasLloyd Energy Impact Trust, said: “Asia is the world’s largest and fastest growing consumer of energy, 85% of which comes from fossil fuels. As a result, carbon emissions in Asia exceed those of Europe and North America combined, a fact that is a key focus of COP27. Providing sustainable and reliable energy in the region should be the number one priority for anyone looking to tackle climate change. Across our initial target markets of India, Philippines, Vietnam, Bangladesh, Indonesia and Sri Lanka there is an estimated $10 trillion funding shortfall for infrastructure investment. Private capital must play a critical role in closing this funding gap.”
Ross Driver, Co-Lead Fund Manager of Foresight Solar Fund, said: “Quite simply the UK will not meet its legally binding commitments to reach net zero unless it encourages significantly increased investment both in renewable generation and in enabling technology. Ideally, this should be via a balanced mix of generation that is complementary – solar, wind, bioenergy – rather than putting all the eggs in one basket.”
Jonathan Hick, Fund Manager of Triple Point Energy Transition, said: “Effective and efficient transmission, distribution, and certainly storage, still requires considerable investment and development, particularly for renewables that can only generate electricity in the right conditions, and currently this is lacking. Far too much energy is wasted, in some cases as much as 40%, before it even reaches a house, an office block, or a production line.”
How will the UK government’s plan to cap revenues of renewable energy generators affect the Renewable Energy Infrastructure sector?
Ross Driver, Co-Lead Fund Manager of Foresight Solar Fund, said: “It is currently unclear whether there will indeed be a price cap and it would appear a windfall tax could now be back on the table. The renewable investment industry fully recognises that it certainly has a part to play in contributing its fair share in these extraordinary times. But at the moment there is no certainty at all on what form this will now take and that’s not helping anyone. After the possibility of windfall taxes, voluntary CfDs, and price caps, we now appear to have gone back to the start under the current administration.
“The UK has historically been one of the most attractive markets to invest in given its stability and investor-friendly credentials. Sadly, since May 2022 uncertainty has reigned in terms of UK government policy that risks becoming very damaging to inward investment unless a fair risk/reward environment can be restored.”
Jonathan Maxwell, Manager of SDCL Energy Efficiency Income, said: “Putting a cap on revenues of renewable and nuclear electricity generators in isolation won’t help solve the fundamental challenges facing energy markets today. While a cap on the pricing of clean energy might appear to provide some short-term relief in an environment characterised by high energy costs, it may also act as a deterrent on investment into one of the key long-term solutions to the energy crisis.
“Governments should be focusing policy on the cleanest and cheapest forms of energy generation and saving, while continuing to support reductions in greenhouse gases. Energy efficiency has a key role to play in reducing demand for scarce energy resources, improving productivity, and achieving rapid decarbonisation at anything like the scale needed to achieve the 1.5ºC or net zero targets set at COP26. Policymakers must grasp the potential and very real attractions of energy efficiency and make it a priority.”
Jonathan Hick, Fund Manager of Triple Point Energy Transition, said: “The proposed revenue cap, officially the CPRL, will naturally have a short-term effect of limiting profits for renewable energy companies, specifically energy generators.
“However, the medium and long-term implications could be far more wide-reaching. The CPRL would cap revenues at levels significantly below investor expectations at the time of their investment. The equivalent for the oil and gas sector, the Energy Profits Levy, expected to run until 2025, seeks to add an additional 25% windfall on profits for these fossil fuel companies. Unfortunately, it has been suggested that the 80% investment allowance on fossil fuel extraction, a proviso in the bill, will incentivise further fossil fuel exploration, an allowance not seen in the CPRL. With such a cap on revenue for such a long period of time, and with special allowance for the oil and gas industry, there is a real risk of investors being disincentivised to put their capital into the renewable energy sector at a time when large-scale private capital investment is needed most.”
How have countries outside of the UK tackled the problem of high energy prices?
Ross Driver, Co-Lead Fund Manager of Foresight Solar Fund, said: “The European Union has agreed a price cap at €180/MWh, although individual states are able to set this at a lower level should they wish. Countries such as Spain have also sought to implement additional targeted mechanisms such as the ‘clawback tax’ that aims to capture a share of the upside from exceptionally high power prices. The challenge with a price cap is to set it at a level that still provides sufficient strong signals for investment, whilst also ensuring generators are making a fair contribution from very high prices. For generators, the upside is capped but the downside risk is not – by way of context, it was not that long ago during the pandemic that wholesale energy prices fell below €30/MWh.”
Jonathan Hick, Fund Manager of Triple Point Energy Transition, said: “In 2021, the EU imported 40% of its gas from Russia, so many of its member states are exposed to high energy prices, as is Britain. Some countries are imposing caps in how much people pay, others are reducing tax burdens, and some are imposing limits on the price per unit of energy. Overall, the measures are short-term, designed to reduce as much as possible the impact on consumers.”
Where are you seeing the most exciting opportunities?
Michael Sieg, Co-Manager of ThomasLloyd Energy Impact Trust, said: “Last week we announced our entry into the Vietnamese market with an agreement to invest an initial US$30 million with a company called Solar Electric Vietnam. Vietnam is a highly attractive market and has experienced rapid growth and industrialisation in recent years which has led to a three-fold increase in the country's electricity consumption. The country surpassed Thailand in 2019 to have the greatest installed solar power capacity of the Association of Southeast Asian Nations. It skyrocketed from a mere 105MW in 2018 to 16,660MW in 2020, far exceeding government targets. Nevertheless, the World Bank has estimated the country will need a further $12-14 billion annually for its energy transition.”
Tom Williams, Manager of Downing Renewables & Infrastructure, said: “Northern Europe is certainly somewhere we are seeing opportunities but given that incremental renewable energy generation installations have increased in almost all countries, it would be narrow-minded to restrict our portfolio by geography. The same goes for renewable type, where we are seeing a plethora of possibilities to further diversify our portfolio, not least in adding more hydro power.”
What is your outlook for your sector, including any risks that might lie ahead?
Richard Lum, Co-Manager of VH Global Sustainable Energy Opportunities, said: “Electrification is clearly a key theme in the development of the energy market over the long term. The ability of market participants to facilitate a greater penetration of renewable power generation as a percentage of this mix will be key, and that will be best enabled by investment in areas such as energy storage, and energy efficiency schemes.
“There is a great bet occurring currently on the ability of green hydrogen to be produced, converted into green ammonia, transported to end markets and reconverted for power generation, theoretically translating into a more connected space for the market price of delivered power, which may increase global volatility in higher energy prices.”
Jonathan Maxwell, Manager of SDCL Energy Efficiency Income, said: “Against a background of high and rising energy prices during the past year and particularly following Russia’s invasion of Ukraine, energy efficiency is more important and valuable than ever before. Most of the public will be shocked to learn that we waste two-thirds of the world’s energy. However, energy efficiency measures can be introduced rapidly to deliver immediate benefits. This is a real advantage now, and especially when other renewable energy sources can take years to develop.”
Tom Williams, Manager of Downing Renewables & Infrastructure, said: “Our outlook for the sector looks good, with a strong number of investment opportunities knocking at our door. It is important to remain disciplined when selecting investments, especially given the capital-intensive nature of renewables, and the resultant need to ensure interest rate exposure is hedged and leverage maintained at levels which are appropriate for the long term.
“Power prices are at high levels, which is obviously positive for us. However, it is essential to retain a realistic outlook on long-term power prices, especially given that they are expected to become more variable.”
