Renewables and natural gas replacing coal and nuclear to power industry, transportation and homes is arguably one of the most important structural transformations in global energy infrastructure.
This is being driven by government policies and increased awareness among institutional investors for sustainable and environmentally friendly investments. Within the infrastructure space, that means reducing reliance on coal fired power stations, continued decommissioning of nuclear power stations, and a further commitment to investing in renewable energy sources.
With the significant cost decreases of renewables combined with the globalisation of natural gas, the economics are looking highly favourable for long-term infrastructure investors: according to the International Energy Agency (IEA), for solar photovoltaic projects there was a 73 per cent decrease in LCOE, or levelized cost of electricity, between 2010 and 2017.
As BlackRock highlights in its latest report, “The global energy and power transition: implications for infrastructure investors”, energy and power (including renewable power) accounted for 62 per cent of global infrastructure investment activity in 2017, equivalent to USD177 billion. Total energy investment worldwide in 2016 was more than USD1.7 trillion, or 2.2 per cent of global GDP, according to the IEA, with energy infrastructure accounting for a significant percentage.
As such, the opportunities emerging as a result of this energy transition are significant. At the same time, the sector itself is going through fundamental change. There is massive technological innovation taking place in power and energy, which has completely changed the cost picture for renewables and for the production and distribution of natural gas.
BlackRock’s paper points out that since 2007 US natural gas production has more than tripled, making the country the world’s largest producer, followed by Russia and Qatar. This abundance is beginning to transform gas from an energy source consumed and priced locally to a globally traded commodity increasingly anchored by US prices, writes the paper’s authors.
New infrastructure investment in midstream and downstream markets will be necessary to support this global natural gas market and to facilitate the production of liquefied natural gas (LNG). HIS Markit forecasts that imports of global LNG could more than double by 2040, with Asia the key driver of demand; this will likely be led by China as it reduces its reliance on coal-fired power generation.
Looking ahead, as the US looks to replace ageing infrastructure, new LNG transportation pipelines and export terminals, not to mention LNG import terminals in Asia and Europe, will need to be built and require significant private capital. Combined with improved economics in solar and wind power, and the rise in battery storage as technology advances, the renewable energy mix currently represents a fertile space for innovation and investment.
According to the International Energy Agency’s World Energy Outlook 2017, the proportion of total global electricity generated by renewables will increase from 24 per cent in 2016 to 40 per cent by 2040.
This will be vital if the developed world is able to support the expected rise in adoption of electric vehicles – those used by households as well as corporates as they overhaul their transport fleets – which will place significant demands on energy grids and require substantial increases in electricity production.
Moreover, battery storage will play a vital role in the renewables revolution in order to overcome the intermittency flaws when relying on solar and wind to support future generations. BlackRock states in its paper that “the continuing development and commercialisation of battery storage technology will likely make up for this limitation over time”.
Speaking to Private Equity Wire, Alan Synnott, Global Head of Research & Product Strategy for BlackRock Real Assets, says that battery storage was “very positive” for the renewables industry. It’s worth referencing US scientist and futurist Roy Amara, who came out with the quote: “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”
It is still very early days in battery storage, though visionaries such as Elon Musk are pushing the technology envelop.
“We are at the very early stage of storage but people are excited by it,” says Synnott. “We are optimistic on the growth of storage and batteries. We think it is becoming investable and we are watching the scale of the opportunity to see when it becomes mainstream. We think there is upside to storage but we don’t believe we can build strategies around it…yet.”
Storage is interesting because from one aspect you consume power and the other you distribute it. So even in a storage system more innovation and flexibility is required than the grid. If one scales that with things such as distributed generation, current day grid facilities will need to become a lot more modern. Grid operators fundamentally understand the long-term future and are working on this. “We will see tremendous innovation in our power systems and grid,” says Synnott, adding:
“Electric vehicles have multiple dynamics that the industry will need to monitor. We get asked questions such as, ‘If we have more electric cars will we use less power and energy?’ when the reality is, because these vehicles will demand more energy from the grid, that additional electricity will likely come from natural gas and renewable energy.”
Indeed, BlackRock Real Assets has just announced it has entered into an agreement to acquire 100 per cent interest in the construction-ready 197.4 megawatts (MW) Guleslettene wind farm (Guleslettene or the Project”) from Zephyr AS (Zephyr); the latest example of greenfield investing in renewable energy.
BlackRock acquired the windfarm through its Global Renewable Power II fund (GRP II), a strategy which to date has invested over 75 per cent of the USD1.65 billion of investor commitments in a diversified portfolio of 12 renewable power infrastructure assets across four continents.
The Project will be built on the West coast of Norway around 10 kilometres north of the city of Florø and Alcoa Norway ANS (“Alcoa”) will buy the entire electricity produced for a period of 15 years. The new power purchase agreement (PPA) is Alcoa’s third in Norway and it will use the electricity to provide its Norwegian based production plants with locally produced renewable electricity.
As part of the PPA, the project has also entered into a power purchase guarantee with the Norwegian Export Credit Guarantee Agency (GIEK).
Zephyr, a leading Norwegian wind farm developer and operator, will manage the construction and once operational, manage the project on behalf of BlackRock Real Assets through a construction and asset management agreement. Construction costs are estimated to total around EUR200 million, which will be funded by BlackRock Real Assets alongside long-term debt financing from DekaBank Deutsche Girozentrale (DekaBank).
In its research paper, BlackRock concludes by looking at the next decade, in the context of this transition of global energy infrastructure away from nuclear and power towards natural gas and renewables. It offers the following viewpoint:
“The major role renewable power now plays in many countries has been years in the making: wind and solar power have been reducing costs and gaining share for nearly two decades. The US-led shale gas revolution, now about a decade old, is at an earlier stage of driving long-run change.
“We believe this deep evolution is part of what makes energy infrastructure an attractive area for investment. Yet it’s generally easier to identify big trends than it is to make specific decisions about how to invest in them.”
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