Renewable energy platforms and the transportation of liquified natural gas (LNG) are already key pillars of the global infrastructure market. Recent gas supply fears in Europe should harden their appeal to others…
One of the key levers in the West’s response to Russia’s Ukraine invasion has involved the energy market. The US, UK and EU have all pledged to reduce their purchases of Russian oil and gas in the years ahead, improving energy security and making gas and oil prices less volatile in the long-term.
Although there are expectations of a new oil and gas licensing round in the North Sea and even increased discussion around fracking, it appears that the new drive for energy independence and security will revolve around the energy transition to renewables.
This is not surprising. According to the IEA, global renewable energy capacity is expected to rise over 60 per cent from 2020 levels to over 4800GW by 2026. Renewables will account for 95 per cent of the increase in global power capacity to that date with solar PV responsible for more than 50 per cent, given its lower cost of production than wind.
China will remain the global leader in terms of capacity additions with it expected to reach 1200GW of total wind and solar capacity in 2026. India, Europe and the US alongside China account for 80 per cent of renewable capacity expansion worldwide.
Yet another result of the Ukraine conflict is an “acceleration of investments in renewable and associated cleantech infrastructure [such as] faster hydrogen development and interconnection of EU electric networks”, according to a recent note from Bank of America which anticipates more growth for wind and solar renewables, electricity and gas infrastructure, nuclear, biofuels and electric vehicles.
Movements are already being seen by governments. In March, the European Commission unveiled a REPowerEU plan to improve energy resilience by focusing on Liquefied Natural Gas (LNG) and pipeline imports from non-Russian suppliers, larger volumes of biomethane and renewable hydrogen production and imports and speeding up renewables permitting and grid infrastructure improvements.
Private equity surge
As an example, it is proposing creating a ‘Hydrogen Accelerator’ programme to drive an additional 15 million tonnes of renewable hydrogen on top of existing targets of 5.6 million tonnes by 2030.
Germany has also been busy setting out a USD220 billion to fund the expansion of hydrogen technology, EV charging networks and LNG infrastructure.
Private equity involvement is set to surge. According to Bloomberg NEF data, PE firms have invested USD2.6 trillion into renewables between 2010 and 2019. Examples include Carlyle Group buying BNRG Renewables solar projects in Southern Maine in the US delivering 100MW of capacity, Apollo Global Management and US Wind financing an offshore wind project off Maryland in the US. In Europe examples include Tikehau Capital investing in solar energy business GreenYellow and Ardian buying the 286MW Andberg wind farm in Sweden from developer OX2 in 2019.
In addition, following moves in recent years by Blackstone, Brookfield, IFM Investors and Stonepeak, infrastructure fund I Squared Capital was reported in April to be looking more closely at investment opportunities in the LNG sector following the European energy security crisis sparked by the Ukraine invasion. Gautam Bhandari, managing partner, told the Financial Times that new LNG export projects should advance as the EU tries to decouple from Russian gas, adding that three or four multibillion-dollar projects are seeking to raise financing this year. I Squared recently closed its third flagship infrastructure fund at USD15 billion and has around 40 per cent of assets under management in the energy sector.
Two recent investments in the UK highlight how the current interest is pushing up valuations in the power sector.
Axa’s investment arm AXA IM Alts and Credit Agricole took a 50 per cent stake in the Hornsea Two offshore wind developer for GBP3 billion – which according to a report in The Times is a third more than analysts believe is its true value.
National Grid also sold a 60 per cent stake in its UK gas transmission and metering business to Australian bank Macquarie and others including institutional investor BCI in a deal that will value the unit at GBP9.6 billion.
Peter Dickson, partner at fund manager Glennmont Partners believes the Russia/Ukraine conflict has focussed minds on energy transition and security.
“Sensitivity around Russian imports and rapid inflation has made even more people think about it and it will speed up energy transition,” he outlines. “It doesn’t surprise me that people are talking again about North Sea oil and fracking, but they won’t decouple the sensitivity of pricing in the global market. You are still exposed to the volatile hydrocarbon in a way which renewables are not. With renewables you get stable pricing, and they are the cheapest local source of electricity in most countries.”
Investor concerns around offshore wind’s dependency on contracted feed-in-tariffs have also eased.
“Many wind farms can now compete on the open market with no subsidy,” Dickson explains. “So, investors have been ok with short-term risk in recent times. There have been concerns around long-term demand but now this issue of energy security provides that guaranteed market growth. It will make investors feel even more comfortable.”
A robust market
As well as more interconnectivity across markets, storage developments and green hydrogen, he expects to see more floating offshore wind platforms allowing for farms in deeper waters. “It will open up large coastlines in the US, south of the English Channel and the Med,” he says. “Investors are getting more comfortable with offshore wind construction. They are being developed by more highly competent and experienced constructors who are able to offer very accurate cost guarantees and projections of risk from the outset. It is a robust market right now.”
The North Sea is the main offshore wind battleground with the European Commission expecting it to deliver half of the over 400GW capacity increase needed to reach European carbon neutrality by 2050. According to the Global Wind Energy Council about a third of global offshore wind development will come from the UK over the next decade.
In the US there are plans to generate nearly 35GW of offshore wind power in eight East and West Coast states by 2030 with a series of license auctions already in place. According estimates, there is an ‘unprecedented’ 1,000 GW of US offshore wind resource which remains untapped.
Having a keen focus on offshore wind is also on the agenda at fund manager KGAL as a key component of its green hydrogen investment plans.
Role of PE
“Renewable energy has to be prevalent in every industrial sector especially those heavy emitting areas such as steel and chemicals,” says Thomas Engelmann, head of energy transition at KGAL. “Private equity can play a huge role in pushing with capital new technologies and developing impact projects to reduce emissions and increase energy independence. We are looking at hydrogen which is flexible in both its usage and storage as an alternative to oil and gas in these sectors.”
The group is looking at investing in hydrogen projects such as storage and electrolyser plants – which converts electricity into hydrogen and oxygen. The electricity would be supplied for example via a PPA from offshore wind farms.
“Hydrogen will play a major role in society and industry in the future,” he explains. “We are creating a new fund and talking to the capital markets at the moment about investing in green hydrogen projects. We are looking to close it at the end of 2022 and start investing between 2023 and 2027.”
In the UK’s April energy security strategy, there was an explicit 10GW of hydrogen production targeted by 2030. According to view on the plan by Richard Nourse, managing partner at Schroders Greencoat, hydrogen is widely seen as the Swiss-army-knife of the net zero story, but it is unlikely to arrive at scale until late in the energy transition story.
Engelmann is bullish about supportive hydrogen plans from the EU and the German Government’s National Hydrogen Strategy. However, he raises some concerns about the development of offshore wind.
“We are looking at offshore wind investments, but the equity prices are very high at the moment. There are also risks in terms of delays for development permits,” he says. “But we are looking more at buying in PPAs than holding or owning stakes in farms. More generally though energy transition without offshore wind isn’t possible so there will be more PE investments there. Even without permits these projects are still investable.”
There are concerns however that renewable infrastructure development and construction could be hit in the short-term by higher inflation in the supply chain with Pierre Abadie, group climate director at Tikehau Capital also cautioning that new investments in LNG terminals or nuclear plants will not come to fruition for between five and 10 years.
“It is naive to think in the next 12 months we are going to be fully renewable,” he says. “We need to look at energy efficiency measures in buildings, homes and factories and small-scale solar panel installations which can be done in just a few months.”
Tikehau Capital through its Energy Transition Fund has investments in companies such as energy efficiency group Crowley Carbon, biomass plant operator ENSO and utility-scale solar provider Amarenco. “We are looking at more investments in these areas as well as electric vehicles powertrains and small-scale solar,” Abadie says.
Over in the US, Alex Darden, head of US infrastructure at EQT Partners, has a focus on solar and is calling for recent state support for offshore wind such as investment tax credits, auctions and a focus on the supply chain to be mirrored throughout the renewables sector.
“The development of solar is hampered by interconnection to the grid. There are multiple different grids in the US, and they don’t work in concert together. We need regulatory agencies to work closer together, sharing best practice and incentivising capital into the right places,” he identifies. “The opportunity set in areas such as solar, EV infrastructure and storage is going to increase exponentially. It will be a long transition but there will be significantly more capital and investors in the sector.”
A mature approach
More PE investment coming into energy transition appears likely, but sources call for a mature approach to the power and renewables sectors.
“There is a lack of PE financing in this area at present. Most of the people coming in to provide the finance don’t have an industrial background. Do they understand the concerns of a factory owner converting from gas to renewable sources of electricity?” Abadie asks. “You need to bring in technical expertise to your PE team when you make these investments to better understand the risk. That way we will see more investments and more energy independence in Europe.”
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