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To what extent does brownfield wind and solar investment present an attractive strategy today?
A significant amount of capital has been flowing into renewables in recent years, particularly at the large-cap end of the market. That has put huge pressure on returns and made brownfield opportunities less attractive. There is also limited additionality from an ESG perspective if you’re investing in assets that have already been built out.
However, the decarbonisation of the energy sector is a key focus for us, so we have sought to identify those slightly more complex opportunities in the mid-market, where we can generate value. It’s still possible to source such opportunities that offer highly attractive risk-adjusted returns. A good example of that can be found in the ground-mounted solar PV space, where we’ve been working for many years with a number of developers in the Polish market.
Through those long-term relationships, we’ve been able to acquire nine separate portfolios, bringing them together to create a sizeable portfolio of around 385 MW. It’s taken a lot of work, but in doing that we’ve been able to build an asset that will generate a strong return with downside protection through a 15-year contract for difference, without taking on material greenfield risks or other exposures. It’s still possible to source such brownfield renewable opportunities in the mid-market, but it’s challenging and requires strong networks and experience.
What other areas represent interesting opportunities to deliver both a positive environmental impact and attractive returns?
There are a wide range of areas: district heating, for example. Fundamentally, it’s the most efficient form of space heating, particularly for people living in colder climates, which provides a strong tailwind from a decarbonisation perspective.
We’ve been very active investors in mid-market district heating, which offers the potential for highly attractive returns, as well as positive environmental impacts. Those positive impacts can be achieved not only by investing in district heating in the first place, but by accelerating the decarbonisation of the sector.
For example, a business we’ve acquired in the Finnish market historically relied on power generated from peat. We’ve transitioned that to renewable biomass and have invested significant capex to improve the efficiency of the boilers, which has dramatically cut down the carbon intensity of the asset. We’re now also looking at other ways to further decarbonise these businesses going forward.
It’s all about identifying assets where you can accelerate that journey, allowing you to generate great returns, while also having a positive and material environmental impact.
What are the challenges in the decarbonisation of the transportation sector? And what other opportunities is that creating?
There will be huge changes as a result of the decarbonisation of the transport sector over the coming years. We are obviously already beginning to see the electrification of the road and rail sector. We have been particularly active on the rail side, procuring brand-new electric and bi-mode trains to replace diesel trains in the UK with our partner Rock Rail.
We’ve acquired over £2.5 billion of rolling stock and anticipate further opportunities to come. Encouraging more people to use public transport is, through providing a better customer experience, in itself an important component of the decarbonisation of the sector, while changing from diesel to electric can cut emissions by up to 65 percent.
As mentioned, we’re also looking at the possibility of hydrogen and battery-powered trains. The technology already exists. It’s simply a case of finding the right opportunities.
What role are biogas and geothermal technologies playing in your portfolio?
Geothermal is another interesting space. It’s fascinating technology and we have recently invested in the space via a gas distribution business we own in the Finnish market.
As part of a decarbonisation transition at that company, we began looking at a shift from traditional natural gas to biogas, and then, more recently, we also invested in geothermal technology. The idea is to transition the business to become more of a heat provider, using carbon-neutral technologies to accelerate that transition over time.
It’s important to remember that there is no one, single solution. If we’re going to meet the net-zero carbon targets outlined in the Paris protocol, we will have to embrace a whole raft of different technologies. What works best will differ depending on the sector and situation.
How much potential does hydrogen have to contribute to decarbonisation and what are the challenges that still need to be overcome?
Hydrogen has incredible potential when it comes to meeting energy transition goals, particularly for certain sectors that require a molecule-based fuel. It’s something we have been looking at for some time. But it can be very difficult to invest directly in hydrogen, given the current complexity and lack of scale opportunities.
That said, we do have an interesting opportunity at the moment. One of our investments – a Dutch gas pipeline, which has historically transported gas from the Dutch North Sea onshore – is involved in a number of interesting early-stage projects. The first is in the carbon capture and storage space. The second, involves the offshore production of green hydrogen.
So, hydrogen is an exciting area with a very important role to play in the energy mix, particularly in those hard-to-abate sectors. But it’s not without its challenges, including the importance of decarbonising the hydrogen production itself.
We must ensure we’re producing enough green hydrogen, rather than relying on blue or grey hydrogen. We also need to improve hydrogen’s cost-competitiveness by scaling up production to give us the necessary economies of scale. Meanwhile, the other side of the equation involves building up customer demand to get the supply/demand balance right.
With those newer and rapidly evolving sectors, such as hydrogen, how do you decide when is the right time to invest and where you should be investing within that ecosystem?
The key thing is to understand the sector well and then to build on an existing area of expertise. Take the hydrogen example. There we are leveraging the management team’s experience of the pipeline business.
“If we’re going to meet the net-zero carbon targets… we will have to embrace a whole raft of different technologies”
We’re also looking at some hydrogen train opportunities, based on our experience in the rolling stock space. Hydrogen has the potential to be an excellent solution for the decarbonisation of rail traffic, particularly in those more rural areas that are difficult to electrify. Combining our skillset in rail with hydrogen creates interesting opportunities. So, building on existing experience is the logical way to go.
What resources, skillsets and expertise are required to execute the decarbonisation transformational strategy?
Something that is very important today, which may not always have been the case in the past, is the full integration of ESG into the business.
It is no longer feasible to have ESG at arms-length. It is vital that the entire investment team is fully up to speed on ESG matters as they pertain both to the investment and asset management phase.
That requires a dedicated effort around upskilling. ESG cannot be viewed as a separate exercise or dealt with by a separate team.
ESG also needs to be fully integrated and it’s been really encouraging to see that this is no longer something we have to push on to senior management of underlying assets. The majority are fully aware of the role that infrastructure plays in the decarbonisation journey and are already building ESG factors into their day-to-day decision-making processes.
In addition to that complete integration, measurement is also critical. KPIs need to be identified up front, and then monitored right through the life cycle of the investment as part of our ESG value-creation plan for each asset we own.
What approach offers investors the chance to have both the biggest possible impact on the energy transition and the most compelling returns?
There are two key approaches. First, ensure ESG is fully integrated into all aspects of the business – from investment, through asset management, all the way into reporting.
Second, and probably even more importantly, it’s critical to be an active investor.
Transitioning existing assets, even those that face ESG challenges, to ensure they are in line with the Paris agreement and reach the highest possible ESG standards, is imperative.
It isn’t enough to simply invest in ‘green’ assets. It is all about accelerating that transition.
That creates the best opportunities for strong returns, as well as the most meaningful environmental impact.