Actis: Tackling ‘the defining issue of our time’

The energy transition market has been around for decades, but it has really picked up steam over recent times. Mikael Karlsson discusses how this is translating into opportunities in the hard assets space.

This article is sponsored by Actis

Renewable sources of power are clearly here to stay and have massive growth potential as the world attempts to meet the Paris Agreement targets. Yet they also have a very specific role in many emerging markets, where power is often unreliable and used inefficiently because of ageing networks, buildings and machinery, and the remoteness of some populations.

Mikael Karlsson, partner and head of energy and infrastructure at Actis, discusses how renewables and the technology required to make these sources of power work on the grid are developing and what kinds of opportunity are becoming attractive in this rapidly changing space.

How does climate change play into your investment themes?

Mikael Karlsson
Mikael Karlsson

Climate change is the defining issue of our time, with global temperatures at the highest they have been for 3 million years. The world will need to decarbonise rapidly, and a full-scale energy transition is necessary if we are to have a sustainable future.

The power sector accounts for a third of current emissions, and two-thirds of this comes from thermal power. There will need to be around $130 trillion of investment by 2050 in the energy sector if we are to meet the Paris Agreement goals, and renewables will be a very big portion of this.

Clearly, this is an important factor in our investments. Renewables contribute to the vital task of tackling decarbonisation at speed and they also meet investors’ need to incorporate responsible investment in their portfolios. Our investors often have long-term investment horizons and if you are, for example, a pension fund for teachers, the police or firefighters, there is a need to contribute to making the world a better place alongside a good financial return.

Yet there are also economic drivers. The cost of renewables has declined by around 80 percent – 90 percent for solar and 60 percent for wind – since 2010, and it continues to do so. They are the cleanest and quickest sources of energy to install – you can get a solar project operational within a year.

Finally, as investors we always look at the environment we are operating in. If you take India as an example, there are 17 or 18 cities that feature in the top 20 most polluted places on the planet – much of that is the result of coal-fired power stations and inefficient combustion engines. Air quality and local impact are also powerful contributors to the energy transition.

How is the energy transition developing in your markets?

Renewables have been – and will continue to be – a significant part of the transition. In non-OECD markets, $14 trillion will need to be invested to meet power demand over the next 20 years – that is equivalent to $1.7 billion a day.

Our markets benefit from strong solar irradiation and winds, which give renewable wind assets the potential to generate three times European capacity. This offers a significant investment opportunity. Yet the opportunities go beyond simply installing plants linked to the grid. There is an increasing market for selling clean energy to private buyers in areas such as South America.

One of our portfolio companies, Atlas, has secured significant contracts with consumers and industrial businesses to supply renewable power directly to them. This is a part of the market that will continue to grow as companies worldwide increasingly seek to comply with Paris Agreement goals – we have already seen this with Amazon and Google, for example.

“The cost of renewables has declined by around 80 percent… since 2010, and it continues to do so. They are the cleanest and quickest sources of energy to install”

Distribution businesses also have a part to play. We have invested in 15 power companies, including 10 renewable energy platforms, but we have also invested in distribution companies for many years.

Here, we can make a significant impact from an environmental perspective because we can invest to reduce losses in the system – and in some parts of the world these are material. By investing in the best-in-class tools and upgrading grid networks, we can reduce losses, which reduces the cost of energy and has clear environmental benefits.

There are also around 1 billion people around the world who lack access to power – the majority of these are in Africa. Many are in remote locations and therefore far from the grid. It is often not cost-effective to build networks to these customers and so there is an emerging market in mini-grids and off-grid solar. As solar power and battery prices are declining, this is becoming a commercially viable proposition.

Technology solutions are also emerging that allow energy companies to manage their assets and ensure they receive payment from often very remote customers. This market is set for growth over the coming years.

What role will gas play?

Gas will have to be part of the mix through the energy transition, particularly as energy demand is rising, with 70 percent of demand occurring in emerging markets by 2040. Renewables offer intermittent supply, and so there need to be solutions that maintain reliable grids.

It is really important that stakeholders focus on the practical energy transition pathway for each country or region that they focus on. Clear attention on the decarbonised end goal, as well as the route towards it, will help to focus priorities and to enable clear frameworks against which the private sector can invest.

Back in 2003, Globeleq, a power business we established, acquired Songas in Tanzania. The country had long wanted to use its own supplies of natural gas to generate power as an alternative to more expensive oil and so, through our investment, Globeleq was able to convert the MW Ubungo power plant from oil to gas, saving the government $5 billion of precious FX reserves that it would otherwise have spent on commodity imports.

And what about other solutions to renewable intermittency?

A key question in the transition to renewables is how to manage their intermittency and ensure reliable sources of power. By 2030, there will be a ten-fold increase in renewable deployment.

There is a growing and exciting storage opportunity across our markets. Storage can be particularly transformational where grids are more fragile and the challenge of integrating intermittent renewable power greater.

“There will need to be around $130 trillion of investment by 2050 in the energy sector if we are to meet the Paris Agreement goals”

Batteries will play a key role here, especially as the world moves to electric vehicles, which will be cheaper, easier to build and, clearly, cleaner than traditional combustion engines. We need to create enough storage to manage the intermittency of renewables and this is likely to come from standalone batteries or from batteries in electric vehicles that can be used for the dual purpose of taking or giving power to the grid depending on the needs of the grid and the vehicle.

The price of batteries has reduced substantially recently, and this will continue. It is no longer a limited technology, but a competitive, mature enabler for the energy transition. One of our portfolio companies, Lekela, a pan-African renewables platform, for example, is conducting a feasibility study into creating Senegal’s first grid-scale battery electric storage system.

A little further out, hydrogen will become more viable. If we can use excess power generated when the sun or wind are strong to create green hydrogen, this will be a big step forward. It is possible currently, but it is expensive and there are some technical constraints. It could be used for power but also for transport, such as aircraft and ships, which move far away from energy sources.

Some of these technologies, such as batteries, wind turbines and solar plants require rare earth metals. How do you manage the supply chain for these kinds of material sustainably?

We have to engage with suppliers to understand the due diligence they undertake – we need to be able to manage risk and ensure critical metal supply can be appropriately traced. Our responsible investment team works closely with us in the energy operations team to examine the policies, codes of conduct and supply chain management processes in place.

How does infrastructure overlap with other sectors on the energy transition?

We work closely with other teams, and particularly with the real estate team. Developments and buildings combined account for nearly 40 percent of global carbon emissions. One area that has been accelerated by covid is digital transition, which increases demand for data centres. These are obviously energy-hungry and so we have been working with our real estate colleagues to help them source clean electricity.

We are also creating Nigeria’s first solar-powered shopping mall, the Jabi Lake Mall. Here, we are installing a 600KW rooftop solar plant that will sell electricity to the mall through a 15-year power purchase agreement and this will reduce its carbon emissions by over 13,000 tonnes. This follows the success of the largest solar car port in Africa, which we installed at Garden City in Nairobi.

Yet power supply is only part of the equation for real estate. Our firm takes a ‘green by design’ approach to investments that meets both commercial and environmental investment objectives by reducing energy consumption through the use of reflective materials, energy-saving lighting, insulation and so on. For example, we have built the first internationally certified green commercial buildings in Nigeria, Ghana, Kenya and Cameroon.

How do you see the energy transition creating further investment opportunities over the coming years?

We are active in markets that are home to 85 percent of the world’s population. In many of our markets, a lack of reliable power supply also remains a barrier to economic growth. So, we are investing in places where this really matters and where we can make a difference.

The biggest role we have is mobilising more capital towards this area –– and we can do that by demonstrating that it is possible to generate compelling returns through energy transition investments while working sustainably to create shared value with local communities. The energy transition has moved up the agenda for investors over recent times, but it is something we have been investing in for many years.

Can you give us an example of the energy transition in play in your markets?

Zuma Energia is a good example. Our investment created one of the largest renewable independent power producers in Mexico by building and aggregating the country’s most competitive projects – Reynosa, the largest wind farm in Latin America Santa Maria and Orejana – into a single 818MW platform.

It neatly illustrates how far the technology has come, too. When we invested in our first wind farm in Latin America in 2009, PESRL in Costa Rica, it used 410KW turbines and had a total capacity of 24MW. Our latest wind farm in Brazil offers 10 times that capacity per turbine, at 4.2MW.

This, along with the lessons we have learned over the years, allows Zuma to sell power at half the price. These cheaper units of power have a significant impact on economic development and offer a sustainable energy source: Zuma has contributed to the avoidance of almost 2 million tonnes of carbon.