This article is sponsored by Quinbrook Infrastructure Partners
How is the energy transition narrative evolving?
Over the past 20 years, we have seen renewables targets move from 1 percent to 50 percent, and even 100 percent in certain economies. At the same time, we have seen the cost competitiveness of renewables improve dramatically, creating significant additional opportunities beyond the decarbonisation of the power sector.
With the increased penetration of renewables on the grid, we have also seen a whole range of unintended consequences around grid stability. That has created interesting applications for energy storage. The confluence of these two trends mean we have now reached a new stage of investment opportunity that takes us well beyond the conventional wind and solar projects that have dominated the investment landscape over the past decade.
What type of investment opportunity is that creating, and where?
The UK is a leader in modernising the grid to take on significant additional renewables. A good example is a project of ours in Wales, where we have installed the first privately funded synchronous condenser (a type of flywheel) in the UK market.
That is a 100-year-old technology that is being used to help stabilise the new renewables-dominated power grid, which is somewhat ironic! That investment is supported by a long-term contract with the National Grid, and we fully expect to see more of these systems procured – not only in the UK, but also in other countries around the world that are currently lagging in grid-support initiatives.
Synchronous condensers help manage power system distortion which arises when the UK is now taking intermittent wind power produced in remoter regions such as the north of Scotland, for example, or offshore wind from the East Anglia coast or solar produced in Kent or Cornwall, and transmitting it to the larger population centres where that power is consumed.
In many ways, today’s scenario is the exact opposite to how the UK grid was originally designed. Historically, coal was mined in a central location, the Midlands, and then taken to the extremities of Britain in a hub-and-spoke type transmission model. This is now entirely reversed and is a great example of the new types of long-term energy-supportive infrastructure that must be developed and funded. They are ancillary, but still necessary, to the energy transition.
In addition, we believe that battery storage will be transformative. Battery costs have already come down substantially, but we also expect to see some important technological developments taking place, in terms of different battery chemistries, the extended duration of those storage technologies and therefore the ability to harness cheap renewables, and then store and re-transmit them as well. That is a game changer because historically electricity has not been a storable commodity.
How do you anticipate the regulatory environment around these themes developing?
The historical regulation of power markets has been designed around the instantaneous settlement of supply and demand. Battery storage changes that fundamentally, because we now have a technology that can store surplus renewable energy and then redispatch it at a later point in time. Battery storage will enable us to overhaul the rules that govern how electricity price formation, and therefore value, are determined.
We do, therefore, believe that significant regulatory change is inevitable. But the direction of that change will be to continue to support the harvesting and storage of low-cost renewable energy. All in all, we believe that the marriage of the relatively cheap, inert and proven technology that is solar PV, combined with proliferating battery storage technology, means that solar teamed with battery storage is currently the ‘engine room’ of the energy transition.
Indeed, we are convinced that the scale of the opportunity will exceed expectations and will become the single largest renewables tech proliferation that we will see, at least over the next five years. The reason I say that is that it enhances the economic value and efficiency of solar substantially, both at a utility scale – as evidenced by our milestone-setting Gemini project in Nevada – through to smaller projects installed in thousands of factories and manufacturing facilities, producing resilient and carbon freepower behind the meter. This ability to provide both a grid-scale and a local, distributed solution is the reason we believe solar combined with battery storage is the number one game in town.
Are we about to see even more ambitious carbon reduction goals?
In 2007, before the financial crisis, there was a significant push around emissions trading, the global regulation of carbon and climate change targets in the US. There were Democratic state governors all the way from the Canadian border to Mexico who were fervently hoping to achieve what we are, in fact, only seeing now, some 14 years later.
The ambition was there back then, but the regulatory and political headwinds were too great to overcome. Today, however, I believe there is no question that, between the announcements from the Biden administration and other potential announcements that may come out from other countries in the run-up to COP26 in November, we will witness a level of commitment to decarbonisation that has never been seen before.
Do you think those commitments will extend beyond the decarbonisation of power generation to the accelerated decarbonisation of industry?
I absolutely believe that this momentum we are seeing, combined with the sheer cost-competitiveness of renewables, will ignite the decarbonisation of industry on a global scale. Unsubsidised renewables are being priced significantly lower than conventional power. There are still issues to be overcome around the maintenance of 24/7 renewable power – there is still a technology and cost problem to be solved there. But, for 18 hours a day, it is possible to access extremely competitively priced renewable energy, and I think that factor alone will take net-zero goals beyond the power sector.
That is what is really exciting. This is no longer just about replacing the existing stock of fossil generation with renewables. We are now talking about using large-scale renewables and, in particular, solar together with battery storage, to power brand new green data centres, new green steel manufacturing, green ammonia manufacturing, new refineries and zero-carbon aviation fuels, and that is just the beginning.
Green hydrogen is probably attracting the most attention right now, but hydrogen represents just one part of this story. This greening of industry doesn’t hinge on regulatory stimulus from a pure economics perspective. There is no government intervention required at the most fundamental level of it all because it makes financial sense and is economically rational. Between the investment community helping to fund and create this new infrastructure and the exploding demand for zero-carbon power from industry, this is going to be an energy infrastructure roll-out of unprecedented scale and pace.
What role do you expect institutional capital to play in that roll-out?
The role of institutional capital will be fundamental and mission-critical. We all know there is a significant amount of debt available for infrastructure projects in the debt capital markets and emerging green bond markets, as well as the traditional banking sector.
But, on the equity side of the equation, the absolute percentage of alternatives allocations currently earmarked for renewables is minuscule. It really is the very tip of the iceberg.
You only need to look at the $4.8 billion renewable energy fund recently closed by BlackRock. That is a fantastic achievement, certainly. But it is hard to believe that that is the single largest dedicated renewables fund that has been raised in the world to date, when you consider the trillions of investment required between now and 2030, which is only nine years away.
There can be no doubt that the global institutional investor community now needs to proactively embrace new low-carbon infrastructure – and renewables, in particular – in order to achieve the world’s critical and increasingly urgent energy transition. Without those institutional investors playing their part, ‘net-zero’ by whenever just can’t happen. It is as simple as that.
Energy transition in action
In 2020, Quinbrook Infrastructure Partners joined forces with Welsh Power to provide the UK’s National Grid with much-needed grid inertia thanks to the installation of a synchronous condenser and flywheel at Rassau in Ebbw Vale. The facility in South Wales will be able to provide approximately 1 percent of the inertia required to operate the UK grid safely – with zero emissions – within 15 minutes of an instruction. This tried-and-true technology will stabilise the operation of the power grid which, in turn, will allow more intermittent renewable electricity to be used on the network as older baseload coal, gas and nuclear plants are retired. The new plant is expected to be operational by late 2021.
Solar and storage: a winning combination
In December 2019, Quinbrook secured a 25-year power purchase agreement with NV Energy for its Gemini solar and battery storage project in Clark County, Nevada. Gemini is one of the largest projects of its kind, globally, with plans to host 690MW of solar PV arrays located on up to 7,100 acres, coupled with battery storage infrastructure. The project is expected to exceed $1 billion in capital expenditure and will capture and store solar energy during the day in order to dispatch it during the early evening peak period when power demand surges. Once built and operational, Gemini is expected to reduce carbon emissions by 1.5 million tons per year.
At the end of last year, Quinbrook formed an innovative joint venture with Birch Infrastructure to develop and construct renewables-powered hyperscale data centre campuses in the US. The data centres will benefit from a low-cost, around-the-clock, renewable power supply, together with back-up resiliency solutions. The aim is to assist data centre operators in meeting their accelerating carbon-reduction and net-zero targets with low-cost renewable power. The joint venture has ambitious targets, with a current development pipeline more than five times the new data centre capacity added in the US in 2020 alone.