Ardian’s approach to powering the future

There is much more to the energy transition than renewables, with new developments emerging all the time. Ardian’s Amir Sharifi, Stefano Mion and Mark Voccola look at some of the most attractive, long-term opportunities in this fast-moving space.

This article is sponsored by Ardian Infrastructure

As the urgency to mitigate and stem climate change has increased over the past few years, so energy transition investments have become ever-more compelling. Although investors may have started with plain vanilla renewables assets, the investment options have broadened significantly in recent times with the development of new technologies and storage solutions, as well as the increasing need to reposition companies dependent on fossil fuels.

Ardian Infrastructure’s managing director Amir Sharifi and senior managing directors Stefano Mion and Mark Voccola discuss where they see opportunity in this rapidly expanding arena and what comes next as the decarbonisation agenda gains pace.

The energy transition has a clear link with sustainability. But to what extent do investments in this area fit within ESG goals?

Amir Sharifi: Sustainability has a strong connection to long-term financial performance. We’re seeing structural changes around environmental and socio-economic issues and we believe a company’s sustainability is driven by business practice, culture and sense of purpose – and we apply this philosophy in our own firm as well as in our portfolio.

Amir Sharifi
Amir Sharifi

This comes from the top. Our founder, Dominique Senequier, is a strong promoter of sustainability and our firm was a pioneer when establishing a profit-sharing scheme for all employees in our portfolio companies. We were early signatories to the Principles for Responsible Investment, having joined in 2009, and we have measured and monitored ESG in our portfolio since 2011. As one of the co-founders of the private equity-led Initiative Climat International, established in 2015, we have also been measuring our carbon footprint for many years now.

We take sustainability very seriously because we believe it is a driver of long-term value. Our infrastructure investments produce thorough ESG reports annually and managers’ variable compensation is linked to ESG measures. We encourage companies to publish their ESG reports as a way of mitigating regulatory risk and to promote ESG discussion and practice more widely. We also seek to improve practice by running workshops for portfolio companies on areas such as biodiversity so that they can share best practice and ideas.

What makes the energy transition such an attractive area of investment?

AS: We are seeing a massive shift towards decarbonisation that will require significant capital. The opportunities are far broader than investment in renewable energy sources and we see the market according to three main trends.

The first is most obviously renewables and we have around 7.5GW in our portfolio today. The second is new solutions that are emerging to deal with issues such as the intermittency of wind and solar power generation. This would include investments in storage and in green hydrogen.

The third is based on the fact that the energy transition will happen. This translates into a lot of opportunity in converting assets that currently have fossil fuel exposure. We recently invested in a district heating business in Finland called Nevel, for example, which generates heat partly from peat, a process that emits high levels of carbon dioxide. We are supporting the business to move away from peat so that it will produce CO2-free energy by 2023.

There is also opportunity in deployment of new technologies, such as AI, to reduce companies’ carbon footprints. Collecting and analysing data from infrastructure allows businesses to optimise their O&M on a global scale and go beyond contractual availability. Carrying out preventative O&M can really capture value in an arena where returns can be tight.

How might the Biden administration affect US opportunities?

Mark Voccola
Mark Voccola

Mark Voccola: The energy transition has been underway in the US for well over a decade, across multiple administrations, even if the changes haven’t necessarily been categorised that way. That said, the new Biden administration will likely create tailwinds behind renewables by dint of more favourable legislation or rulemaking. We might see changes to make permit applications more efficient, or tax incentives, for example, and more federal dollars directed towards R&D and technology, all in line with the government’s clear goal to support the energy transition.

Given this is a decades-long transition, it will take time before we see an evolution to the next iteration and so I expect what we’ll see is a strengthening of existing investment opportunities for now. We’ve already seen renewables go from zero 10 years ago to now accounting for 10 percent of the energy mix.

It was a niche business just 15 years ago and now it’s mainstream, with big industrial companies now having renewable products in their portfolios and utilities increasing their renewables generation capacity. The other big change is that this is now end user-driven. A few years ago, this was largely being pushed by governments; now it’s being pulled by consumers. That shift makes this an unstoppable trend.

What role do new technologies have in the market?

Stefano Mion
Stefano Mion

Stefano Mion: New technologies are increasingly emerging that can offer solutions to weather-dependent sources of power. Digital innovation can help the grid increase the efficiency of intermittent energy supply and improve baseload capacity. And while we’ve seen material improvements over recent time to the basic engineering of products, such as to increase the capacity of wind turbines, the use of AI and big data have a big role to play in stabilising the grid.

These types of technology add a layer of complexity to renewable investments – you’re not just buying turbines with a fixed-term PPA – but that complexity is positive for investors like us because it creates a real opportunity for management teams to create value in the assets.

And how do you view the role of natural gas in the energy transition?

MV: It’s a great partner for renewables. The availability of cheap natural gas has enabled renewables to grow in the US over the past decade. And it will be around for decades because it will take time for renewables to gain further market share.

Natural gas can be used while technology is developed, efficiency is increased and solutions emerge to ensure interrelated sources of renewables can work together. It can also be used in areas where land or weather patterns aren’t suitable for renewables currently. Overall, it’s a risk mitigator that helps diversify energy sources and helps maintain the reliability of the grid.

Storage is clearly a much talked-about area. How do you see it developing?

SM: It’s developing rapidly and improving at an astonishing speed. Yet the sector varies quite widely from geography to geography because regulators are finding different ways to integrate it according to the energy mix in each market.

Batteries are an interesting add-on to the grid, although usually we are still talking about smaller distributed solutions, such as small-scale storage for specific customers or factories. It clearly has benefits over the short term, but there is a debate about whether hydrogen might be a better solution over the longer term.

Could hydrogen be the long-term solution?

AS: It may well be. It’s a commonly known molecule used in a variety of industries, but today it’s largely produced through fossil fuel-generated sources and it is energy-intensive to produce.

However, there are two recent developments that have changed the game. The first is that the levelised cost of renewable energy has dropped below the €15 per MWh price, which makes producing green hydrogen more competitive.

The second is that governments are now starting to back hydrogen. That’s essential until competition in the market reduces the capital expenditure required in hydrogen production at scale. It’s a bit of a chicken-and-egg situation at the moment because you also can’t make the capital expenditure unless you have scale.

We’re seeing both the EU and the US strongly supporting hydrogen. There is a new EU 2030 Hydrogen Strategy and the US has recently put together a Hydrogen Program Plan. The big question is how long it will take for both to establish programmes and for demand to step up.

There have been estimates that hydrogen could account for 50 percent of energy production by 2050 and that could offer a decarbonising investment opportunity of $300 billion by as soon as 2030. We’re monitoring it closely and last year we signed a memorandum of understanding with Italian utility A2A to explore the feasibility of building a green hydrogen plant.

How do you take climate change into account when analysing investment opportunities?

AS: We take into account the fact that there will be a transition and that, because many companies are reliant on fossil fuels as a source of energy today, this needs to be factored into the business plan. This has implications at the investment selection stage so that we take the risk of exposure to fossil fuels into account and make a decision about how we can future-proof the business by improving CO2 performance through strategic investment or R&D.

Géosel is a great example. It’s a business that stores around 40 percent of France’s national hydrocarbon consumption – it’s a strategic asset for the country that allows it to cope with a crisis. With the energy transition, oil consumption will reduce and so we needed to create a long-term strategic plan for the business and create a culture centred around ESG – a move that also helps reduce the cost of financing.

We have embarked on a project called Géosel of Tomorrow in which we have asked employees for input on how we can position the business for the future. Some of the proposals include transforming salt caves into batteries, producing and storing green hydrogen, and making use of the company’s existing pipelines. We want to ensure the business is fit for the future through strategy, fostering the right culture and investment.