Energy transition report
Q: How has Mirova’s strategy evolved in recent years with regards to energy transition and renewables?
RL: Our strategy has remained consistent over the years. We have continued to invest mostly in greenfield assets and mature technologies – primarily onshore wind and solar PV – alongside our partners, which include developers and utilities. That has remained unchanged.
We believe in the alignment of interest between ourselves and our partners, and we want to contribute to the energy transition by investing in new capacity as opposed to monetising existing operating assets.
So, from that standpoint, the core of our strategy has remained constant. Obviously, we’ve had to adjust to the evolution of the market, moving away from mostly feed-in-tariff schemes in a lot of countries to more market-driven opportunities with the emergence of private PPAs. That has been the case in Spain and Portugal, where we closed our latest deals, but also in France, where you now have to go through an aggregator with whom you need to sign an aggregation contract.
Q: You tend to focus roughly half of your funds on France. Where are the best opportunities in France for managers like yourselves?
RL: France has very ambitious targets in onshore wind and solar. Last year, we had a record year with more than 1.5GW of new wind capacity installed. It remains an atomised market, however, with a lot of small- to medium-sized projects. It’s not like Sweden or Spain, where you have very large wind farms.
In France, we are constrained by our environment. The population is scattered so we have to build small- to medium-sized projects, which present pretty good opportunities for regional developers who continue to be active and seek financial partners.
We have also seen very interesting opportunities in the solar sector associated with storage – an area we are exploring with one of our partners in Corsica, for example.
Then there is the emergence of biogas plants, where we have also made investments alongside one of our developer partners. France aims to increase the penetration of green gas on the grid, and that creates a very interesting opportunity. Overall, the renewables market remains very dynamic, with the advantage of benefiting from very satisfactory tariff mechanisms, such as 20-year contracts on both solar and wind. CfD’s [contract for difference], which have replaced FiTs, are fairly stable and predictable, which, combined with the planned growth of installed capacity, makes it a very attractive market.
“From a risk standpoint, it’s much better to have assets that are profitable at market prices without subsidies”
Q: In January, you closed a subsidy-free deal in Spain, acquiring nine wind farms. Do you welcome the end of subsidies in Europe and how does this affect your strategy?
RL: I believe, from a risk standpoint, it’s much better to have assets that are profitable at market prices without subsidies. It means the technology is mature and is now in a position to continue to grow. On the other hand, market-driven schemes also generate more complexity in the deal structuring. For us, being a very specialised fund in renewables with a dedicated team of experts, that should create a hedge.
I would say the more complex the transaction becomes, the more favorable it is for us because we can leverage our expertise and know-how. For example, structuring PPAs is a complex process. There are long discussions, and it is fairly technical, so it means being able to understand the electricity market well and the risks involved. But we are well positioned to do that.
Q: You talked about the newer sectors you’ve entered recently. Do you see yourselves ever expanding into something like offshore wind?
RL: We’ve decided not to expand into offshore wind because, first of all, it involves large transactions. For those, it would make sense to have bigger funds to deliver larger tickets. But we have decided to remain in the mid-market and invest in small-ticket deals – that’s where we can create more value. If you look at the latest offshore transactions, there is a lot of liquidity in that market and the returns are already quite tense, while the risk is higher. In my view, the risk should be more rewarding than it is in offshore wind.
But what we have been looking at for a few years now and continue to look at, is storage. We think there are good opportunities given the reduction in cost and improved battery performance. We’re also very interested in looking at electrical vehicle charging infrastructure, but only to a certain extent, because the models are not completely project finance-like. We intend to try to understand this market and we are in contact with most stakeholders to help create bankable structures, so that the enormous capital required for its development is addressable by private investors.
“If you look at the latest offshore transactions, there is a lot of liquidity in that market and the returns are already quite tense, while the risk is higher”
Q: Is the electrical mobility sector ripe for infrastructure investors like yourselves? Are there opportunities that you’ve identified?
RL: Yes, we’ve identified a few. We are working on specific projects but they’re confidential, so I cannot go into details. But they are models in which you have a captive fleet and, say, a private industrial player that gives you some capacity payments. That means you’re not fully exposed to obsolescence risk or traffic risk, which are two key risks that we consider difficult to ‘swallow’ today, given the pace of the deployment of electrical vehicles as well as the evolution of the technology.
Q: Fund managers haven’t really entered the space. Do you expect this to change?
RL: I think the opportunity is huge because of the capital required to meet European or country objectives. Technology is catching up, and the anticipated car shift is important, so we really believe there is great potential. There is a strong willingness amongst municipalities to accelerate deployment of electrical vehicles because of pollution issues.
We have been in discussion with various players – municipalities, utilities, international bodies and other stakeholders – for a year now, and a lot of companies are thinking about the kind of business model they can deploy. We’re seeing the first projects coming out with a decent risk profile for a long-term investor like us.
Q: What about storage – do you expect to invest in that market in the foreseeable future?
RL: In recent years, storage has become more and more competitive. We remain sceptical about making investments in storage capacity that need long-term cashflow to be paid back where you have short-term contracts in front of you. If you are exposed to that, we’re afraid that the capacity you build today is going to be left competing against the capacity built tomorrow. We clearly see the curve of a big improvement in cost and therefore if you’re not secured with long-term cashflow, you are outdated and then your capacity isn’t well-placed in the merit order.
Q: Are there any European markets, in terms of sectors and geographies, that you would consider relatively untapped?
RL: Untapped? No, not really. But there are markets that are booming and that we think are interesting. For example, Spain and Portugal are really back on and we’re very happy to have done the first new generation wind park in Spain, because it gives us an opportunity to understand the market early and to be prepared for the next transactions.
There are also opportunities in the Nordics, which have these ambitious growth targets in renewables. The economics in the Nordics have been difficult because of the low electricity and green certificate prices. But, there is a rebound, so maybe it’s the right time to secure long-term contracts and make a decent return.
This story is sponsored by Mirova.