All businesses have been impacted in the short term as a result of covid-19 and the related lockdowns that have brought economies around the world to a virtual halt, but renewables seem to be faring fairly well, attendees of Infrastructure Investor’s Global Offsite heard from panelists on Tuesday.
“On the renewables side, we see fair resilience,” Alena Antonava, investment manager of RPMI Railpen’s Long Term Income Fund, said, commenting on how her organisation’s infrastructure portfolio has performed during the current crisis.
“It’s mainly because of the nature of renewable generation businesses…their low marginal cost of production and also their robust maintenance regimes,” she added.
BlackRock’s experience has been similar, according to the firm’s managing director and global head of renewable power David Giordano.
“Our long-term contracted assets are performing quite well,” he said. “Electricity is very much an essential service at a time like this. And so, whether it’s a utility or a corporate off-taker, we’re seeing a lot of resiliency in those contracts.”
As for the part of BlackRock’s renewables portfolio that is more exposed to merchant risk, Giordano referred to the 15 percent decline in electricity demand globally, noting that “has been pretty consistent” across their portfolio.
He said there have been peaks and valleys in the past four months, and the “flexibility” evident in all economic sectors is going to change the demand profile, and by extension, the way infrastructure investors evaluate long-term pricing.
“But the fundamentals of the assets, the performance of the assets and the performance of the contracts has been quite strong,” Giordano said.
Asked whether the current crisis might necessitate a re-introduction of subsidies, Giordano was confident it did not.
“Renewables is really the low-cost, new source of electricity coming into the grid without subsidies,” he pointed out. “I don’t think…you’re going to see sort of the massive feed-in-tariff programmes that really facilitated the growth of the industry in Europe in particular. I think what you’re going to see potentially is more movement to the distribution level as power supply and demand becomes much more dynamic to the users and you get much more time-of-day pricing.”
Antonava agreed and emphasised that given the risk of climate change, “investors should be ready” to take on merchant risk, something RPMI Railpen is doing.
She also pointed out that fighting climate change and advancing the energy transition is not just about investing in renewables.
“There will be so many other projects that investors can get involved in, and anybody with innovative ideas in energy efficiency, for example, or managing demand/supply balance – those types of projects will be winning going forward,” Antonava said.
Copenhagen-based Nykredit Asset Management is “not too keen on taking too much merchant risk”, its head of alternative investments and manager selection Ulla Frimor Agesen explained. But she acknowledged that “we do see we need to take more greenfield risk in order to generate the returns that we are looking for”. To that end, Nykredit is working with some GPs that invest in projects at the pre-permit stage.
“If you go out today, at least in the Danish market, and look for an onshore wind farm in existence, you can maybe get 3 percent or so. So, it’s not really interesting if you’re looking for a bit higher returns there,” she said. “So, you do need to kind of move up the risk curve.”