What stage have we now reached in terms of the energy transition?
The energy transition was really kickstarted by the UN back in 1995 and reinforced by the Kyoto Protocol two years later. With consensus around the need to decrease carbon emissions, we began to see the first scalable renewable energy solutions come to market in the early years of this century. But the Paris Agreement, in 2015, marked the beginning of a new, more active phase, of energy transition.
A commitment to strengthening the global response to the threat of climate change has provided a new political impetus, while the technologies available for reducing emissions continue to be developed with two primary objectives in mind: first, to decrease carbon emissions in transportation; and second, to decarbonise heating and cooling around the world.
The automotive industry has made significant progress with the development of electric vehicles. There is a consensus emerging around the technology, or handful of technologies, that will drive this shift. When it comes to decarbonising heating and cooling, however, further technological advances are still required before we can clearly see what the solution for a green future will be.
What makes this an interesting area for infrastructure investors?
Ardian has been a pioneer in terms of financing the energy transition. We made our first investment back in 2007, developing a renewables platform in Italy, alongside an Italian family. Today, we manage renewable projects in Europe and the Americas. Renewable energy offers all the characteristics that we like to see in infrastructure investment. It requires a long-term approach that matches our strategy. We believed from the outset that this would be a credible source of energy and, of course, today, that is exactly what it is.
Which geographies are proving particularly attractive when it comes to clean energy generation and what do you see as the key differences between the regions?
At Ardian Infrastructure, we focus on Europe, North America, and select countries in South America, particularly Chile, and we are active in renewables projects in all these areas. There are, however, clear differences between each of these geographies.
Some countries in northern Europe, for example, have now adopted frameworks where there is no support from government at all for the development of new renewable energy projects. That means the revenues are entirely driven by the price in the energy market. And while you can still find the public supporting schemes in other European countries, we believe this is an evolution that will ultimately be adopted by all European countries and it is an area where we have increasingly been looking to invest.
These are more complex transactions, certainly, and there is more risk involved. The main risk is what we call intermittency. Renewable energy plants simply don’t produce energy all the time like a gas power plant or nuclear power plant. They only produce energy when the wind is blowing or the sun is shining. But we feel it is possible to mitigate this risk through power purchase agreements adapted to renewable projects, which typically secure the price of that energy through commercial contracts that have usually a long maturity.
Meanwhile, the US is already fully merchant. There are some tax incentives at the development stage but once you reach operation, you have to rely on PPA schemes to cover the price of energy.
We think it is important to be involved in each of these different market dynamics, not least in terms of diversifying risk at a portfolio level. It is also good to gain experience of the different systems in operation to mutualise companies’ knowledge.
What opportunities exist outside of renewable energy generation and what role are technological advances playing?
“[With] the emergence of smart grids … the energy industry is in possession of a huge amount of data”
We don’t only invest in renewable energy generation. We are also invested in other parts of the energy supply chain, including the networks that have the responsibility of transporting the gas or electricity to where it needs to go. The growth of renewable energy has significant technical implications in this area, particularly the need to adapt to intermittency. The emergence of smart grids, meanwhile, means the energy industry is in possession of a huge amount of data that can be used to optimise the management of the grid and to support customers in improving their own energy consumption.
And then, of course, there is storage. Storage covers a range of different technologies including batteries, which is an area we think will provide interesting solutions for future energy systems to manage intermittency. This is something we are looking at very closely in conjunction with our wind farm businesses, in particular.
We also believe hydrogen technology could be an effective way to store electricity produced by renewables. This is not yet at a stage where it can be efficiently deployed but there is a great deal of research going on by various utilities that are developing pilot projects. I think hydrogen technology will likely produce some interesting opportunities over the next decade.
Do you believe utilities will have a role to play in this new, clean energy world?
Yes, I do. Utilities have been hit hard by energy transition, particularly in countries where they were highly centralised. Energy transition means having to develop a lot of small projects such as wind farms and solar farms. Solar panels can even be installed on the clients’ rooftops. That is a very different proposition to managing large, centralised energy production facilities like gas power plants or coal power plants.
All of the big utility companies have had to reorganise themselves internally to meet this challenge. But we think this brings opportunity for smaller, regionally focused utilities, which is an area where we are keen to invest. We made one investment in Encevo in Luxembourg, back in 2012, and we have recently invested in EWE, a north German utility.
In both cases, the companies are fully integrated with responsibility for management of the grid, renewables production and sales to customers. They also have strong local footprints, enabling them to tailor solutions to regional needs – because, of course, renewable energy production generally serves the area where it is generated. This is a really interesting part of the market when it comes to the energy transition.
Energy transition in practice
In 2019, Ardian made a €300 million investment to build a wind farm in Sweden. The firm acquired the development rights for the project from OX2, which will also lead the construction and technical management of the facility. The wind farm will be operational in 2021 and is expected to produce more than 800GWh of electricity per year.
The 53-turbine wind farm will be one of the largest in Sweden, which has passed legislation to go carbon-neutral by 2045, alongside Denmark, Norway and Finland. Ardian has also made two other wind farm investments in the region and its Nordic portfolio now exceeds 400MW of gross capacity, corresponding to the yearly energy consumption of more than 600,000 electric vehicles.
Last year, Ardian also acquired a 49 percent stake in two photovoltaic plants in southern Peru from Spanish multinational Solarpack. The plants have a combined capacity of 48.6MW after repowering. Ardian had previously acquired a further four photovoltaic plants from Solarpack in both Peru and Chile.
Also, in 2019, Ardian acquired a 26 percent stake in the regional German utility company EWE, with plans to play a leading role in supporting and shaping the energy transition, with renewable energy in particular. The company is moving towards becoming “an innovative solutions provider” offering integrated services and products for energy, communication, networked data and mobility.
Based in Oldenburg, Lower Saxony, EWE is one of the largest utility companies in Germany, with a strong local footprint. It provides electricity to around 1.4 million customers and supplies natural gas to 800,000 customers. It also provides around 700,000 customers with telecoms services. To achieve this, EWE operates more than 190,000 kilometres of electricity grid, natural gas grid and telecoms networks. It has plans
to invest more than €1.2 billion in a fibre optic expansion over the next
How is the energy transition ecosystem evolving? Who are the key players and are they changing?
Understanding that is one of the big challenges facing the energy industry today. All market participants are focused on the objectives laid out in the Paris Agreement. That is progress on where we were ten years ago. But there is still a wide array of different strategies being pursued to get us there. We know we need to reduce carbon emissions. The question is, how are we going to achieve those targets? Which technologies, which new ways of producing energy will deliver a workable solution? That is a very different situation to the stable energy market, made up of coal plants, gas plants and nuclear plants, that we knew before.
The second question, of course, is who the new players in the energy space are going to be. Today, we have the utilities. We have financial investors – infrastructure funds, like ourselves. And then there are the corporates, like Google, which are investing in or developing their own renewables projects. It is a very fragmented market and it remains to be seen how this will play out.
What do you believe is required to succeed as the energy transition progresses?
I believe it is essential to have an industrial approach in order to effectively manage construction risk and operational risk, and also to ensure you are developing innovative solutions for managing those assets. Technology has a big role to play there. We use a range of cloud and digital technologies to optimise the performance of all our wind farms, for example.
Technology also helps us pick the right investments and the right suppliers. A few years ago, we undertook analysis of all the major turbine manufacturers to ensure we were working with the very best. I think that kind of approach is essential if you are going to be operating in these markets for a long time.
Because, while there was a brief period when governments were sponsoring these projects – when they appeared to represent easy money – that is no longer the case. As we enter a new phase of the energy transition driven by market pricing, a financial approach is not enough. You need to have deep industrial expertise. You need management teams in place with the ability to find new opportunities to increase value in your assets and to ensure you are at the cutting edge of future developments.