This article was sponsored by Quinbrook Infrastructure Partners
What are the options for investors in UK renewables today?
David Scaysbrook: There are two main routes – listed and unlisted markets. Within the listed space, there are dedicated vehicles that only invest in UK renewables, along with more generalist infrastructure vehicles with some level of exposure, as well as integrated power companies that have a mix of renewables as part of a larger energy business.
In the unlisted sector, there are a growing array of investment funds which invest directly into renewable projects as well as vertically integrated supply businesses, either through ‘evergreen’ vehicles or closed-end vehicles with a defined maturity. These vehicles also cater for both equity and debt or debt hybrid investments. We’re certainly seeing a significant increase in the allocation of private capital to unlisted funds and dedicated vehicles, with an unprecedented volume of ‘first time’ allocations from LPs seeking exposure to the UK energy transition.
Where are the best opportunities to invest?
DS: We’ve invested in UK renewables for over 20 years and have definitely moved on from ‘plain vanilla’ wind and solar as energy markets are disrupted and becoming more complex and, frankly, riskier. As weather-dependent renewables push through 35 percent of total installed capacity in the UK, we’re experiencing some foreseeable yet unintended consequences of having that level of renewables penetration in a power system that was never designed for it. That’s bringing new investment risks as well as opportunities into play and that is fundamentally reshaping our investment strategy. Today, we’re focusing more on flexible and dispatchable capacity, demand response, storage and targeted grid support infrastructure.
Flexible generation capacity (or peaking capacity) fills in the critical supply gaps when the wind doesn’t blow and the sun doesn’t shine. With the recent disruption in UK energy markets, we’re seeing the real value that flexible and responsive peaking capacity can have in the UK power market, which is increasingly dominated by variable renewables – we started building out our Velox portfolio of peaking assets several years ago in anticipation of greater volatility and recently they’ve been running flat out.
There are also times when there’s too much wind in a given location (like northern Scotland) and it’s getting choked off by constraints on the UK power transmission system. That’s wasteful and is being addressed by National Grid. Storage solutions like batteries will enable the UK to store that surplus wind in those choke point locations – and then, when the wind drops off, export it into the power system for value. That’s another important piece of flexible energy infrastructure that enables more variable renewables to connect to the grid going forward.
What are the main challenges in the UK power market?
Anne Foster: We’re looking towards an energy market that’s no longer primarily vertically integrated but is significantly more distributed, both from an ownership and locational point of view. In addition, there is a forecast rapid increase in electrification and overall demand, be that for vehicles, household heating or rapidly growing industries such as data storage.
The challenge is to ensure that the grid continues to be accessible, reliable and secure. How do you fill peak periods? How do you avoid blackouts? How do you support the grid voltage on a 24/7 basis irrespective of changing weather?
That’s where a meaningful allocation of new investment needs to go. It’s one thing to invest in new renewables generation, but that doesn’t work unless you also put in all the other pieces that help ensure that renewable generation is fully used, distributed and doesn’t undermine grid security.
How is the drive to net-zero shaping investment?
DS: It’s creating orphaned assets such as coal and conventional gas plants and carbon-intensive industrial processes not powered by renewables. Instead, LPs are redirecting their capital to sectors that contribute positively to the reduction of emissions – and, as renewables get cheaper, this is opening a vast array of new opportunities. The energy transition is both disruptive and revolutionary from an investor’s perspective.
There’s a very significant increase in the opportunity set, although traditional renewables still dominate investor capital flows within the energy space. This is in part because one of the most obvious ways for buyers, including large corporates, to decarbonise is by swapping the source of their electricity to renewable energy. The UK has been relatively late to shift to corporate power purchase agreements, but is catching up quickly. Ultimately, that looming growth supports more investment in renewables and it becomes a virtuous circle.
What is the next step for companies?
DS: As we move into deeper net-zero implementation, sectoral commitments and transformations are the next big challenge – and opportunity. Some steps involve mass electrification, some don’t.
There are a host of opportunities in greening energy commodities as well – such as renewable power to oil rigs and mines, to reduce carbon intensity, carbon sequestration, direct air capture, new electrolysers for green hydrogen, steel mills that have electric arc furnaces and new biodiesel refineries, just to name a few.
How are you using technology to make renewables work better?
DS: Optimisation is a word you’ll hear a lot more going forward. Power assets and power markets will increasingly be managed most efficiently via algorithmic dispatch protocols with the assistance of machine learning and AI.
“Delivering large-scale and low-cost, 24/7 renewables for energy-intensive sectors is the holy grail”
Human controllers simply cannot manage the vast number of variables that are now influencing the behaviour and outcomes in power systems, where both utility-scale and distributed energy solutions are rapidly proliferating.
Look, for example, at weather prediction and the use of real-time weather data on power system behaviour and efficiency – it’s a natural area for advanced algorithmic management.
We already see algorithmic optimisation in battery storage. One of the leading UK optimisers is a data science team based in Oxford. They are using algorithms to maximise revenue from battery storage in ways that humans just cannot replicate.
Big data combined with blockchain technology is another area of technological advancement that goes to the core compliance: tracking, and verification of the true provenance of renewable energy and its use in real time. Just because a company buys power from a wind farm in Scotland does not mean those megawatts are fully matched to its operations. What happens when the wind farm is not supplying power to the grid but the company’s plant is still consuming grid power?
What we see on the horizon is 24/7 matching of the renewable energy that customers procure with their actual consumption at their facilities using advanced blockchain verification platforms – getting down to hourly granularity to track where their power comes from and the carbon intensity of any grid purchases so that they have verifiable data records for their carbon reporting and monitoring of progress to their net-zero targets.
How important are ESG and stewardship practices in the renewable energy sector?
AF: You can almost always find a link between managing ESG well and
protecting and growing capital value. For us, building better businesses leads to better outcomes for all stakeholders. The two are fundamentally combined.
The push to net-zero cannot be at the expense of other important societal needs. For example, if you take jobs away in carbon-intensive industries, you have to also seek ways to bring back support to those impacted communities. We look for ways of building assets in communities that have relied on fossil fuels in the past and hopefully creating opportunities to train people in the clean energy sector.
From an environmental point of view, it’s critical to look at where projects are located. There’s interesting work going on in locating renewables in sympathetic ways to improve ecosystems and support local farmers.
One thing we’ve worked on is getting pollinators on to solar farms and building habitats that can attract local wildlife and bees, which are critical to local farming communities.
Facilitating increases in biodiversity needs to be part of the overall infrastructure planning. It’s important to consider all areas – job creation, social impact, supply chain impact, human rights impact and long-term community impact. We think about how we benefit communities, particularly local and rural communities that have been hit by covid-19 and where renewable energy can help to drive economic benefits.
Good stewardship means working day-to-day with portfolio companies and their diverse teams, and actively sharing best practice across regions. To drive positive change, we work very closely with our portfolio company teams to support their impact on the ground.
Green data centre opportunity
Data centres are some of the largest corporate purchasers of renewable power in the world today. Their power demands are growing at exponential rates.
DS: The industry is at the vanguard of carbon reduction initiatives and the application of supportive technology – not only through renewable procurement but also in offsetting carbon emissions. For example, Microsoft is retrospectively offsetting all carbon right back to when the company was founded in 1976. Green data centres are growing at incredible rates, and almost every major operator is committed to net-zero. It’s a logical place for Quinbrook to focus.
The tech industry is siting data centres in places where renewable energy is plentiful and cheap. Our Gemini solar and battery storage project in Nevada is selling all its power – 690MW – to the local utility NV Energy. One of their anchor customers for the power was a 200MW hyperscale data centre being built by Google. That was a lightbulb moment for us. Data centres were moving out of metro locations into areas with cheap land, fibre connections, water supply and, most importantly, cheap renewable power. We now have over 20 host sites for hyperscale ‘green data centers’ under development in the US and one here in Australia.
AF: In Ireland, we’re seeing growth in data centres interfering with power markets and supply. So that’s where the optimisers and control businesses, as well as renewable generation and supply, also come into play. In the UK, there are several drivers. One is that the climate is incredibly well suited to data centres – it increases some of the power efficiencies and takes away some of the need for additional energy for temperature control. Secondly, there’s a big push to have greater security over data, so it’s becoming more localised.
It’s important to remember that renewables are intermittent and most data centres require energy reliability 24/7. So, we need to implement multiple sources of power until the full suite of renewable power solutions are commercially feasible.