This article is sponsored by Quinbrook Infrastructure Partners
Building renewables infrastructure from the ground up allows managers and their investors to control the cost and sustainability of projects every step of the way. Quinbrook Infrastructure Partners co-founder and managing partner David Scaysbrook explains why better environmental, social and governance choices make for better investments.
What’s the attraction of greenfield versus brownfield renewables infrastructure?
When you create investments from scratch, you can better control the key inputs in the value chain – site and equipment selection, procurement and critical development decisions. You can avoid paying away a premium to others for access to asset opportunities.
In our experience, the relative downside risk from unsuccessful projects is often significantly less than the risk of overpaying for an asset in an acquisition – particularly in a competitive auction. Our diversified greenfield strategy has consistently offered returns that in our view are superior to what we are seeing in the M&A market.
The analogy we use is that it’s like baking a cake. You know what ingredients go into it and you control how it’s baked, so you have a better idea of how it’s going to taste. For example, you can choose to use tier 1 equipment, or you can use lesser quality equipment and cut corners.
If you take the long-term view – as we do – then you choose top-tier equipment that will go the distance. That really makes for a higher value project, whether you are keeping it, generating cash from it or selling it. We subscribe to building it right from the get-go.
How do the different greenfield markets differ?
There are some significant differences, mainly because of historical interventionist policy. For Quinbrook, the most attractive market for greenfield development at utility scale is the US, whereas at a distributed scale it is the UK and Australia. Ultimately, these are opportunity-rich markets.
In Australia, we have avoided utility-scale renewables that supply into the wholesale power market. That is because of dysfunctional regulatory and policy settings and the spectre of competing against government-owned entities and aggressive government intervention. Instead, we pursue a distributed scale strategy, investing behind the meter – so on a much smaller scale but more insulated from policy intervention risk in the wholesale power market.
The US is really 50 markets because it is driven by state policy. Being so large and fragmented, we see opportunities everywhere in the US. We call it finding truffles – we have been able to find enough truffles so far, and we continue to find them. There is a mix of policy incentives and policy landmines, but they are fairly well signalled.
The UK has oscillated over the last five to eight years between being opportunity-rich in new renewables to being somewhat lean in an equity returns sense. The last few years have not been so prolific, but with the net zero target now introduced, the closing of coal-fired power and Brexit, we are entering a new and more interesting phase for UK renewables.
How do you balance the short-term economic impact of covid-19 against the long-term outlook for renewables infrastructure?
Covid has had a dampening effect on the near-term power price and demand outlook. More indirect is its impact on corporate profitability and the availability of tax equity in the US, which is fundamental to wind and solar in particular. That is the single biggest challenge to US renewables build out in the near term.
It’s essentially a fiscal policy incentive issue, so the industry is waiting for the election result. The Democrats have signalled their intention to introduce tax credits reform, which could fix the issue.
Longer term, the fundamental drivers for new renewables build are really enduring in the US. We are at a tipping point where we are well into ‘subsidy-free’ renewables build. More importantly, we are going into an industrial renaissance largely driven by very low-cost renewable power that goes beyond past interpretation of demand growth.
We are seeing new manufacturing and industrial sub-sectors emerge that will create their own demand for renewables – like green data centres, electrification of vehicles, green hydrogen and green steel. These new silos generate their own demand profile for renewable energy, and that is developing because the energy is cheap and the cost is stable over the long term.
Where do you see the investment potential in battery technology?
Historically, electricity had to be consumed as it was produced. Therefore, its price was determined almost instantaneously through the interplay of supply and demand. There is a peak market and an off-peak market, and that is really the way it has been structured for decades.
With batteries you can shift electricity into periods of higher or lower market value. That changes what electricity is worth at a given point in the day or week, even seasonally. In a nutshell, batteries are going to change the pricing and value of electricity – when it is produced, when it is stored, when it is released. Along with solar, it is the most significant shift in power markets since the Second World War.
In your view, how sustainable is the technology involved?
It is basically the same technology we have been using for years in portable devices. Just because we are using lithium today does not mean it is the best answer – it is just the way the industry has evolved. However, it is cost-competitive now and it is a game changer. And we believe it will spawn a lot of innovation – different battery chemistries, different applications. Over time, we think we will see six or seven different battery chemistries dominate different segments of the various storage markets.
There are well-known issues around cobalt and the sourcing of cobalt, but the industry is adapting very quickly and moving to products like lithium phosphate and nickel. So, there are definitely questions about the sustainability of the current solutions, but things are becoming safer, and they will become cheaper and more fit for purpose. We are really at the dawn of a new industry.
Where are the risks in renewables infrastructure?
Let’s forget for a minute that it is renewables specifically – you are investing in energy supply assets in power markets. And power markets are becoming increasingly commoditised. So, you are in an exposed commodity position and at risk from the value of electricity being materially lower at a point in the future. That is a very significant risk which is hard to mitigate, so you need to secure long-term contracts and have a strong competitive positioning.
The second one is implicit redundancy risk. Today’s solar module is not going to be as great as tomorrow’s and it is not going to be as cheap. And what about the impact of power sources like green hydrogen?
Contracts not only protect you from price volatility, they also protect a new project from redundancy risk because they are sharing that risk with the customer under a long-term contract. These days, you have got to think about the cost of solar halving again over the next five years, and the cost of batteries being reduced by a third – these things are fundamentally shifting the value of electricity in ways that not even the greatest forecaster can predict.
Do you have to draw a line between profitability and sustainability?
Not in our business. For nearly three decades, we have been creating jobs, we have been mitigating carbon, we have been creating local community benefits and making money for our investors. There has never really been a compromise for us between doing something that is fundamentally sustainable and making profits.
We have consistently made returns for our investors. And we have always had the benefit of creating incremental impact outcomes. The difference these days is that we are measuring it forensically and reporting it to our investors because they want to know.
So, do you assess all decisions for their ESG impact?
Because we are building new infrastructure, we have lots of choices to make. This really goes to the heart of our ESG principles. We can either choose a contractor with a bad track record on employee treatment and health and safety. Or we can choose a contractor that cares and implements practices that respect and protect its workforce. We ask those questions and we do that diligence.
For example, we discovered once through our diligence that a solar module manufacturer had been prosecuted by the environmental protection agency in their country – which is not known for being particularly environmentally aware – for poisoning downstream villages from toxic release into the river system and water supply. We chose not to buy their equipment and chose a company with a better track record on environmental stewardship, even though the equipment was more expensive.
We do not want to profit a supplier’s P&L with our investors’ capital if they are not paying due regard and acting as a good corporate citizen. We also have to be aware of the reputational risk to us and our investors.
How engaged are investors in decision-making?
Some more than others – but it is increasing at a high velocity. Three years ago, we were creating answers to pro forma questions about ESG and sustainability policies that we had unilaterally authored but were not being asked. But there is now a consistent lexicon developing among investors around the diligence of managers’ ESG and sustainability practices.
We receive questions not just during the diligence phase when we are marketing a fund, but also ongoing questionnaires from existing investors about our policies and procedures. We recently received a modern slavery questionnaire from one of our investors – the first time we have ever received one.
Fortunately, we are in reasonable shape with our policies and procedures. It is genuinely a groundswell and we expect it to gather momentum as investors exercise their power of choice, namely: who should I choose to manage my capital?