Renewables roll-out forcing incumbents to change tack

The next phase of growth for the sector will see investors scale-up assets by building high-yielding portfolios, according to industry experts.

While country leaders were striving to secure a legally binding agreement at Paris's climate conference, a specialist panel at Infrastructure Investor’s Global Investment Forum last week was discussing the challenges facing the energy industry's future. 

Investors had one clear message for the audience: helped by technological advances, new technologies are becoming an increasingly economical proposition – with zero fuel costs adding to the mix by generating attractive marginal profit. 

Gautam Bhandari, a partner at New York-based I Squared Capital, pointed out that translating this into a boom in renewables would depend on how regulators balance the demands of clean energy with the interests of existing power companies.

Raymond Fung, chief executive officer (CEO) of Shenzhen-based CGN Private Equity, backed Bhandari's point by discussing the case of Germany. 

Since the Fukushima nuclear disaster in 2011, Germany has been actively replacing nuclear energy with renewable power generation, Fung noted. However, he argued that the transition has created a volatile power market and taken a toll on energy companies. 

E.On, Germany’s biggest utility, reported a quarterly loss of €7.25 billion in November – its biggest-ever. It has since decided to split the company into a renewables and grid service business unit, on the one hand, and gas trading and conventional power business, on the other.  

RWE, the country's second-largest power entity, is meanwhile creating a new separate subsidiary to manage its 3.5 gigawatts of renewable electricity capacity and 550,000-kilometre grid. 

Operational hydro and geothermal power plants, Fung remarked, could provide relatively stable electricity supply. But construction costs of such projects remain very high, he noted. “Popular options like solar and wind are very destructive to the grid, due to their unpredictable supply patterns and current frequencies. Grid operators hate them.” 

“In North America, wind and solar have become very viable type of power sources,” echoed Bradford Nordholm, CEO of US-focused Starwood Energy Group. “However, when the power gets to the centralised grid, it becomes a challenge as it takes a lot of resources to maintain a stable performing grid.”

He argued that the energy market is getting more competitive than ever. With government initiatives and policy supports, power generation companies are ‘getting on board’ by shifting from coal to renewables and gas. 

Regulators, public pressures and corporate social responsibility have all contributed to make renewables a significant part of the energy infrastructure space, Bhandari concluded. As far as private investors are concerned, he said, the industry's next phase will be to consolidate assets into portfolios generating stable yield.