Vauban: More to the energy transition than renewable energy

This article is sponsored by Vauban Infrastructure Partners

How has the pandemic impacted the energy transition agenda?

The covid pandemic and subsequent lockdown measures around the world have had a dramatic impact on our daily lives and on the economy, of course. But any direct impact on energy demand, and therefore carbon emissions, has been short-lived. Demand for energy has quickly rebounded so, in that sense, the long-term impact will be limited.

However, the rescue packages that governments everywhere are putting in place will undoubtedly accelerate the energy transition. Indeed, at Vauban, we have conducted a review of the long-term implications of covid on our entire portfolio, in conjunction with academics. The conclusion we have reached is there are two key mega-trends that will be significantly amplified, affecting every asset we own. The first is digitisation. The second is the energy transition.

The desire to ‘build back better’ that governments, globally, are articulating will be a profound legacy of the pandemic. But those governments do not have the financial capacity to achieve those ambitions alone. Private capital will have a vital role to play in driving the global recovery and investing in the energy transition.

And will that accelerated energy transition create attractive opportunities for investment in renewable generation?

Mainstream renewable energy generation projects – in other words, wind farms and solar farms – typically no longer match the risk/return profiles that we are targeting. Competition is extremely high and IRRs have, inevitably, therefore come under pressure.

However, we see interesting opportunities in waste-to-energy and biomass. We also look to other aspects of the energy transition, seeking to partner with state-owned utilities and industrials that lack the firepower to address all the changes required to meet energy transition objectives.

Which sectors are particularly interesting right now?

Waste, in general, is an important theme. In addition to waste-to-energy investments, we target projects focused on the waste and water sectors more broadly, including recycling and water treatment. In fact, we formed a significant partnership with Suez last year, focused on financing projects in these industries.

We have also completed a number of district heating deals that, again, meet that profile of partnering with incumbents to provide much-needed capital to support the energy transition. For example, we have invested in a Norwegian district heating and cooling asset that uses highly efficient and environmentally friendly pumps, called Oslofjord Varme. We have completed a district heating deal in Italy as well.

Case study: Proxiserve

Initial investment: March 2019

Proxiserve is a leading player in the resilient and growing French market of smart metering and energy services. It provides installation, maintenance and sub-metering services for heating and water equipment in joint properties and public collective housing in France. Proxiserve also installs and maintains heating systems and boilers – as well as electric vehicle charging stations, with more than 70,000 installed to date. Finally, through its Edenkia brand, the group provides energy solutions, electricity supply and sub-metering to large tertiary sites.

The company is expected to grow steadily in the coming years, benefiting from the political support for energy transition devices and the adoption of the energy transition law requiring the installation of heat meters in collective buildings.

Another key theme for us, meanwhile, is smart metering. Smart meters and sub-meters are important for reducing energy consumption and carbon dioxide emissions. We invested in Proxiserve, a French player in heat and water metering. Proxiserve is also involved in domestic EV charging, which leads me to the final area of the energy transition where we seek out investment opportunities – clean mobility.

We have long invested in clean mobility through rail transportation, including metros, tramways and high-speed lines. We now expect our focus on both passenger and freight rail to increase. We believe the sector is benefiting from real tailwinds as air transport, in particular, falls out of favour.

We also see it as a mitigant to road transportation. At the same time, we continue to look at developments in EV charging.

Overall, I would say that, as a long-term investor, pretty much everything that we look at is inevitably related to the energy transition in some way. But in the current market, we believe investing in the waste and water, smart metering, district heating and clean mobility sectors better meets our objectives and the objectives of our investors than investment in renewable energy generation itself.

Competition in the renewable energy sector is intense, but how would you describe the competitive dynamics around these other energy transition assets?

There has certainly been increased pricing pressure in certain subsectors, for example in the Nordic utilities space, where we already have exposure. One way in which we are able to mitigate that risk, therefore, is to benefit from the platform that we have already established, seeking out add-on acquisitions rather than targeting new independent assets.

Another important differentiator, meanwhile, is our stakeholder-centric investment approach – our ability to partner with industrial companies and the public sector, just as we have with Suez in France and with some of the publicly owned Nordic utilities.

Finally, because we are a long-term investor, with 25-year horizons, we are able to avoid some of the returns pressure that has crept into more heated parts of the market, by looking at other areas of the energy transition that some have deemed less attractive in the short term due to covid, such as clean mobility.

What is your approach to assessing and mitigating regulatory risk?

Regulatory risk has clearly played an extremely important role in the evolution of the renewable generation sector, where subsidies were pervasive until a more recent shift towards a merchant environment. But the areas where we operate, such as clean mobility or waste-to-energy, for example, do not have the same sorts of regulatory exposure on pricing.

In these areas, the regulatory environment progressively provides incentives to the energy transition without heavily subsidising the asset. Of course, we are extremely careful about assessing regulatory risk, but the pressures are not the same as for the wind and solar generation industries.

What are you seeing in terms of the appetite for energy transition assets among underlying investors?

The appetite from underlying investors is definitely increasing and has been since the start of this journey, now over a decade ago. There is no doubt that investing behind environmental themes is important for the pension funds and insurance companies that commit to our vehicles, as it has become increasingly front-of-mind for their own stakeholders. And just as governments have increasingly embraced the role that the public sector must play in driving the transition, there is also a growing emphasis on the role of the financial services sector.

I would add, however, that the energy transition has always been integral to our strategy. That goes back to us being a long-term investor, focused on the resilience of our assets over time. It has not taken a change in public sentiment, increased regulatory pressure or demands from our limited partners for the energy transition to become part of our central investment ethos.

What new energy transition opportunities lie around the corner?

We expect the intensity of the energy transition to continue to increase over the next decade. We also expect the scope of the energy transition to broaden. No industry or asset will remain untouched, particularly in the infrastructure arena.

But, at the same time, it is important to remember that there is still a long way to go. Only around a third of the technology required to meet 2050 targets even exists today – two thirds of the necessary technology has not yet been developed to the point that it is ready to be deployed at scale.

Emerging technologies including hydrogen and carbon capture systems will have a critical role to play. Indeed, we are already starting to see opportunities, for example to include carbon capture in waste-to-energy assets.

Case study: Oslofjord

Initial investment: April 2018

Oslofjord Varme is a leading independent Norwegian district heating company that builds, owns and operates heating and cooling systems in the Greater Oslo area. With a production capacity of around 308MW, the company utilises highly efficient and environmentally friendly heat pumps that produce around three units of heat per unit of electricity consumed.

Vauban’s investment in Oslofjord Varme has been made through a joint venture alongside Infranode and Kommunal Landspensjonskasse. Through its Core Infrastructure Fund II it is investing in a 25-year ownership horizon and has 42.5 percent stake in the company. Oslofjord Varme also holds joint-venture interests in Norwegian district heating companies Drammen Fjernvarme (50 percent) and Fredrikstad Fjernvarme (57.5 percent).