Amid rising public pressure for environmental, social and governance investing, the trend towards electrification has taken a new twist in recent years. Longstanding renewables funds have been joined by an array of infrastructure investors moving away from traditional asset classes. Simultaneously, oil and gas majors and traditional utilities are looking to rapidly acquire operational renewable energy portfolios and development pipelines.
This rising interest in renewable energy does not just come off the back of a need to fulfil ESG commitments. It makes business sense too. Renewables assets have proven resilient to the market instability caused by covid-19, maintaining consistent returns throughout.
That being said, renewables have not escaped unscathed, and current market conditions are causing investors to think twice before investing. High price volatility, negative power prices and asset curtailment are just some of the issues that have come to the fore. This has called into question the internal rates of return of renewables projects, and particularly those that are merchant-led.
Despite the benefits from investing in renewables infrastructure, fund managers and other renewables infrastructure owners still need to provide certainty around the performance and productivity of their assets to maintain investor confidence. This has given even greater impetus to the race to digitise, and boardrooms around the world are coming to terms with the need to invest – quickly – in systems that afford greater transparency on asset performance, in order to maintain a competitive edge.
Data transparency drivers
Our conversations with infrastructure investors have revealed three main drivers necessitating greater access to data: the business case certainty for renewables; price risk; and growing complexity.
“Fund managers must invest in technologies that give them up-to-date insight”
The need to demonstrate a project’s business case is an industry given, but it is difficult to prove whether a project is consistently performing to expectations without performance monitoring data. Putting into place asset management platforms that can tackle this has benefits for both project owners and investors. Identifying and mitigating the reasons why assets or systems underperform reduces asset downtime, increases returns and enables firms to incentivise operations teams, while holding suppliers of turbines and modules to account.
In terms of price risk, power prices are still rising, driven by rapid electrification across all sectors. This is the real driver behind the shift into a post-subsidy environment – first towards projects backed by long-term power purchase agreements, and ultimately towards ‘fully merchant’ assets designed to take full advantage of power price ‘upsides’.
However, covid-19 has proved that power prices can still be volatile amid energy demand fluctuations. In a merchant market this represents a challenge, and renewables owners will need to stay on top of power price risk, making smarter use of forecasting, asset and electricity price data to protect their projects from power price ‘downsides’.
Forward-thinking asset and fund managers must become more hands-on with their asset management. Fund managers must invest in technologies that provide up-to-date insight into their portfolios’ operations, rather than relying on static reports from teams onsite. Gaining direct insight into assets’ technical performance is undeniably advantageous, and a greater understanding of asset behaviour will inform owners’ ability to acquire assets that match the profile of their portfolio and spread risk.
The race to build larger portfolios has in fact created the third driver for data transparency: complexity. As the renewables market has matured, it has diversified into new technologies and markets. Fund managers and other project owners looking to expand their portfolios now face the problem of integrating these assets, and their corresponding data collection software into their systems – with many producing data in a format that is not compatible with earlier technologies.
External, market-specific factors such as supply constraints, price erosion and availability and performance issues must also be taken into account when deploying capital. To effectively inform divestment and investment strategies, and manage a portfolio’s risk profile, data need to be centralised. Speed matters in a fast-growing market and, without a central data system, renewables project owners and investors face losing out on acquisition opportunities to competitors that can act more rapidly.
To solve these challenges and provide investors with confidence, renewables project owners need to invest in systems capable of providing greater transparency across the financial, commercial and technical aspects of their portfolios.
This has not always been the case, and the role, uses and generation of data have evolved dramatically over the past 20 years. Even a decade ago it was not uncommon in renewables for original equipment manufacturers to restrict access to performance data, nor was access necessarily expected. Data restrictions are starting to be overcome, and the industry has seen a culture shift as digitisation has led to technological innovation.
For example, the ease with which data can be collected and transferred has improved dramatically, in part due to technological developments. As a result, the demand for asset, power pricing and forecasting data from owners and investors has increased and we have seen the development of more sophisticated data collection and transfer systems.
These ‘data hubs’ can draw detailed information from individual assets and across entire projects to establish their productivity and calculate their actual versus expected performance. In this way, underperforming assets can rapidly be identified and the underlying cause mitigated before more serious damage occurs. This ultimately enables project owners to minimise downtime and maximise long-term revenues by establishing preventative maintenance schedules.
With portfolio expansion a priority for owners and investors, versatile asset management platforms can also aggregate data from any renewable technology source and create market-specific risk models for external factors such as electricity prices. Portfolio owners and investors can then make more informed divestment and investment decisions.
A long road to full automation
Despite all of these benefits, the renewable energy sector’s digitisation journey is by no means complete. Project owners and infrastructure investors that invest early in new technologies will be likely to gain a first-mover advantage in the energy market of tomorrow.
Platforms that can automatically control assets based on electricity prices in order to permanently maximise revenues have yet to be developed. Though widespread commercial deployment of these platforms is some way off, full automation is the goal and renewables asset owners will need to invest in this technology to remain competitive.
The green transition is in some respects tied to the growth in digitisation. It is crucial that fund managers and other renewables project owners invest in digital tools that provide greater data transparency and certainty for investors to encourage future investment. The companies that will be most successful in gaining the backing of investors and building large portfolios will be the ones that can use data and technology now to demonstrate their ability to mitigate risk and maintain stable returns.
Jonas Corné is chief executive of Gothenburg-headquartered Greenbyte, a data software developer focused on renewables