energy transition report - … · how to invest in storage ... first energy storage fund in 2016...

Successful 60+ successful transactions in 4 funds – every project „on track“, no write-offs International 15 nationalities and 30 languages in the investment team Innovative first mover in energy efficiency and energy storage* As experts for infrastructure investments along the value chain of the energy transition, we offer our clients not only economically attractive, but also ecologically sustainable investment solutions. We always combine innovative strength with a conservative approach. Today we avoid overpriced bids in tenders for wind and solar parks and focus on off-market transactions, structuring services and new sectors such as energy storage or off-shore wind or the Europe-wide smart meter rollout. We would be pleased to present our investment strategy to you in a call or meeting. * First Energy Efficiency Fund in 2012, first Energy Storage Fund in 2016

Your partner for sustainable

infrastructure investments

• wind-repowering • offshore-Wind • energy storage • energy efficiency • smart meter rollout • e-mobility charging infrastructure

SUSI Partners AG I Zurich – Luxembourg – Frankfurt – Zug – Singapore I +41 44 386 98 00 I susi-partners.ch

EDITORIAL

1INFRASTRUCTURE INVESTOR ENERGY TRANSITION

For subscription information visit www.infrastructureinvestor.com

Senior Editor Bruno Alves +44 207 167 2031 [email protected]

News Editor Kalliope Gourntis +30 6937 230 121 [email protected]

ReportersNia Tam+852 2153 [email protected]

Jordan Stutts+1 646 214 [email protected]

Zak Bentley+44 20 3862 [email protected]

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Subscriptions and reprints Ian Gallagher (Americas)+1 646 619 [email protected]

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Director, Digital Product Development Amanda [email protected]

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Chief Executive Tim McLoughlin [email protected]

Managing Director – Americas Colm Gilmore [email protected]

Managing Director – Asia Chris Petersen [email protected]

IN THE Asia section of this report, starting on p. 28, Macquarie Capital’s John Walker calls renewables Asia’s “biggest [investment] opportunity of the century”. He’s spot on and, like-wise, it’s no exaggeration to call the ongoing energy transition the biggest global investment opportunity of the century.

Historians will look back on this as a pivotal period, when the world weaned itself off fossil fuels and started on a sustainable energy path – though whether that will be enough

to counteract the worst effects of climate change remains to be seen…

What is entirely certain, is that the energy transition is, at heart, very much an infra-structure story – one anchored by renewable energy genera-tion. Familiarity with the latter, however, should not breed las-situde. As you can read in our roundtable, beginning on p. 14, renewables are undergoing important changes, as they move

from feed-in tariffs to power-purchase agreements (which we cover in more detail on p. 8) and merchant expo-sure. They are also cheaper than ever, yet not quite ready to take over base-load generation duties – although InstarAGF makes a strong case, start-ing on p. 40, for the baseload abili-ties of bioenergy. But as KGAL Invest-ment Management underlines on p. 20, renewables are investments that need to be managed. The idea that you can just buy well and then expect your renewable assets to generate a

steady revenue stream is pure fiction.That’s important to keep in mind

because it applies to pretty much every other investible asset that makes up the energy transition. And while renewables are, in a way, very much a known quantity, storage and energy efficiency investments – which we detail over p. 6-7 and 18-19, as well as in our roundtable – are very much not. Storage, in fact, is the subject of hot debate as to its investibility, with frontrunners such as SUSI Partners and Foresight Group already busy clinching deals, while the majority of industry participants sit on the side-lines waiting for some of the sector’s kinks to be ironed out.

But investibility is not just about sectors, it’s also about different mar-kets. With the help of Mirova (p. 24), Partners Group (p. 31), IFM Investors (p. 36) and Actis (p. 43), we bring you expert views on Europe, Asia, Australia and the world’s developing markets. We also did our own digging on how Australia’s National Energy Guarantee threatens to affect the risk profile of the country’s renewables, which you can read about on p. 34.

Whether you are already heavily invested across the whole energy tran-sition spectrum, or are a renewables investor wanting to dip your toes into other sectors, or maybe preparing to take the plunge for the first time, you will find much to inform you over the next pages.

Enjoy our inaugural Energy Tran-sition report,

Bruno Alves

EDITOR’S LETTER

BRUNO ALVESINFRASTRUCTURE INVESTOR SENIOR EDITOR

A historical change

e: [email protected]

ISSN 1759-9539 JUNE 2018

It’s no exaggeration to call the ongoing energy transition the biggest global investment opportunity of the century”

Energy Transition

Infrastucture Investor

4. By the numbersFrom unlisted fundraising, to installed capacity, to some recent landmark deals, we bring you some key energy transition stats

6. Beyond renewablesSUSI Partners argues the energy transition value chain is the perfect antidote to the current yield compression

8. Power to the corporatesCorporate tech giants have brought a new layer to the renewable energy market, although significant barriers remain

12. Roundtable: Inflection pointRenewables have crossed the Rubicon when it comes to cost of generation and, increasingly, exposure to power prices. Five of the sector’s key managers discuss how the asset class’s risk profile is changing, why it’s still very much dependent on government support and how storage is still more of a promise than an investment reality

18. It’s all in the service agreementDespite a clear need and high growth potential, investors have not backed the energy storage sector in large numbers, partly due to a lack of standardised contracts

20. The importance of proactive managementKGAL argues that, while buying well is important, managing well holds the key to creating long-term, sustainable value from assets

24. Contributing to Europe’s energy transitionMirova talks about the firm’s core strategy, its

commitment to the energy transition, and the sectors it finds exciting

26. ‘Opportunity of the century’While the $5bn Equis Energy deal may not be easily replicated and each jurisdiction presents its own set of challenges, renewables and energy transition in Asia probably offer the biggest opportunity globally

31. First-mover advantagePartners Group explains why half of the firm’s renewables portfolio is based in the region

34. Wong policy, right time?Australia’s National Energy Guarantee made significant progress in April. But questions remain about whether it is the right policy and what impact will it have on investment?

36. A sunny outlook for Australia’s renewablesIFM Investors talks about Australia’s renewables sector, what is making it attractive for investors, and whether there is any future for fossil fuel generation in the Australian market

40. A source of renewable ‘super infrastructure’InstarAGF makes the case for bioenergy, explaining why its profile is ‘compelling’ both from an environmental as well as an economic perspective

43. Growth markets offer ‘the next generation of upside’Renewables are a huge part of the infrastructure story in growth markets, but, contrary to investor perception, these markets are offering a healthy supply of lower-risk brownfield assets

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4 INFRASTRUCTURE INVESTOR ENERGY TRANSITION

UNLISTED FUNDS TARGETING renewa-bles – which to date make up the lion’s share of energy transition assets – has been increasing steadily, bar a dip in 2015. That has been accompanied by a healthy increase in average fund size, as the number of renewables funds have been decreasing, with LPs concentrating larger amounts of capital in the hands of managers with a successful track record, mirroring what’s happening in the larger unlisted infrastructure fund universe. So far, 2018 is off to a strong fundraising start, following the €3.5 billion final close of Copenhagen Infrastructure Partners III. The vehicle – which invests predominantly equity but can also do debt – should help make 2018 the best renewables fundraising year ever, considering the amount raised by it is roughly equivalent to 78 percent of the total raised for renewables-focused funds in 2017. n

From unlisted fundraising, to installed capacity, to some recent landmark deals, we bring you some key energy transition stats

STRONG START

CIP III, the only renewables fund closed in 2018*, has raised almost as much capital as was raised for the sector in 2017

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Capital raised Number of funds closed

1.79 2.61 3.52 2.87 4.69 5.40 4.21

Source: Infrastructure Investor

*Valid as of 23 May press date

Number generator


DATA

350

300

250

200

150

100

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02012 2013 2014 2015 2016

New

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$b

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112.5

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6.7

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6.4

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3.5

A TEMPORARY BLIP?

Global renewable energy investment had been steadily increasing until 2016

Source: IRENA, BNEF, Frankfurt School-UNEP

Note: Investment volume adjusts for reinvested equity. Total values include estimates for undisclosed deals

Solar Wind Biomass & waste-to-energy Small hydro

EASTERN POWERHOUSE

Asia, led by China, outperforms all the other continents healthily when it comes to global renewable energy capacity (2017)

Source: Infrastructure Investor

MOVING ON UP

As the number of unlisted funds targeting the sector decreases, average fund size has been increasing

$201m $207m $239m $276m $540m

2013 2014 2015 2016 2017

Source: IRENA

North America

347,635mw

South America

202,120mwAfrica

42,139mw

Eurasia

96,326mw

Asia

918,655 mw

Oceania

27,155mw

Middle East

18,920mw

Central America and the Caribbean

13,801mw

Europe

512,348mw

Danish powerAt €3.5 billion Copenhagen Infrastructure Partners III is now the largest renewable energy fund ever raised. The number of LPs in the fund more than doubled to 42 compared with its predecessor

$5bnThe GIP-led acquisition of Equis Energy

– which has 1.9GW of operational, construction and shovel-ready renewables assets across APAC – was billed as the “the largest renewable energy generation acquisition in history”

2xDenmark’s Industriens Pension spent just under DKr 600 million ($99.7 million; €80.6 million) investing in wind projects in Japan, India, Thailand and the Philippines in 2012-15, netting DKr 1.2 billion from selling them earlier this year

40GWS&P expects storage capacity to increase to more than 40GW by 2022


VALUE CHAIN

WE’VE BEEN LIVING with low interest rates for some years now and let’s be honest – yield compression is omnipresent and has reached all traditional asset classes. But this is not a problem without a solution for those willing to be innovative and go where other inves-tors don’t yet roam. The challenge? It’s not easy being innovative and tackling new asset classes is perceived as risky.

With this short article I want to argue the case for new asset classes within a by now well-known existing one – energy efficiency

retrofits and energy storage investments as part of the larger asset class of energy tran-sition infrastructure. Finally, I want to pro-vide an outlook on the coming investment opportunities along the value chain of energy transition.

Today, if we are not overly optimistic, you can expect a return of between 5 percent and 7 percent in most Western European countries when buying an operational wind farm or solar park. Even if you go offshore and invest in one of the large wind farms in

the sea, returns max out at 7 percent. Of course, you can score some additional

basis points by ‘believing’ in higher electric-ity prices in the long-tail of your investment, but I would argue that electricity will not be more expensive in the future than it is today, and that’s partly because the levelised cost of energy of new renewable energy assets continues to fall.

We also see fund managers buying at P50 estimates but let me be straightforward on this: at SUSI, we always calculate at P75 and over the past nine years, on average, we were 0.6 percent above our predictions. That’s a great result, but it shows that the data set is not yet complete enough to calculate with anything less than P75.

ENERGY EFFICIENCY: HIGH YIELD/LOW RISKSo, where can investors get a more attractive risk/return profile? Let’s talk about energy efficiency retrofits. We introduced a business model in this sector four years ago and since then have invested more than €200 million of equity successfully. We’re not getting double-digit returns, but our investments come with an average investment-grade rating of BBB+.

As such, we are currently preparing our second fund and there still isn’t any serious competition around. Why? Because provid-ing capital, be it equity or debt, is not good enough. What is needed is a contracting model with off-balance-sheet financing. Sound complicated? Well, it’s not, but only once you have gained the necessary experi-ence. In energy efficiency, every deal is dif-ferent and scalability and project size could be higher. So, it’s not a good environment for direct investments, but for funds it’s scal-able enough.

Here’s how our business model works:

Beyond renewablesTobias Reichmuth, founder and chief executive of SUSI Partners, argues the energy transition value chain, where the Swiss firm has invested €1bn, is the perfect antidote to the current yield compression

FACILITY/ INDUSTRY OWNER ESCO

SUSI ENERGY EFFICIENCY

FUND II70% energy savings: €2.8m

5% ENERGY

SAVINGS:

€0.2M

25% ENERGY

SAVINGS: €1M

retrofit of building

ANNUAL ENERGY

COSTS: €15M

REDUCED ENERGY

COSTS: €11M

TOTAL SAVINGS:

€4M

INITIAL

INVESTMENT: €16M

GUARENTEED

MINIMUM SAVINGS

INVESTS €16M &

GETS BACK €28M

OVER 10 YEARS

How energy efficiency investments work

Source: SUSI Partners

INFRASTRUCTURE INVESTOR ENERGY TRANSITION 7

VALUE CHAIN

an infrastructure owner (public or private) wishes to upgrade its infrastructure (e.g. street lights, buildings, technical facilities) but wants to do so without using its balance sheet. Leasing or bank loans still would have to be shown on the balance sheet, so they are not an option.

To achieve an off-balance-sheet structure, a fund provides 100 percent financing for the needed measures and takes the installa-tion (e.g. the street lights, a heating/cooling system, etc.) on its own balance sheet. The fund then enters into a service agreement with the infrastructure owner (e.g. street lighting) and receives part of the resulting savings over a pre-defined period.

The nice thing about this business model is that the savings are guaranteed by the technology partner. Therefore, an energy-efficiency investment has no technology risk and only takes counterparty risk (e.g. the city which needs to share the savings result-ing from the new LED streetlights over the next 10 years).

For the fund, the long-term contracting agreement allows for stable annual distribu-tion; for the infrastructure owner, it means energy and financial savings without any capital or balance-sheet exposure and the technology partner is happy selling a project with a 10-year maintenance contract. Last

but not least, the CO2 savings are high and easily calculable – it’s a truly ESG-friendly impact investment.

ENERGY STORAGE: RETURNS LIKE 2008 SOLARAnother energy transition area where com-petition is not yet too fierce is energy storage. Solar and wind farms do not necessarily pro-duce electricity when it is needed, so adding decentralised storage capacity to the renew-able energy mix is a must.

Before we launched our Energy Storage Fund, we performed a deep-dive together with ETH Zurich, Switzerland’s version of MIT. The research resulted in the SUSI Energy Storage white paper and has guided our investment strategy in energy storage since then.

What we found allows for excellent invest-ment opportunities: various business models generate stable annual distributions and are already today cheaper than fossil-fuel solu-tions such as diesel generators or gas ‘peaker’ plants, which only run some days per year.

Thanks to the fast roll-out of electric cars, significant battery production capacities have been and are being built. The learning curve and economies of scale make large industrial-scale batteries affordable. Most important, though, is that large players such as Panasonic,

NEC or GE provide strong lifetime warranties on batteries and other mature energy storage technologies. With this, the technology risk is manageable and with capacity contracts you can plan cashflows far ahead. Which is why we think decentralised energy storage installations should already be considered infrastructure investments today.

So far, banks are not (or are only reluc-tantly) providing project debt for energy storage projects and this is good for us inves-tors. We are now in a position where we can negotiate double-digit project returns with excellent downside protection without debt financing – and it’s obvious this represents potential upside in the future once banks decide to enter the market. We see relatively few investors in the market and no specialised ones (except for SUSI, of course). This allows early investors to pick the most attractive pro-jects from a risk/return perspective and to build a track-record and network ahead of future competitors.

A BOUNTIFUL VALUE CHAINWhat we currently see happening in the energy transition space is nothing short of exponential growth.

Over the next 10 years, 50 percent of new cars will be fully electric (thanks again, Elon Musk), nearly all electricity meters will be replaced by smart meters (much supported by an EU directive), and a smart grid will be rolled out. Next to this, behind-the-meter solar will power factories together with local batteries and wind parks built between 2000-06 will experience a repowering with 3MW turbines instead of the old 400KW vintage ones.

For institutional investors, all of this means attractive investment opportunities. Over the next decade, massive investments in smart meters and e-charging infrastruc-ture will be needed and billions will go into the repowering of wind parks and the smart grid. And did I mention that we can use Blockchain technology for the efficient asset-management of all this?

It’s an exciting time to be a player in the energy transition. Let’s finance it together! n

ANCILLARY SERVICES

POWER QUALITY/FREQUENCY

REGULATION

OPERATING RESERVE

ISOLATED AREA SUPPLY

“BLACK START” SERVICES

T&D DEFERRAL/BULK STORAGE

RENEWABLES/PEAK SHAVING

LOAD LEVELING

The storage value chain

Source: SUSI Partners

8

FEATURES


The state of Iowa is typically known as the platform for triumph for any aspiring US presidential candidate. Yet

the battleground state has also been the springboard for the success of the corpo-rate power purchase agreement market since Google arrived in 2010 to complete a 20-year PPA for NextEra Energy’s 150MW Story County II wind farm.

What was then a niche move in the energy market in Iowa by a search engine giant has now become a key cog in the machine for renewable energy asset owners globally, providing long-term stability against merchant power prices.

Google and fellow pioneer Walmart were soon joined by other tech giants such as Apple, Facebook and Microsoft, with the sector’s combined data centre and corpo-rate responsibility requirements edging them towards procuring the US’s growing renewable energy capacity. Within a few years, corporate PPAs had gone from pow-ering just a few hundred megawatts of US renewables to more than 4GW, according

to Bloomberg New Energy Finance. While the tech titans and the US remain the leading drivers of the market, corporate PPAs are now used to power Mars bar factories and IKEA furniture stores. It’s not just in the US either: Europe signed more than 1GW of PPAs last year, India has signed almost 3.2GW since 2008 and 2017 saw the emer-gence of such deals in Burkina Faso, Eritrea and Namibia, BNEF says.

GROWING PAINSDespite a slight dip in the volume of cor-porate PPAs signed in 2016, this remains a booming market. While Google and

Walmart set the wheels in motion almost a decade ago, some 76 percent of deals have been signed since 2015, according to BNEF.

However, this is still largely taking place in the US, despite the progress made else-where. The renewables industry has called the European Commission’s Renewable Energy Directive “insufficient” in helping to promote corporate PPAs; in fact, it remains a “grey area” as to whether corporate PPAs are even legal in Germany.

The UK is one market where progress has been achieved with corporates, albeit to a limited degree. The listed Foresight Solar Fund, which has a UK portfolio of more than 500MW, secured its first corpo-rate PPA in the country last year for the 72MW Shotwick project, believed to be the UK’s largest operating solar site, although Ricardo Pineiro, who has led Foresight’s UK solar investments since 2011, expressed caution as to it being a market leader.

“It was an interesting one,” he muses. “The solar park is right next to a [Finnish paper mill group] UPM facility and that helped to enter [into] that corporate PPA

Corporate tech giants have brought a new layer to the renewable energy market, although significant barriers remain. Zak Bentley reports

Power to the corporates

I would say there are still more generators looking for corporate PPAs than corporates willing to write them” Pineiro

Mirova, multi-specialist infrastructure asset manager

Committed to sustainable infrastructure investing

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Discover more at www.mirova.com Follow Mirova on

With over 15 years’ experience in managing essential infrastructure and renewable energy assets, Mirova strives to provide institutional clients with long-term investment opportunities in greenfield and brownfield projects across Europe, while supporting the sustainability of local economic, community and environmental development. Because sustainable development starts with responsible investment.

Promotional document. Investments in infrastructure are subject to loss of capital risk

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10 INFRASTRUCTURE INVESTOR ENERGY TRANSITION10

PPAs

because we’re literally next door. It’s not your traditional fleet PPA. I would say that was more opportunistic than anything else, rather than a pure corporate PPA. We do expect the market to pick up considerably in the upcoming years.”

Where the bulk of European achieve-ments in this market have been made is in Scandinavia. Last year, Norwegian alu-minium group Norsk Hydro signed up to buy the power from GE and the Green Investment Group’s 650MW Markbygden wind farm, in Sweden, the largest corporate PPA in the world. A more unique structure in Norway also emerged in 2017, through which Alcoa, another of the country’s aluminium groups, agreed a PPA for the 281.4MW Nordlicht wind farm, owned by Siemens Financial Services and German pension group Ärzteversorgung Westfalen-Lippe. The contract was for the first time guaranteed by the Norwegian Export Credit Guarantee Agency, a crucial mecha-nism to bring the deal to an AAA rating, with Alcoa at the time rated BB-.

Foresight last year signed Spain’s first corporate PPA and is close to signing a second and Pineiro explains the fund wants similar guarantees for its own deals.

“We are trying to identify corporates with attractive credit ratings,” he says.

“We’re a little flexible in markets like Spain but definitely investment-grade. Also, we always have to do a bit of analysis on the strength of the company’s balance sheet.”

POWERING AHEADIn a renewables industry where subsidy-free is on its way to becoming the norm, corpo-rate PPAs will be increasingly looked for as a way to satisfy the previous guarantees offered by subsidies. However, key questions remain about the structure of such products.

“More liquidity and standardisation will help,” says Marcel Galjee, energy director, industrial chemicals at AkzoNobel. “The

duration of the contract plus the underlying commitments and securities are important to reach an agreement in the negotiation process. This is where the industry can play an important role; we are used to longer contracts and therefore able to give a secu-rity to the developers and financiers.”

According to Pineiro, though, this is easier said than done.

“Corporate PPAs are more challenging in the sense that each corporate might have their own requirements,” he explains. “They have their own objectives they are trying to achieve and that makes it a more complex process. Also, at the moment I would say there are still more generators looking for corporate PPAs than corporates willing to write them. It’s a new market really that we’re trying to create.”

That’s not to say that corporates cannot work together in this area. One of the most noteworthy innovations Europe has brought to this market is the Dutch Wind Consor-tium comprising AkzoNobel, DSM, Google and Philips, working together to jointly negotiate PPAs.

“[Corporates] could learn from and strengthen each other as we have seen in the consortium approach,” says Galjee. “We all bring our expertise and create more oppor-tunities by joining forces than competing.”

The approach sounds ideal. The practice might take a period of fine-tuning as the world plays catch-up with the US. n

A GROWTH MARKET

Generation capacity signed each year as corporate PPAs

Americas EMEA APACSource: BNEFAPAC numbers are an estimate

5,500

5,000

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

02008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Cap

acit

y si

gne

d (M

W)

TOP 5 CORPORATE PPA OFFTAKERS

The tech giants remain the dominant market players in corporate PPAs

Capacity generation (MW)

Google

Amazon

Walmart

Microsoft

Facebook

0 500 1,000 1,500 2,000 2,500 3,000 3,500

Solar Wind

Source: BNEF

Trusted Investor in Infrastructure

• Sustainable Energy and Utilities• Transportation and Mobility• Digital Infrastructure

ASTUTE I DISCIPLINED I ADDING-VALUE

CONQUEST is an alternative asset manager, focused on investing in long-term, high-quality real assets across the Infrastructure & Industrial market spectrum. CONQUEST benefits from a strong track record of delivering stable and recurring yield to its institutional clients. Boasting significant operational expertise held within the global team, CONQUEST strives to deliver superior returns while preserving capital and emphasizing downside protection. conquest.group


RoundtableRenewables

SPONSORED BY

n ACTIS

n CONQUEST

n FORESIGHT GROUP

n GLENNMONT PARTNERS

n KGAL INVESTMENT MANAGEMENT

PHOTOGRAPHY: PETER SEARLE

Inflection pointRenewables have crossed the Rubicon when it comes to cost of generation and, increasingly, exposure to power prices. Bruno Alves and five of the sector’s key managers discuss how the asset class’s risk profile is changing, why it’s still very much dependent on government support and how storage is still more of a promise than an investment reality

It’s one of those comparisons head-line writers just love: after crunch-ing data from a range of sources, Germany’s Kaiserwetter Energy

Asset Management put fossil-fuel gener-ated energy in 2017 across the G20 mar-kets at a cost of between $49 and $174 per megawatt-hour. And renewables? Between

$35 and $54 per MWh during the same period.

Of course, cost of generation isn’t the be-all and end-all, certainly not for the five renewable energy investors we have gath-ered for our annual renewables roundta-ble – a group that includes Glennmont Partners’ Joost Bergsma, who graciously

hosted our discussion; Conquest Asset Management’s Stephane Wattez-Richard; KGAL Investment Management’s Michael Ebner; Actis’s Adrian Mucalov; and Fore-sight Group’s Dan Wells. But as an ice-breaker, it’s hard to beat, so we couldn’t resist asking our participants whether Kaiserwetter’s recent findings are proof


ROUNDTABLE

that every new megawatt of generation should, henceforth, be coloured green?

“We cannot say yet that renewable energy is the cheapest of energies. But that is definitely the path it is on,” starts Wattez-Richard. “However, as always, it’s about the end and the means to the end. We cannot look at renewable energy in isolation, as a standalone asset on the energy grid. As it becomes more widespread, it has a growing impact on the ageing traditional networks, the costs of which will need to be borne by the renew-able operators.”

Ebner agrees that few conventional power sources can com-pete with renewables on a MWh basis but warns that “security and stability of supply can today only be achieved if conventional power sources support renewable energy. However, this neces-sary support is expected to fade over the next years”.

While Wattez-Richard and Ebner are active in Europe, the story is similar in emerging markets – Actis’s playground.

Joost Bergsma, founding partner & CEO, Glennmont PartnersA power and utilities veteran with over 12 years of experience under his belt, Bergsma is actively involved in originating Glennmont’s deals, having executed on some of the firm’s key wind and solar deals. He has

held senior roles at BNP Paribas (formerly ABN AMRO) and SG Warburg & Co.

Michael Ebner, spokesman for the management board, KGAL Investment ManagementEbner joined KGAL in 2015, where he’s also responsible for the firm’s infrastructure division. In that role, he takes responsibility for transactions as well as asset and portfolio

management. In addition, he also oversees KGAL’s human resources, structuring, and marketing communications divisions. He was at Dresdner Bank prior to KGAL.

Adrian Mucalov, partner, infrastructure, ActisMucalov is responsible for originating and managing infrastructure investments at Actis, which he joined in 2009. He has been heavily involved with several of the firm’s energy investments across Africa and Latin America.

Prior to Actis, Mucalov worked as a management consultant with Monitor Group & Monitor Corporate Finance, in Toronto and Seoul.

Stephane Wattez-Richard, director, Conquest Asset ManagementWattez-Richard is primarily responsible for investment management and driving deal origination, structuring and execution at Conquest AM, and is a member of its investment committee. Before joining Conquest in 2012, he

had previously spent about 15 years in senior roles in investment and corporate M&A with the likes of Schneider Electric, Areva Transmission & Distribution and Cable & Wireless.

Dan Wells, partner, Foresight GroupWells joined Foresight in 2012 and is based in their London office, where he’s responsible for the firm’s existing retail solar funds as well as deploying its energy infrastructure strategy more widely. Before his time at Foresight, Wells, who has 17 years of experience under

his belt, was a managing director in Sindicatum’s corporate finance division.

AROUND THE TABLE

In places like Brazil, we have wind farms running net capacity factors of over 60 percent. So, you could easily produce two to three times the power you’d get from the same wind farm in Germany” Mucalov


ROUNDTABLE

“Many new wind and solar plants that are being built in our markets are pro-ducing energy at a cost of $30 to $45 per MWh. What’s more, in places like Brazil, for example, we have wind farms run-ning net capacity factors of over 60 per-cent. So, you could easily produce two to three times the power you’d get from the same wind farm in Germany,” Mucalov says. “That is helping make renewables even more competitive in our markets. But the countries where we are active are industrialising and they also need 24/7 power. Renewables are intermittent, so in the absence of scalable battery technol-ogy, they can still only be an element of the power system today.”

Wells offers a different perspective: “I think, increasingly, the key considera-tion is when and where an electron is pro-duced and to what extent there is control over it. In that sense, the value is as much

about how you manage electrons as how you generate them. The other thing to consider is that renewables are quicker and easier to build. So, when you take all those factors into account, I’d say we’ve been through an inflection point over the past two to three years where renewables have become the dominant form of new-build generation.”

GOODBYE SUBSIDIES...Does that mean, then, that renewables have also reached an inflection point when it comes to government subsidies? Or gov-ernment support, for that matter? After all, renewables have been trending towards the unsubsidised end of the spectrum in Europe and Donald Trump’s election doesn’t seem to have slowed down the growth of US clean energy generation.

“Clearly, this remains a regulated sector, so it’s certainly helpful to have some gov-ernment support, not just in terms of the feed-in tariffs, but also in terms of grid con-nection,” Bergsma says. “But I think there continue to be important drivers in Europe. Energy pollution continues to be a big one; and energy security is very important in driv-ing government support for clean energy, particularly as geopolitical uncertainty has accelerated over the past 24 months and parts of Europe are running out of gas.”

“When people think of government support, they usually think of subsidies,” Mucalov interjects. “Today, with the decrease in the price of renewables in our markets, we don’t require a direct govern-ment subsidy. But I would say that in all our markets, government is heavily involved. For example, some are completely liberal-ised and have merchant markets, but many don’t have merchant wholesale markets, so you’re actually operating through long-term power-purchase agreements. That means you’re either selling to a govern-ment entity or if you’re selling to another entity, it’s regulated in some way. So, it’s absolutely crucial to have strong govern-ment regulation and clear rules for foreign investors.”

With a PPA, your starting point for your investment is riskier and the price you’re getting for the PPA is riskier, too” Bergsma


ROUNDTABLE

HELLO PPAsAs the market moves away from direct gov-ernment subsidies towards merchant expo-sure, power-purchase agreements have emerged as one of the most important developments in the industry. Widely seen as a bulwark against a significant increase in the sector’s risk profile, PPAs matter because one of the reasons renewables have been such a hit with investors is due to their per-ceived low risk.

“With a PPA, your starting point for your investment is riskier and the price you’re getting for the PPA is riskier, too,” Bergsma admits. “As we move away from feed-in tariffs, you’ll need to factor in at least three components to create a stable, long-term cashflow. One is to have a PPA where you mostly have merchant risk, but you still have a floor price. Secondly, renewables are intermittent, so operators will probably need to start providing some form of grid stabilisation payment. Finally, there needs to be some form of carbon payment, and it’s telling the EU is now looking again at how to price carbon.”

KGAL’s Ebner is not so sure PPA struc-tures are higher risk, warning there was plenty of risk built into tariff-backed assets, too. “Feed-in tariff projects have typically been leveraged quite highly, so the equity investor actually took a merchant-power risk in the past as well. Look at Italy. We’re not exaggerating in saying that the feed-in tariff there was largely spent covering the debt service plus the opex and the equity was to a large extent served by pure mer-chant power revenues. Therefore, I don’t really believe there’s a huge difference between the highly leveraged feed-in tariff projects of the past and the new ones, with PPAs as base structures.”

As Wells points out, though, PPAs are not a one-sided proposition. “One must-have which is not an explicit contractual term, but more of a comfort factor, is that the PPA has to also be a good deal for the corporates, otherwise you’re going to be in a position in, say, three years’ time where you might be dealing with buyers’ regret.

So, it’s not just about charging for the tight-est possible deal, but also about making sure you have a sustainable contract.”

And for those with wider remits, like Conquest’s Wattez-Richard, PPAs can open other doors: “Discussions with indus-trial partners around PPAs can and should become broader conversations with those partners looking for asset deconsolidation opportunities.”

MAKE THEM SWEATOne thing that has certainly changed about the market, particularly in Europe, is its return profile, which has compressed significantly over the past few years. This is a well-known phenomenon, but worth exploring around a table where wind and solar – the most mature technologies – emerge as a key part of our participants’ portfolio.

“Solar PV, within the sustainable

Feed-in tariff projects have typically been leveraged quite highly, so the equity investor actually took a merchant-power risk in the past as well” Ebner


ROUNDTABLE

infrastructure segments we invest in, remains a priority,” says Wattez-Richard. “One reason is the stability of its proven technology and energy production, which means solar energy has relatively lower maintenance needs as well as better pre-dictability. That translates into a better risk profile than onshore wind, even though their respective prices tend to converge. Also, the market is fairly fragmented in Europe, which allows asset managers like ourselves to bring value via aggregation of smaller assets into larger portfolios, which direct investors are less inclined to do.”

Bergsma, who has been active in Europe for more than a decade, argues the continent still offers a deep set of brownfield opportunities. He is also enthusiastic about offshore wind, particu-larly how quickly it’s weaned itself off sub-sidies. And, while he acknowledges there is a lot of capital out there, that money has been chasing large deals, which leaves plenty of opportunities for mid-market managers such as Glennmont.

However, he admits managers must work harder for their returns. “Today, with good asset management capabilities, you can really sweat those assets and squeeze out cost,” he says. For brownfield assets backed by tariffs in a “strong country”, that means “5 to 7 percent levered IRRs for something that is scalable”. More com-plex assets, such as biomass, will generate higher returns.

Ebner, though, isn’t a fan of industrial-scale biomass, even if it does provide an upside. “The main challenge of biomass is that you’re operating in the energy market but also in the dual-use feedstock market, and they can evolve in totally different directions. My second issue is that, when we looked at biomass in the past, we were often asked by our LPs how sustainable and ethical biomass was and ultimately a lot of investors declined to invest in it.”

For Foresight, which manages both yield- and value-seeking capital, the compressed returns landscape, not

just in Europe but also in the US, has pushed those value-seeking pools of capi-tal towards the development end of the spectrum.

“We look to maximise returns by obvi-ously doing more greenfield and, increas-ingly, taking a hands-on, late-stage devel-opment approach to life,” Wells explains. That’s because “the construction premium has narrowed considerably over the past few years and there is a recognition that solar, particularly in developed markets, is not very difficult to do”.

Mucalov, of course, is in a completely different position, given that the wind, solar and hydro assets Actis invests in “generate a substantially higher return in our growth markets”. The flipside to that is that Actis still has to combat investor perceptions about growth markets’ higher risk profile, even if the data doesn’t neces-sarily show higher default rates.

“In order to attract foreign private capital,

To think of storage as an infrastructure asset, you need to go through several layers. But even with a highly contracted asset, your payback period is going to be shorter than your average infrastructure asset” Wells


ROUNDTABLE

many of these governments actually offer what we believe are a better set of risk pro-tections. In many of our markets, govern-ments offer US-dollar contracts and full government guarantees, sometimes backed by MIGA or other credit enhancements. In some markets you do have to take some local currency risk – or even full currency risk – but the majority of our markets still offer hard currency returns to investors as well,” he says.

THE GREAT LEVELISER As our conversation comes to an end, stor-age as an investment opportunity comes up. Everyone around the table is sold on the impact storage will have on the energy market and beyond. As Wattez-Richard puts it: “Storage is already and will remain key to the distributed energy sector in general and to the renewables industry in particular. Its technology also impacts both the grid and electro-mobility. In that sense, we are

looking at storage as part of a wider sustain-able infrastructure investment strategy.”

What our participants are less sold on, is storage’s immediate investibility. A quick show of hands reveals everyone is able to invest in storage, but hurdles rang-ing from “unproven technology” to lack of a “sound business case without subsidies” mean that all but one of our participants is currently investing in it.

The exception is Foresight, which is already “heavily invested” in storage, so it’s only fair that Wells gets the last word: “From a technology standpoint, lithium-ion is a fundamentally proven technology. The technology risk is more about what are the competing assets that can provide the same service – for example, frequency regulation getting done by solar or smart inverters in the future. Battery degrada-tion is also a factor, given it occurs at different rates depending on how you use your asset.”

He continues: “In terms of applica-tions – co-location, standalone or behind the metre – our view is that co-location with renewable assets has a real role to play only when there is a sufficient case for the value of time-shifting that energy. Standalone batteries provide great oppor-tunities if there are sufficient contracts in place. And behind the metre has a big role to play, but in many markets it is still a long way off from being cost-competitive.”

Yes, but is storage an infrastructure play in the end?

“To think of storage as an infrastruc-ture asset, you need to go through several layers. Firstly, you need to identify what the mix of contracted versus uncontracted revenues is going to be. But even with a highly contracted asset, your payback period is going to be six to eight years – so shorter than your average infrastructure asset – which means you need a higher return. But storage has a real role to play as part of a diversified portfolio, so not just alongside generating assets, but trans-mission and distribution assets, too.”

Watch this space. n

The market is fairly fragmented in Europe, which allows asset managers like ourselves to bring value via aggregation of smaller assets into larger portfolios” Wattez-Richard

18

FEATURES


If energy storage is to achieve its projected growth, power markets around the world will have to adopt a standardised contract similar to

power-purchase agreements used in the renewables space.

Little doubt remains about the poten-tial for energy storage to be the next great infrastructure disruptor, but the sector has yet to attract capital from a large number of institutional investors. What’s keeping that capital away has less to do with the technology risk of a new type of asset and more to do with how exactly they will make money.

“One thing we don’t have for energy storage that I think is absolutely critical to unlocking this market, especially to access cheaper financing and to help make inves-tors more comfortable with these assets, is any sort of standardised PPA for the services it delivers to a customer,” explains Anissa Dehamna, associate director of the energy

storage group at Navigant Research, a clean technology-focused market research company.

Energy storage seems like a sector poised for growth – seen by many as a natu-ral complement, or back-up, to cheap, but not always active, solar and wind projects. Attached to a renewables source, batter-ies store excess generation and switch on whenever production dips. At the grid level, they can provide demand-response services when additional power is needed most.

The sector is already taking off in North America and Europe , with around 302.3MW and 244MW of utility-scale stor-age capacity expected to come online this year, respectively, according to Navigant Research. The future of energy storage also looks bright in Asia-Pacific, where renewa-bles are being built the quickest. But the lack of a standardised framework that says in writing how battery assets will generate

revenue is holding back a lot of, but not all, investors from committing to the sector.

According to Aris Karcanias, who co-leads FTI Consulting’s global clean energy practice, “the floodgates have yet to open in a meaningful way, as they have for renewables. However, there are important niche opportunities developers and inves-tors are exploiting to cut their teeth as the market matures.”

There is certainly a trickle of institu-tional capital moving into the space. Swiss manager SUSI Partners is raising a dedi-cated energy storage fund that will invest in OECD assets providing load-levelling, ancillary services and decentralised energy supply.

And even if investors have yet to commit to energy storage, there is a strong recog-nition of the value batteries will be able to provide.

“Every project we have in our portfo-lio right now, we’re looking at storage for

Despite a clear need and high growth potential, investors have not backed the energy storage sector in large numbers, partly due to a lack of standardised contracts, finds Jordan Stutts

It’s all in the service agreement


STORAGE

those projects,” John Breckenridge, head of Capital Dynamics’ $3.5 billion clean energy infrastructure group, says.

‘WAIT-AND-SEE SITUATION’Energy storage is young, involves new technology and is being built in power markets already in transition from waning fossil-fuel production and increasing clean energy penetration. It doesn’t take a lot to throw off the economics of what makes batteries profitable, something a reliable service contract could help mitigate.

Take Zouk Capital’s investment in UK storage developer Green Hedge. Zouk, a sustainability-focused growth capital inves-tor, committed £30 million ($40.7 million; €34 million) to Green Hedge last July to help the developer build a storage pipeline of projects ranging between 10MW and 50MW of capacity. But at the end of last year, the UK government de-rated batteries from the capacity market, decreasing an annual payment those assets would receive for providing power to the grid.

“That stream of revenue to a large extent has been reduced.” Massimo Resta, a partner in Zouk’s clean infrastructure team, says. “That opportunity is not as attractive as it was at the time.”

Resta says the uncertainty in this space around what type of contracts should back storage projects and how they should be remunerated has created a “wait-and-see situation” for some investors.

However, his belief that energy storage is a burgeoning investment opportunity has not diminished. He says that once the market has matured and standardisation kicks in, batteries are assets capable of gen-erating low double-digit returns.

“We just wanted to secure some assets and wait for the right time to build them,” Resta explains. “The immediate opportu-nity is not as attractive as it was maybe 18 months ago, but in the long run, I think it still is.”

There’s a similar story in the US, where last year the Federal Energy Regulatory

Commission changed rules governing frequency regulation services in the PJM Interconnection power market in the country’s Northeast. Like in the UK, bat-teries in operation or under development had a vital revenue stream reduced, chang-ing their project economics.

“A lot of the assets in that market were de-rated, meaning a 20MW asset may be a 13MW asset in the eyes of the market,” Dehamna says.

A DIFFERENT MINDSETVishvesh Jhaveri, director of project finance and strategy at San Francisco-based energy storage company Advanced Micro-grid Solutions, agrees that a standardised contract for batteries will help investors better understand the “risks and rewards” of these assets and will unlock a cheaper cost of capital to build them.

In 2016, AMS received a $200 million investment from Macquarie Capital and long-term project financing from CIT Bank to build a 50MW portfolio of battery systems in Southern California. The pro-jects, the first round of which began opera-tion this year, all have contracts with the utility Southern California Edison to power

commercial and industrial customers.AMS calls the contract it uses an

“energy management services agreement,” Jhaveri says, designed to deliver savings to the customer rather than on a dollar-per-kilowatt-hour basis, like a PPA.

“Most of the people doing this are solar developers, and they don’t want to rock the boat on a solar PPA as much as possi-ble,” Jhaveri explains. “When someone like AMS, who is primarily a storage developer, enters the mix, we come in with a blank slate and a different mindset as to what the contract needs to look like in order to maximise revenue.”

And once a framework that works for energy storage is established, certainty around an investment in this sector will follow.

“If we create certainty around how assets are compensated, that also makes designing and integrating assets much more standardised,” Dehamna says. “The market has been moving very fast. I would say within three years we’ll get this figured out just because the number and size of projects has been increasing rapidly, and we’re starting to see quite a bit of momen-tum building.” n

PROMISING GROWTH REGIONS

400

350

300

250

200

150

100

50

0

Inst

alle

d c

apac

ity

(MW

)

Asia- Pacific

North America

Western Europe

Latin America

Middle East

Eastern Europe

Africa

800

700

600

500

400

300

200

100

0

Dep

loym

ent r

even

ue ($

m)

370.8 302.3 244 58.9 36.9 26.6 29.2

748.7

581.3

433.6

123.469.9 58.5 49.4

Asia, North America and Western Europe are projected to be the leading markets for battery deployment in 2018

Source: Navigant Research

ASSET MANAGEMENT


THERE’S CONVENTIONAL WISDOM that when it comes to investing in renew-able energy, the “doing” part is easy: you see outfits made up of two men and a truck, digging to put solar panels in the ground and constructing 5MW, 10MW, or 50MW of generation capacity.

But when looking at these hese invest-ments, you still have to consider all kinds of variables that you can’t control – whether the sun shines or the wind blows, the like-lihood of exceedance, and energy price development. And people don’t tend to give much thought to how, considering these variables, you generate value over the long term – even though that’s the most important issue, especially if you’re look-ing at a 25- or 30-year asset life; 40 years

even in solar. Long-term value requires well-managed assets, and that’s more than modelling, negotiating and buying: it requires real technical and financial asset-management capabilities, and that’s no easy thing to achieve.

When KGAL started investing in renewa-ble energy in 2003, although we made some typical rookie errors, we also quickly realised that being close to the asset is a key factor in preserving and creating sustainable value. So, as we built our portfolio, we also built our team, and today we have more than 50 people dedicated to renewable energy investments, with 30 of them responsible for the asset management of our portfolio alone – including four engineers supply-ing additional technical know-how for the

The importance of proactive management Michael Ebner, spokesman for the board of KGAL Investment Management, argues that, while buying well is important, managing well holds the key to creating long-term, sustainable value from assets

We take a bottom-up perspective on assets: we look at them individually, then aggregate across technologies, geographies and portfolios”

ASSET MANAGEMENT


risk assessment of the new opportunities as well as the performance management of existing assets.

Many of these specialists have joined us from the world’s leading institutions in many different fields, such as utilities, developers, finance, industry, and investors, and together they are now responsible for 120 assets in locations across eight European countries.

We are observing increasing competi-tion in the renewables investment market, including from generalist infrastructure funds and direct investors that perceive renewables as an easy option for sustainable returns. They’re introducing billions in ‘dry powder’ as they look to increase their allo-cation to renewable energy, which, in turn, means rising prices and declining returns.

So, in this market, the question that has to be in the back of everyone’s mind is, ‘when do the yields that you are receiving no longer really reflect the risks that you are taking on board?’ The answer really depends on how well you understand the risks and can manage them for the long term.

When looking at new opportunities in the market we make a distinction along the value chain between development, construction, operation and management, and the exit/repowering phase of an asset. Following that – and focusing on our West-ern European area of interest – we separate mature markets from less mature markets, to create a matrix that you can apply any-where. For long-term returns of between 3 percent and 3.5 percent, with relatively low leverage, you can choose brownfield (operating) German (mature) wind invest-ments. Then again, that market is super-hot and we believe that to really generate additional value, you must take on and be able to manage greater risk.

If we look at the value chain, how can we do that? If you have the right skillset, one option is to enter greenfield and work on mid- to late-stage project development; take assets through to ready-to-build; structure them; work out the kinks and get through the first years of operations, and then sell

– or hold for the long term. But the 50 or 150 basis points you can

pick up this way is a reward that is not with-out risk or challenges. And it is essential to engage with those challenges to achieve that premium. The key risks we’ve identi-fied range from environmental risks and revenue risks – Where are your revenues going to come from over the lifetime of the asset? When do you exit? – to problems around grid connection delaying develop-ment. Identifying these risks is one thing, but when it comes to interpreting and evalu-ating their potential impact, and countering or eliminating them, it’s really experience that makes the difference.

So, if you want to deal with those risks and realise those higher returns, proactive asset management made up of a valuable combination of technical and financial skill is really what you need – and not just in the development phase, but also from the start of operations and throughout the working life of the asset.

COMPETITIVE COSTSIn mature markets with many existing assets, you can identify and acquire, aggre-gate and maybe repower some assets: older wind assets, smaller turbines which can be replaced, and underperforming solar assets, of which there are plenty. We think these investments are attractive because you can lock in that base yield – low as it is. That gives you options around the repowering and offers an opportunity to take advantage of that redevelopment.

There are also opportunities to lock in attractive yields in less mature markets, by pursuing a brownfield buy-and-hold strat-egy. There are still feed-in tariffs available, in the Baltics for example, though these are fundamentally different from what we saw in the sector earlier on. You might argue that once upon a time Spain and Italy were in the same boat that many emerging Euro-pean markets find themselves in now – and look where it got them.

But there are a couple of critical dif-

ferences today. First, there used to be a huge disparity between the Spanish feed-in tariff of 40 cents and the market price of 5 cents; there’s still a disparity today, but we’re looking at one-and-a-half or two times – not eight. And, also, chosen well, political factors are unlikely to hit as hard today.

The second key difference, and really the more important one, is that right now renewable energy investment is being driven by a competitive cost of generation. It’s quite clear that renewable energy can compete against other sources, beyond levelised cost of electricity, eye-to-eye – to true grid parity. This long-term driver offers some insulation against short-term shocks to the system and offers the pros-pect of a return which is sustainable for the long term.

And finally, implementing operations effectively requires you to have a system in place to monitor and control your assets under management: you must be able to measure and analyse what you’re doing, see what’s underperforming and under-stand the shortcomings.

An important thing to note is that we take a bottom-up perspective on assets: we look at them individually, then aggregate

Long-term value requires well-managed assets, and that’s more than modelling, negotiating and buying: it requires real technical and financial asset-management capabilities”

ASSET MANAGEMENT


across technologies, geographies and port-folios. This approach enables us to identify, interpret and implement opportunities for optimising performance – in other words it shows us where we can create value.

Effective and proactive asset manage-ment enables us to add value to both the top and bottom line in renewables portfo-lios. For example, by increasing availability of assets, or making technical adjustments to improve productivity, or boosting profit-ability by bundling your assets’ output. On the cost side, if you have critical mass in your portfolio, you could look at bundling your own OEM services and tendering those – it’s not straightforward to combine a portfolio of 15 to 20 assets and tender them for maintenance because the issue is not just contractual but is also concerned with understanding the asset.

If you have the right skills, this can really lead to sustainable returns. A bottom-up approach is really useful in this context, too; understand the drivers so you can create value and focus on what’s essential.

STAY CLOSEThere’s a case study from our own portfolio which really illustrates this approach. At the end of 2009 we bought a recently commis-sioned solar plant in Germany, with 60,000 solar modules and a 5MWp output. Before long, we saw performance dropping and, after some investigation, it became clear we had a technical issue with the panels. The word on the street suggested the manufac-turer might be the issue, and sure enough they stepped up fairly quickly, initiating a voluntary goodwill programme for replac-ing modules; by the end of Q4 2010 we changed a quarter of the modules and were back on track – for a while.

We kept monitoring the assets and we could see performance starting to dip again. We presented our detailed data backed by technical expertise to the manu-facturer again, and after some back and forth we came to an agreement whereby a third of modules were changed again.

Once more we saw an uptick as a result, but it didn’t last – the problem was clearly not going away. We were ultimately able to negotiate an ongoing change programme with the manufacturer, whereby we cover some costs for logistics and under which we have now replaced two-thirds of modules so far. This happened because we stayed close to the asset: we could understand, identify and interpret the performance data and then take steps to optimise it.

The change programme has a payback period of about 4.5 years – which is fine in a 25-year fund. A short-term investor might have walked away after the first quick win. Or a less-experienced investor might have accepted the issues as unavoidable degrada-tion and been satisfied with what they were able to achieve.

The postscript to this story is that in 2013 we recorded a 13 percent increase in revenue and 16 percent increase in EBITDA on that asset alone. It’s only one in a portfolio, but those figures put us back on track with the ambitious plan we had at the time. If we had walked away – as many did – after that first round of replacements,

we would essentially have abandoned that value. So, proactive asset management can mean the difference between making money or not.

Renewable energy investment can deliver sustainable, differentiated returns compared with other real assets – and even compared with infrastructure investments. When it comes to the variables which no one can influence – resource yields, energy prices – you need to take a position on how you evaluate those risks and what they mean for your return expectations. And to cap-ture those variable factors you need a skill-set that ideally requires a combination of technical and financial abilities.

We believe it is a major advantage for us to have those skills in-house: if there’s a problem, we don’t have to call an inde-pendent engineer to quote and diagnose it – we can see what we’re dealing with ourselves. Moreover, we can work proac-tively across portfolios to see where value is being created or lost. So, I hope it’s clear why, although buying well is important, in our view managing well is the real key to unlocking value. n

ROLL UP YOUR SLEEVES

Planned performance versus observed results for a 5MWp PV plant in Germany with more than 60,000 solar modules

100

90

80

70

60

50

40

30

20

10

0

%

2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: KGAL

20172010 2014Q2 + Q4:15,000 modules exchanged

Q2: 20,000 modules exchanged

Q1: 8,000 modules

exchanged

Plan Actual

Gap widening again Gap widening again

A PASSION THAT LASTS: REAL ASSETSFor the past 50 years, we have been a trusted partner in real assets. Our track record speaks for itself. We are proud of our long history and our deep market understanding. What we do, we do for our customers. We think one step ahead, to ensure best advice for our clients and partners to prepare for market challenges. For a long-term relationship and long-term growth. KGAL: your partner in real assets.

REAL ESTATE | INFRASTRUCTURE | AVIATION

© Gasteig München GmbH / Johannes Seyerlein

www.kgal-group.com


EUROPE

Q How has Mirova’s strategy evolved in recent years with

regards to energy transition and renewables?RL: Our strategy has remained consistent over the years. We have continued to invest mostly in greenfield assets and mature technologies – primarily onshore wind and solar PV – alongside our partners, which include developers and utilities. That has remained unchanged.

We believe in the alignment of interest between ourselves and our partners, and we want to contribute to the energy transition by investing in new capacity as opposed to monetising existing operating assets.

So, from that standpoint, the core of our strategy has remained constant. Obvi-ously, we’ve had to adjust to the evolution of the market, moving away from mostly feed-in-tariff schemes in a lot of countries to more market-driven opportunities with the emergence of private PPAs. That has been the case in Spain and Portugal, where we closed our latest deals, but also in France, where you now have to go through an aggregator with whom you need to sign an aggregation contract.

Q You tend to focus roughly half of your funds on France. Where

are the best opportunities in France for managers like yourselves?RL: France has very ambitious targets in onshore wind and solar. Last year, we had a record year with more than 1.5GW of new wind capacity installed. It remains an atomised market, however, with a lot of

small- to medium-sized projects. It’s not like Sweden or Spain, where you have very large wind farms.

In France, we are constrained by our environment. The population is scattered so we have to build small- to medium-sized projects, which present pretty good opportunities for regional developers who continue to be active and seek financial partners.

We have also seen very interesting opportunities in the solar sector associated with storage – an area we are exploring with one of our partners in Corsica, for example.

Then there is the emergence of biogas plants, where we have also made invest-ments alongside one of our developer partners. France aims to increase the penetration of green gas on the grid, and that creates a very interesting opportunity. Overall, the renewables market remains very dynamic, with the advantage of ben-efiting from very satisfactory tariff mecha-nisms, such as 20-year contracts on both solar and wind. CfD’s [contract for differ-ence], which have replaced FiTs, are fairly stable and predictable, which, combined with the planned growth of installed capac-ity, makes it a very attractive market.

Q In January, you closed a subsidy-free deal in Spain,

acquiring nine wind farms. Do you welcome the end of subsidies in Europe and how does this affect your strategy?RL: I believe, from a risk standpoint, it’s much better to have assets that are

Contributing to Europe’s energy transition Mirova head of renewable energy funds Raphael Lance talks about the firm’s core strategy, its commitment to the energy transition, and the sectors it finds exciting

From a risk standpoint, it’s much better to have assets that are profitable at market prices without subsidies”


EUROPE

profitable at market prices without sub-sidies. It means the technology is mature and is now in a position to continue to grow. On the other hand, market-driven schemes also generate more complexity in the deal structuring. For us, being a very specialised fund in renewables with a dedi-cated team of experts, that should create a hedge. I would say the more complex the transaction becomes, the more favorable it is for us because we can leverage our expertise and know-how. For example, structuring PPAs is a complex process. There are long discussions, and it is fairly technical, so it means being able to under-stand the electricity market well and the risks involved. But we are well positioned to do that.

Q You talked about the newer sectors you’ve entered

recently. Do you see yourselves ever expanding into something like offshore wind?RL: We’ve decided not to expand into off-shore wind because, first of all, it involves large transactions. For those, it would make sense to have bigger funds to deliver larger tickets. But we have decided to remain in the mid-market and invest in small-ticket deals – that’s where we can create more value. If you look at the latest offshore transactions, there is a lot of liquidity in that market and the returns are already quite tense, while the risk is higher. In my view, the risk should be more rewarding than it is in offshore wind.

But what we have been looking at for a few years now and continue to look at, is storage. We think there are good oppor-tunities given the reduction in cost and improved battery performance. We’re also very interested in looking at electrical vehicle charging infrastructure, but only to a certain extent, because the models are not completely project finance-like. We intend to try to understand this market and we are in contact with most stakeholders to help create bankable structures, so that the enormous capital

required for its development is address-able by private investors.

Q Is the electrical mobility sector ripe for infrastructure

investors like yourselves? Are there opportunities that you’ve identified?RL: Yes, we’ve identified a few. We are working on specific projects but they’re confidential, so I cannot go into details. But they are models in which you have a captive fleet and, say, a private indus-trial player that gives you some capacity payments. That means you’re not fully exposed to obsolescence risk or traffic risk, which are two key risks that we consider difficult to ‘swallow’ today, given the pace of the deployment of electrical vehicles as well as the evolution of the technology.

Q Fund managers haven’t really entered the space. Do you

expect this to change?RL: I think the opportunity is huge because of the capital required to meet European or country objectives. Technology is catch-ing up, and the anticipated car shift is important, so we really believe there is great potential. There is a strong willing-ness amongst municipalities to accelerate

deployment of electrical vehicles because of pollution issues. We have been in discus-sion with various players – municipalities, utilities, international bodies and other stakeholders – for a year now, and a lot of companies are thinking about the kind of business model they can deploy. We’re seeing the first projects coming out with a decent risk profile for a long-term inves-tor like us.

Q What about storage – do you expect to invest in that market

in the foreseeable future?RL: In recent years, storage has become more and more competitive. We remain sceptical about making investments in stor-age capacity that need long-term cashflow to be paid back where you have short-term contracts in front of you. If you are exposed to that, we’re afraid that the capacity you build today is going to be left competing against the capacity built tomorrow. We clearly see the curve of a big improvement in cost and therefore if you’re not secured with long-term cashflow, you are outdated and then your capacity isn’t well-placed in the merit order.

Q Are there any European markets, in terms of sectors

and geographies, that you would consider relatively untapped?RL: Untapped? No, not really. But there are markets that are booming and that we think are interesting. For example, Spain and Portugal are really back on and we’re very happy to have done the first new generation wind park in Spain, because it gives us an opportunity to understand the market early and to be prepared for the next transactions.

There are also opportunities in the Nor-dics, which have these ambitious growth targets in renewables. The economics in the Nordics have been difficult because of the low electricity and green certificate prices. But, there is a rebound, so maybe it’s the right time to secure long-term con-tracts and make a decent return. n

If you look at the latest offshore transactions, there is a lot of liquidity in that market and the returns are already quite tense, while the risk is higher”

NEWS ANALYSIS


When Singapore-based Equis Funds Group sold its renewables platform to New York-based Global

Infrastructure Partners, Canadian pension PSP Investments and China’s sovereign wealth fund China Investment Corpora-tion, the industry couldn’t help but notice.

It wasn’t just the hefty price tag, which at $5 billion has made it the largest renewa-bles transaction to date, but also the fact that it happened in Asia, a region charac-terised as not offering the type of large-scale transactions found in areas such as Europe or North America.

One obvious conclusion to be drawn is that investors are committed to the sector and the region.

Andrew Affleck, founder and managing partner of Armstrong Asset Management, a Singapore-based investment firm spe-cialising in renewables in Southeast Asia, provides a more in-depth interpretation.

“The Equis transaction has set some important benchmarks for renewable

energy in Asia; the positive ripple effect is already tangible,” Affleck notes. “The first key point is the value of scale and prov-ing the fact that it can be achievable in a five- to seven-year time frame. Secondly, in order to achieve that scale and value, the approach must include both developed and developing markets.

“As to the ripple effect, the awareness created from the Equis transaction has led other investors to explore if this business model can be replicated with other estab-lished development teams looking to scale their business in the region,” he adds.

Edgare Kerkwijk, managing director of the Asian Energy Transition Fund, a vehicle launched last year by Swiss invest-ment firm SUSI Partners and South Pole Group, a financier focused on climate-related projects, agrees. “The Equis deal was quite unique as they managed to develop a large portfolio with a footprint across Asia-Pacific – from India to Japan to Australia,” he states.

“For any investor that wanted an

While the $5bn Equis Energy deal may not be easily replicated and each jurisdiction presents its own set of challenges, renewables and energy transition in Asia probably offer the biggest opportunity globally. Kalliope Gourntis explains why

It’s incredible the pace at which the European strategics have entered the local market. It’s very clear they see Taiwan as the stepping stone into Asia” Kwok

‘Opportunity of the century’

NEWS ANALYSIS


immediate sizeable portfolio with full APAC coverage, this was the only oppor-tunity available,” he says, referring to a platform that comprises 180 assets total-ling 11.1GW in generating capacity across seven countries.

“We therefore will not see a similar deal soon and investors will need to build their own regional pipeline and/or consolidate existing smaller players,” he continues. “The latter is something we will see in coming years.”

TAIWAN: GATEWAY TO ASIAAllard Nooy, chief executive of InfraCo Asia, an infrastructure development and investment firm focused on frontier and emerging markets in South and South-east Asia, believes similar deals will occur “when offshore wind in Taiwan gets off the ground, which is going to be massive,” he tells Infrastructure Investor.

How massive? Andrew Kwok, senior vice-president, private infrastructure, Asia at Swiss firm Partners Group, provides an example.

“At roughly $5 million per megawatt, the development of 5GW will require $25 billion in investment,” he says, referring to the 5.5GW of projects the Taiwanese government is set to approve in the coming months. At the end of April, the country’s Bureau of Energy granted 3.8GW of grid capacity to projects being developed by the likes of German developer wdp, Copenha-gen Infrastructure Partners and Orsted. Another 2GW of offshore capacity will be auctioned off in June.

“It’s incredible the pace at which the European strategics have entered the local market,” Kwok comments. “And it’s very clear that they see Taiwan as the stepping stone into Asia and probably the brighter spot outside Europe. It’s really a boom market for offshore wind in Taiwan,” he says.

Partners Group is no stranger to the country. In mid-2016, it invested more than $200 million in a solar platform alongside

Cathay Life Insurance, Taiwan’s largest insurer.

The Swiss firm acquired a controlling stake in the joint venture, which aims to develop 550MW of solar power by 2020. Once completed, the portfolio will be sup-ported by 20-year power purchase agree-ments with Taiwan’s state-owned utility.

“We saw a very attractive policy sup-port regime for both utility-scale solar and offshore wind,” Kwok explains. “All of the policy support mechanisms that were promised by the incoming govern-ment [of President Tsai Ing-wen] were pretty much enshrined in the Power Act of January 2017, so you had force of law. And so, all the targets for nuclear shut-down and all the impetus that attracted us were there,” he adds.

Aside from setting ambitious goals – the government plans to shut down all nuclear plants and triple its installed solar capacity to 20GW by 2025 – it also began re-zoning state-owned land for solar ground-mount installation.

VIETNAM: BANKABILITY CLOUDSVietnamese solar is also attracting investor

attention, but it’s not always positive.Last September, the Vietnamese gov-

ernment issued its final model PPA for solar power projects, largely ignoring calls from investors, business groups and lend-ers to address issues such as a provision for international arbitration, termination arrangements and grid connectivity.

“We also struggle with the current form of the PPA,” InfraCo Asia’s Nooy admits. The Singapore-based firm partnered with renewable energy developer Sunseap International earlier this year, to jointly develop one of the first utility-scale solar farms in the country.

The Ninh Thuan solar project, located in the province by the same name, is a 168MW project scheduled to begin opera-tion in mid-2019.

“The bankability issue is probably the largest issue for international lenders, at least,” Nooy says.

But, developer interest remains strong “because Vietnam offers an attractive feed-in-tariff system and an abundance of land that is ideally suited for solar power generation,” law firm Jones Day wrote in a January note.

A FiT of $0.935 per kWh (excluding

ASIA

1,000,000

900,000

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000

0

Inst

alle

d c

apac

ity

(MW

)

ASIA’S INSTALLED RENEWABLES CAPACITY

By 2017, Asia had installed 982,873MW of renewables capacity across all technologies, accounting for 45.1% of the world total

2015 2016 2017

Onshore wind Solar

Source: IRENA

Bioenergy Geothermal Hydropower

499,906

517,126

529,606

161,653 182,710 201,587

88,629139,043

211,21624,355

29,770

32,918

3,898

4,103

4,426

NEWS ANALYSIS


VAT), has been set for solar projects achiev-ing commercial operation before 30 June 2019 and for a 20-year term.

While the model PPA is compulsory for all solar projects, investors and developers can negotiate additional terms but no real amendment is allowed to the standard text.

INDONESIA: COAL POWERHOUSEIn Indonesia, transitioning to clean energy is even trickier. While the country has solid economic fundamentals and a strong demand for electricity it relies heavily on coal. Yet, this has not deterred the Asian Energy Transition Fund, which is aiming to raise €250 million within the next 12 months, from selecting Indonesia as one of the four countries it will invest in – Thai-land, the Philippines and Vietnam being the other three.

Asked whether renewables can com-pete with cheap coal, Kerkwijk replies: “At the moment, renewables are unable to compete with coal. The price of coal is currently around $0.05 to $0.06, while renewables are more expensive, given that the projects are relatively small and there are no economies of scale. We’ve heard that even some gas projects are being aban-doned in favour of coal projects because coal is cheaper,” he adds.

While the country has set renewable energy targets, they are not binding. What’s more, state-owned utility PLN – the only power off-taker in the country – is backtracking on the renewable energy targets, since it had heavily invested in gas and coal projects based on assumptions that energy demand would grow at a rate of between 5 percent and 7 percent annu-ally, which it hasn’t.

To spur investment in the renewables sector, Kerkwijk suggests that renewable energy targets be made mandatory and that PLN adheres to them.

“This should also be supported by the international community, which is fund-ing PLN’s expansion programme,” he says. “Another suggestion would be to allow

private companies to procure renewable energy directly, since many of them have indicated a preference to use renewable energy only.”

Armstrong’s Affleck agrees that in countries where fossil fuels are still subsi-dised, the implementation of renewables is a challenge.

“Indonesia is certainly lagging other markets in the region, but ourselves and others will set important project construc-tion milestones in the wind and solar sector during 2018, which should help catalyse change,” he says.

Armstrong Asset Management is cur-rently investing its Southeast Asia Clean Energy fund, a $164 million vehicle target-ing utility-scale renewables and resource-efficiency projects in the region. In addi-tion to Indonesia, its primary countries of focus are Malaysia, Thailand, Vietnam and the Philippines.

PHILIPPINES: RENEWABLES RENAISSANCE The Philippines is another country in the region that has had a fitful path to energy transition. While the country had adopted two rounds of feed-in-tariff schemes – first in 2012 and then in 2014 – it currently has none.

Despite this lack of a framework, Nooy argues that funds are still flowing into the country’s renewables sector thanks to the enabling legislation that was passed in 2007.

“There were ceilings set on the first wave of wind, solar and hydro,” he explains. “This ceiling is now gone for both wind and solar and the market is maturing.

Local lenders are much more familiar with the sector than they were before.”

While nearly half of the Philippines’ generation in 2016 was derived from coal, renewables accounted for 24 per-cent of the energy mix, according to the Philippines’ department of energy. Solar and wind represented only 2 percent of the renewables total, while hydropower accounted for 9 percent and geothermal stood at 12 percent.

The geothermal sub-sector is consid-ered to be the most advanced segment of the country’s renewables market. Last year, it attracted the likes of Macquarie Infrastructure and Real Assets, which, along with local pension fund GSIS and Singaporean sovereign wealth fund GIC, acquired 48 percent of the listed shares of Energy Development Corporation, the world’s largest integrated geothermal com-pany, for $1.3 billion.

MIRA funded its portion of the invest-ment through the Macquarie Asia Infra-structure Fund I, a $2.3 billion vehicle it closed in February 2016; and MAIF II, which closed on its hard-cap of 3.3 billion in April, making it the largest infrastruc-ture vehicle in the region.

“It’s just fantastic that you would see such a transaction in a market like the Phil-ippines,” David Luboff, a senior managing director at MIRA, remarks.

It also illustrates the region’s dynamic nature.

“Around three years ago, in October 2015, when we had our first close of MAIF, we probably wouldn’t have anticipated to have had such a transaction in the fund. So, things change,” Luboff says. EDC rep-resents the largest transaction in MAIF I.

CHINA: THE SOE ADVANTAGE China is also a very important market for the Australian infrastructure fund manager.

“We are really excited by it and renew-able energy does play a big role in our thinking in terms of transactions to look at and execute in China,” Luboff

When offshore wind in Taiwan gets off the ground, [it] is going to be massive” Nooy

ASIA

NEWS ANALYSIS


ASIA

explains. MIRA has recently invested in China’s renewables sector.

“It’s a portfolio of wind assets. We’re buying into an existing platform and our capital will get exposure to those existing assets and also to a secured development pipeline,” Luboff says. “There’s a huge amount of capacity that’s coming onstream so we’re attracted to these types of oppor-tunities because you get the existing busi-ness but we believe in the growth story and so backing a platform we can grow is obviously very valuable to us,” he adds.

Luboff declines to get more specific other than to say the assets have an oper-ating capacity of around 220MW cur-rently and that the acquisition was made through a follow-on vehicle to MAIF. How-ever, according to a source, the Chinese investment in question is Shanghai Sineng Investment, a leading private wind devel-opment company in China.

For other investors, the Chinese market has proved frustrating.

“China is a market that is huge by any measure and no one wants to ignore it,” Partners Group’s Kwok remarks. “But as a foreigner you’re competing against SOEs [state-owned enterprises], which have an exceptionally low cost of capital,” Kwok adds.

“It’s kind of a dual-debt market: if you’re an SOE, you’ll be able to get some-thing that is much more efficient than what a foreigner can get.”

Raymond Fung, chief executive of CGN Private Equity, believes renewables devel-opment in China is headed for a significant change.

“Instead of building a clutter of wind farms, we are moving [much more] towards a distributed [model],” he says.

“So we [will] have smaller wind farms, coupled with distributed PV, rooftops, maybe together with a heating and cool-ing [system], using heat pumps etc.

[That means] you are merging energy solutions together with distributed energy assets, which is actually quite common in Europe, but it is quite novel in China.”

THE BIGGER PICTUREWhile China’s scale – both in terms of its market as well as its projects – is huge, the same does not apply to Southeast Asian markets. Some investors Infra-structure Investor has spoken to have said project size is not large enough to attract institutional capital.

Kwok, of Partners Group, agrees that for onshore wind and solar that is gener-ally the case.

“And the way to combat that is you land a local team. You run very fast when the policy becomes supportive and you secure a large pipeline that you then develop over the next three or four years,” Kwok continues.

“That’s the only way to do it. We can’t do it with a single project.”

Affleck, on the other hand, believes that the Equis Energy deal has turned that statement on its head. “Where there is a need and the grid can manage, there are already many large-scale (50MW-plus) projects under development and construction,” he says. “We have multi-ple projects across Southeast Asia in this category now. But single large projects

are probably in the minority of where scaled investment will be achieved in the region over the next five years,” Affleck concedes.

Regardless of size, however, the number of opportunities will be signifi-cant given the region’s fundamentals. Energy consumption in Southeast Asia has doubled in the past 20 years and is expected to continue to grow at 4 per-cent annually through 2025, according to Affleck.

John Walker, vice chairman for Asia at Macquarie Capital, drives that point home. “Renewables in Asia probably offer the biggest opportunity globally,” he told Infrastructure Investor at our inau-gural summit in Seoul. “This includes both the so-called developing markets, such as Indonesia and Vietnam, but also the very developed markets,” he commented.

According to Walker, renewables and energy transition is a trend that is here to stay. “It’s probably the biggest infra-structure opportunity in Asia, and prob-ably – potentially – for Asia, the biggest opportunity of the century.” n

180

160

140

120

100

80

60

40

20

0

New

inve

stm

ent (

$b

n)

HAS RENEWABLES INVESTMENT PEAKED?

Investment climbed steadily until 2016, when it registered a sharp drop

2008 2009 2010 2011 2012 2013 2014 2015 2016

China Asia & Oceania (exc China & India)

25.3 38.1 41.4 46 58.3 63.3 87.3 115.4 78.3

13.6

14.520

25.1

30.9

45.3

50.5

46.1

26.8

Source: IRENA, Frankfurt School-UNEP Centre, BNEF


ASIA

Q What do Asian renewables mean for Partners Group?

BH: To start with a broader view, we see the transformation of the world’s power mix from fossil fuels to renewable gen-eration as one of the most compelling and largest investment opportunities now and into the future, so we have been very active in this area. Renewa-bles investments make up approximately one-third of our overall infrastructure portfolio.

In Asia-Pacific, we have invested into wind and solar across Japan, Taiwan, the Philippines, Thailand and Australia, so Asian renewables are certainly in our sweet spot and half of the capital we have deployed in the renewables sector has been here in our region.

Q How do you compare renewables opportunities in

Asia-Pacific with other markets, such as Europe and the US? AK: We are global investors and we look at opportunities and investing on a global basis. If you look at Asia-Pacific, where we have invested around half of our renewables portfolio, the region pre-sents lots of demand for renewables, with several themes driving the momentum. The first one is nuclear replacement – particularly in Japan and Taiwan – where you can see real policy drivers support-ing renewables. The second theme is decarbonisation, which is happening in Australia and Korea. And the third is a better risk/return relationship, relative to other regimes around the globe, for our clients. BH: The latter point is important, because, while there are plenty of

positive developments and investment opportunities in renewables in Europe and the US, we often see superior risk-adjusted returns in Asia on a relative-value basis.

Q With half of your renewables portfolio already in Asia-

Pacific, how do you ensure balance? AK: We are careful that we are not over-weight on certain jurisdictions, regimes or feed-in tariff schemes. Considering that renewables in some countries still rely on government policies and subsi-dies, we try not to be concentrated in any single country. Also, we are fairly diversified across technologies, being active in solar, onshore and offshore wind. BH: I would add that, as part of our rel-ative-value approach, we have an alloca-tion range rather than a set target of how much we want to deploy in a region or a sector to give us flexibility. Our infra-structure programmes typically have a 10 percent to 40 percent allocation range for investments in the Asia-Pacific region and in the past few years, as we deployed capital, we have certainly got closer to the higher end of that range.

However, one thing to remember is that while we have deployed a lot of capital [in renewables], we have also exited several investments. By nature, renewables investments can be ramped up very quickly, with the construction period being much shorter than other types of infrastructure such as roads, rail and large-scale thermal power assets. We actively manage our concentration in this regard.

First-mover advantagePartners Group’s Benjamin Haan, head of private infrastructure Asia-Pacific, and Andrew Kwok, senior vice-president, private infrastructure, Asia explain why half the firm’s renewables portfolio is based in the region

The key to success is really to have the flexibility to tap the opportunity early. Go with the right partner and the right local management team as well” Haan


ASIA

Q Speaking of exits, Partners Group sold Japan Solar

earlier this year. What drove that investment and was it a good exit for you? BH: We identified that Japan’s renewables market was going to be a very interest-ing place to be when the government’s policies started to change post the Fuku-shima incident. When the feed-in tariff scheme was introduced in 2012, we saw that opportunity and ended up making a sizeable investment in the country.

We stepped in early, which I think is crucial to being successful, forming a part-nership with Equis, the Singapore-based fund manager, to invest in the market through the Japan Solar platform. We started the platform with four projects and when we exited as the largest share-holder this January it had 27 projects in its portfolio, with 600MW of projects in total secured and 200MW in operation.

It was a fantastic outcome. It outper-formed our original expectation with a blended gross return of 3.2 times on our original investment. Other exits in the region were also above the underwriting and those investments we haven’t exited yet are performing according to plan.

The key to success is really to have the flexibility to tap the opportunity early. Go with the right partner and the right local management team as well, because investing in renewables has to be local. We also leverage a set of trusted indus-try advisors for origination and on the asset management side and we broaden our network with developers to complete more projects. AK: When it comes to the exit decision, it’s really a relative-value exercise. When you look at the assets or platforms we have exited, you’ll see they have been signifi-cantly de-risked and thus have become more like core assets. In the current market, we believe core, stable infrastruc-ture assets can attract higher valuations, even though they are delivering a lower yield. We exit because we have created

the value and see a good market for sale. That’s what happened in Japan.

Q How about Taiwan, where you started investing in the solar

sector two years ago? AK: Taiwan presents similar dynamics to Japan. We were quite fortunate to invest in solar back in 2016. This is very consist-ent with our strategy – we spot a policy trend and we get in quickly.

We were attracted by the feed-in tariff and the strong policy push, which have remained consistent after two-and-a-half years of progress. The reverse auction of government land tranches is also sup-porting the industry, in line with the top-down support from the government.

We have secured a pipeline of projects for more than 450MW and over the next

two months, we are planning to increase our original commitment.

Q What do your investors make of all your exposure to Asian

renewables? Are they happy with it? BH: In general, our clients are very attracted to that exposure. We have deployed around $800 million into renewables in the region since 2011 and have successfully delivered results. I would highlight that, while we are cer-tainly investing in Asia-Pacific, a majority of that has been in developed Asia rather than emerging markets. The former offers the most attractive risk-adjusted returns and our investors have been sup-portive of the investments we have made and the results achieved.

When you look at the assets or platforms we have exited, you’ll see they have been significantly de-risked and thus have become more like core assets” Kwok


ASIA

Q You stressed developed Asia. Which markets in Asia would

you stay away from, then? AK: One of the markets we are not spending much time in at the moment is China. It’s really a shame, given China has installed half of the world’s renewa-bles capacity in the past five years. But it’s due to a combination of factors, includ-ing poor grid planning, which led to sig-nificant capacity curtailment; long delays in paying generators, a tough situation for investors, especially when they are after stable yields; and finally, strong domestic competition. With competi-tive state-owned enterprises, which are supported by low cost of capital, China is a very tough market to operate in for foreign investors like us.

I am not saying infrastructure inves-

tors can’t do well in China, but it’s rela-tively hard for us and an example of a market that we don’t have on our prior-ity list.

Q What about your targeted markets, what would you say

are the main challenges in those? AK: It’s never easy to deploy when you’re as selective as we are. But one of the key challenges is that we try to get in early when the policy is strong and formative. If we are not among the first movers within 12 to 18 months after a policy is established, we may get priced out. Jump-ing in quickly is a challenge, but also an advantage for us. BH: Also, we have seen returns being pres-sured in some of our core markets, like Japan for example. As markets mature

and become more competitive, returns for investing in operating wind and solar assets become lower and no longer reflect risks accurately. We cannot be competitive with cheaper sources of capital in these countries.

Q What about other energy and renewables-related

opportunities? Do you see opportunities such as energy storage emerging in the region?BH: We definitely see that coming as renewables become a bigger part of the energy mix. We have seen the impact of renewable energy sources, which are intermittent, on grid stability. And there is an opportunity for energy technologies that can complement renewables to pro-vide stability, such as energy storage and grid optimisation. But at the moment, government support mechanisms haven’t been put in place in our key target mar-kets and, on a purely economic basis, the sector does not yet make sense.

We are, however, currently working on a hybrid solution, which combines power generation from solar and wind and battery, in Australia’s Sapphire wind farm. I think this type of structure will become prevalent in the coming years.

Q Looking forward, what trends do you expect to see in the

next three years?AK: Offshore wind is definitely coming to this region, with Taiwan, Korea and Japan making real commitments to make this a reality, and we are seeing the first offshore projects in the pipeline in Aus-tralia. Asia is going to be the next hub for offshore wind on the back of many Euro-pean developers setting up shop here.

However, it will take some time. The good news is that it is just a matter of cost at the moment to get the equipment and infrastructure over here. The current project cost in Taiwanese offshore wind is still high by European standards, but it will decrease as technologies improve. n

Taiwan solar: Similar dynamics to the Japanese market, where Partners Group also invested early


AUSTRALIA

This is shaping up to be a land-mark year for the Australian energy sector.

After a decade of policy uncertainty and many months of prevari-cation over what new regulations should look like, the federal government’s pro-posed National Energy Guarantee moved a step closer to reality in April, following a meeting between state and territory energy ministers and their federal coun-terpart, Josh Frydenberg.

At that meeting, the ministers agreed discussions on the NEG could continue, despite some significant opposition still festering among their ranks.

But what will the NEG look like if it does come to pass at another meeting in August this year? How will it affect the outlook for investors in Australia’s energy infrastructure? And what obsta-cles remain to the country finally getting an energy strategy worthy of the name?

SHIFTING RESPONSIBILITYThe National Energy Guarantee prom-ises to enshrine into law targets for both reliability and emissions for Australia’s energy providers.

It is Prime Minister Malcolm Turn-bull’s flagship policy on energy, mor-phing out of the Finkel Review which followed the major state-wide blackout that struck South Australia in Septem-ber 2016.

The finer details of the policy are still to be determined, but ahead of the recent aforementioned meeting of the Council of Australian Governments (COAG) Energy Council, the Energy Security Board, the group created by COAG to implement the recommenda-tions of the Finkel Review, provided the

first high-level design of the proposed NEG. Detail is still light, but it makes clear that the obligation to ensure a supply of clean, reliable energy is being shifted to energy retailers and some large power users.

What’s also clear is that the NEG will be technology-neutral, thanks to pres-sure from many federal and state MPs who are unwilling to give up on fossil-fuel generation for good. This, in turn, means that there is no specific support for renewable energy in the NEG, to the disappointment of many – in direct contrast to the Finkel Review’s proposed Clean Energy Target, which would have forced electricity companies to provide a set percentage of generation from low-emissions sources.

Tony Wood, energy programme direc-tor at the Grattan Institute, a Melbourne-based think tank, does not see this as a major problem.

“Whether the target for renewable energy is 23.5 percent, as it is now, or much higher as the Australian Labor Party is proposing, it doesn’t matter from the policy perspective. If Labor gets in to power, it can just turn the dial up, as nothing in the NEG is dependent on the target itself,” he says.

“The NEG provides some reasonably long-term direction, to 2030, for invest-ment. This is imposed on retailers, rather than emitters, so they’ll have to enter into contracts with suppliers who hit a number in emissions intensity that is still to be determined. And there’s no reason that can’t be in gas or ‘clean coal’ or other sources.”

In theory, this could drive investment in low-emissions technology, with suppli-ers forced to raise their game to meet

their customers’ obligations. But what about renewables, perhaps the most obvious source of low-carbon energy generation?

INVESTMENT CERTAINTYMegan Raynal, partner at Maven Libera, says there has already been a shift in how investors view renewables in Australia.

“The bottom line is that the NEG is changing the investment profile of renewable energy,” she says. “PPAs will get shorter, wholesale prices will go down for a number of reasons that aren’t just to do with the NEG, and there’s no addi-tional support for renewables.

“When I tell that to infrastructure investors, they’re no longer considering renewable energy as an infrastructure play – it’s now more like private equity, unless there’s a long-term PPA with guar-antees on pricing.”

Wood acknowledges the concern in the renewables sector, but argues that the NEG itself should not deter investors.

“People in the renewables sector think it’s not strong enough, because they argue existing targets will drive reduced emissions anyway,” he says. “But if the NEG is ramped up, it will certainly drive lower emissions.”

A big question mark remains over what happens after 2030, with the NEG designed to cover 10 years from 2020. After that, with no specific support for renewables, projects in that space may have to survive on their own merits.

“The NEG may well provide more short-term certainty,” says Garry Bowditch, executive director of the Better Infrastructure Initiative at the University of Sydney’s John Grill Centre for Project Leadership. “But there are

After months of hand-wringing, Australia’s National Energy Guarantee made significant progress in April. But questions remain about whether it is the right policy and what impact it will have on investment. Daniel Kemp reports

Wrong policy, right time?


AUSTRALIA

still definite questions about whether investors will be left with stranded assets after 2030.”

RELIABLE POLICY?The reliability aspect of the policy, driven by political need after the South Australia blackouts, while again theoretically likely to drive investment in additional capacity, could be hard to reconcile with the government’s stated primary aim of lower-ing the cost of energy for consumers.

“I cannot see how you have very high levels of reliability and a reduction of carbon emissions coupled with lower prices – that seems to be an extraordinary mix of contradictions,” Bowditch says. “To underwrite reliability, you have to move from an energy market to a capacity market, and we know from international experience that this is very expensive to maintain. That cost will ultimately be borne by the end user.”

Several sources have indicated to Infrastructure Investor that they have concerns about government intervening in the energy market like this. One of the major uncertainties for investors is whether they will be forced to invest in new infrastructure or upgrades to their existing assets to avoid them becoming redundant, and whether that results in higher prices.

Is the NEG the wrong policy at the right time, then?Views clearly differ, although most feel it is better to have

something in place after years of uncertainty than to continue with nothing at all.

“It’s not perfect, but given where we were, it can be made effective and it can be ramped up by future governments,” Wood says.

And, as Raynor points out, if investors accept that renewa-bles in particular are still a “volatile energy play”, there isn’t that much new in the NEG. “This is how people have been operating for a while, so it’s not a shock. But investors have certainly been re-rating renewable energy in particular with this in mind for some time.”

Roger Lloyd, managing director and CEO of Palisade Invest-ment Partners, summed up the prevailing view among investors when speaking to Infrastructure Investor in April: “Eight years of the last decade have been politically uncertain, but we’ve now got some certainty [around energy policy] coming with the NEG. We’re heading towards certainty – but we’re not quite there yet.”

COAG will meet again in August to agree on a final design, after which the NEG, in whatever form it finally takes, is likely to pass into law.

But there’s always the possibility of an early federal election in 2018 to overcome first – and with an Australian government not managing to serve a full three-year term without changing its leader since 2007, you wouldn’t bet against further political uncertainty. n

Key dates for the NEG

High-level design paper for NEG published by Energy Security Board on same day that COAG Energy Council commits to continuing detailed design work

APRIL 2018

ESB continues consultation with stakeholders on detailed design elements of NEG, including legislative and rule change requirements

MAY-JUNE 2018

ESB to release final design document for consultation

JULY 2018

ESB to present design of the NEG to COAG Energy Council for approval

AUGUST 2018

Drafting of legislation to begin, with aim for legislation before Parliament this year

POST-AUGUST 2018

Victoria state election. The state’s Labor government has been reluctant to support the NEG without clarification on how future governments can scale up the emissions targets

24 NOVEMBER 2018

New South Wales state election. The Liberal-National Coalition is currently in power, as it is at the federal level, and is supportive of the NEG

23 MARCH 2019

Latest possible date for a federal election. There is speculation that Malcolm Turnbull will call an early election in August or September 2018, although the PM has denied this, saying: “The election will be next year, I can assure you.”

18 MAY 2019

INFRASTRUCTURE INVESTOR ENERGY TRANSITION36

AUSTRALIA

Q How would you assess the current state of play in the

Australian renewable energy sector?KM: Over the last 24 months there’s been probably more activity than we’ve ever seen before, on the back of a couple of variables.

One is a very high RET price, com-bined with high wholesale prices, which means that bundled prices have been well above estimates – and there’s nothing like high prices to attract new entrants to a market. That means there’s been quite positive sentiment around investment in renewables.

And the second is that the renewables space is a part of the infrastructure asset class where you can make a deal happen – you can’t make an airport just happen, or a toll road just happen, but you can make a renewables deal happen simply by having some space to install cells or a site to build a wind farm. Because of that, and because there’s a reasonable amount of equity capital in the market, there’s a lot of owner-driven investment occurring. It’s on a relatively small scale individually, but when aggregated it’s a substantial amount of activity.

Q What kinds of projects do you think offer the biggest

opportunities for investors in Australia?KM: I think there are opportunities in both solar and wind.

Traditionally, solar was considered

the more expensive option and from a technology perspective that’s changed. Arguably, solar has come inside of wind in cost terms, and a lot of that is a func-tion of the wind resource. The econom-ics of a wind project are so heavily driven by how often the wind blows, coupled with how far you need to go to connect the wire into the grid. Solar is gener-ally easier, because you can put it much closer to the grid, it doesn’t make any noise, and the economics work pretty well because of where solar panels are priced currently. On balance, you’d expect to see more solar because of the ease of implementation, but wind is still perfectly feasible if you’ve got a good wind resource and reasonable connectivity.

I think, though, that there will be an increasing interest in solar that’s behind the meter. We’ll see more and more solar cells on factories and different sites like that, and that makes a lot of sense as parties will self-generate, effectively, and defray some of the cost they’re otherwise taking from the grid. Over time, you’ll see increasingly distributed generation and consumption – that doesn’t mean people will go off the grid completely as they’ll still very much need to be connected to it from a reliability per-spective. It’s just that the direction of electrons will change over time.

Q With that prospect of increased distribution, then,

how will storage affect Australian renewables?KM: Currently, we’re putting renewa-bles into a system that’s got stable and dispatchable generation. The first, say, 15-20 percent of capacity, you can just put that in and displace other sources of generation. Typically, that’s single-cycle gas, which is the most expensive and the most intermittent form of generation currently – you’re going to offset that, but you’ll still have it available.

At a certain point, however, you lose

A sunny outlook for Australia’s renewablesIFM Investors’ global head of infrastructure, Kyle Mangini, talks about Australia’s renewables sector, what is making it attractive for investors, and whether there is any future for fossil fuel generation in the Australian market

You can’t make an airport just happen, or a toll road just happen, but you can make a renewables deal happen simply by having some space to install cells”

Past performance is no indicator of future performance. This information has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person or entity. IFM Investors Pty Ltd, ABN 67 107 247 727, AFS Licence No. 284404, CRD No. 162754, SEC File No. 802-75701 (“IFM Investors”) recommends that before making any investment decision, each prospective investor should consider whether any investments are appropriate in light of their particular circumstances and refer to the appropriate information memorandum for further information.

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AUSTRALIA

that luxury. You then need to start pric-ing renewables not just in the form of what it might displace, but on the basis that, if it isn’t generating, you’ve got that incremental back-up. And that’s a step-change in the cost, because you go from having just a marginal cost generation, to the marginal cost generation plus the marginal cost of storage. For now, there’s still enough latent capacity in the market so that storage isn’t pertinent – but there will come a point where we cross that line.

Q What about hydro? The federal government’s planned

Snowy 2.0 project has prompted debate about how it will affect the market.KM: Hydro, generally, in Australia, has already been developed to its maximum potential in terms of incremental capac-ity. Snowy 2.0 isn’t about adding a sub-stantial amount of incremental energy, so it won’t affect investment in that sense, because the energy is a function of how much water there is. Rather, Snowy 2.0 is about increasing your peak capacity.

Q What impact could the proposed National Energy

Guarantee have on the investment environment in Australia?KM: It’s a little difficult to say because it’s still vague. From the available infor-mation, it doesn’t seem like there’ll be a huge amount of investment required from a statutory point of view for some time.

The NEG sounds to me like it’s a sen-sible approach to ensuring there’s a reli-able grid – but the detail isn’t there yet to take a firm view on how it’s going to affect the market more broadly. My take is that it seems to be a fairly sensible way of trying to maintain a balanced system alongside trying to decarbonise the grid more broadly.

In the wider context, the wholesale market in Australia was established to

send price signals, and it’s a market that doesn’t have a capacity payment. So, for generators, in particular generators who are not a conduit to the retail market, they only get paid if they’re operating. That was always very much the market design, and that design was such that when there was excess capacity, prices would be low, and when there was a shortage of capacity, prices would be high. This would in turn encourage more investment into the market. Prices are now high, and if there’s intervention from government, that cuts across the whole market construct – and that would be unfortunate.

Q What are the main challenges for investors in the Australian

energy sector?KM: There are a range of broad chal-lenges here that have an element of political overlay.

There’s clearly a high degree of sen-sitivity around the prices that families are paying for energy – and that’s a per-fectly appropriate consideration. Ideally, that will be considered in the context

of where those high prices are coming from, so that the entire industry isn’t effectively penalised.

I think there’s got to be an aware-ness, too, that there’s the potential for reduced consumption through the grid as generation becomes increasingly dis-tributed – and if you socialise the cost across the number of electrons that move through the system, then there’s the potential that the variable cost will go up. There needs to be an appropri-ate level of thought about how pricing applies to the market, whether it’s more fixed or variable.

Q There have been political moves here to try to

encourage new fossil-fuel generation. Do you think this has a realistic future, particularly with regard to coal?KM: I don’t think that coal will be used for power generation in 50 years, and I’m not sure there’ll be coal in use in 30 years. Increasingly, as there’s an aware-ness of the damage that’s being done to the environment and the potential impact that could have on future genera-tions, there’ll be a desire to get on top of that. But it’s not clear to me how long it will take to see that change.

If you look at power stations in Aus-tralia, you have some coal generators that are mine-mouth generators which sit next to the fuel source, and the vari-able cost of those assets is very low. It’s a fundamentally cheap source of power if you don’t price the cost of the emis-sions that are going into the environ-ment. But once there’s a cost associated with emissions – and IFM is measuring and reducing the carbon footprint of its infrastructure assets and thinks it’s a matter of ‘when’ not ‘if’ all countries introduce a price on carbon – the cost of emissions look fundamentally differ-ent. I think the standard benchmarks of assessing these from an economic perspective have completely changed. n

The wholesale market in Australia was established to send price signals, and it’s a market that doesn’t have a capacity payment”

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BIOENERGY

IN 2016, MORE than 190 countries signed the United Nations’ Paris Agreement, reflecting an urgent global consensus on the need to adopt a less energy intensive, more sustainable model of economic devel-opment. While it remains to be seen whether all signatories will ultimately pull their full weight towards the agreement’s greenhouse gas (GHG) reduction targets, the Paris treaty could well serve as a strong catalyst for low-carbon innovation and investment.

Part of the Paris equation relies on reducing energy consumption where practicable – a priority for the private sector, which accounts for about half of the electricity consumed globally – with the balance resting on our ability to better har-ness renewable and low-emissions energy sources.

The impact of climate change on our environment and human civilisation has been part of the public consciousness for four decades, helping to spur the first modern commercial wind and solar power facilities in the early 1980s. Today, renewable energy production is surging with about two-thirds of net new generat-ing capacity coming from clean sources. Renewable energy accounted for about 18 percent of electricity generation in the US in 2017, according to the Business Council for Sustainable Energy and Bloomberg New Energy Finance.

Looking ahead at the next 20 years, we are on the cusp of adopting clean energy and greening our essential infrastructure at an unprecedented scale as we seek to arrest the growing GHG footprint of the global economy.

CITIES ARE LEADING THE CHARGEA 21st century energy paradigm is emerging by necessity, characterised by new renewable sources of power such as bioenergy, energy storage and efficiency, local microgrids, and the electrification of mobility. Combined, such community or regional initiatives help to reduce energy use, improve energy security and unlock new value in several other sectors.

We have a unique opportunity to transform the energy landscape, and accordingly, our economic prospects and quality of life – starting with innovation at the local level. Infrastructure is the pivotal enabling force of any commu-nity, creating the capacity to meet exist-ing and future challenges presented by population growth, urbanisation, and other emerging natural and techno-

A source of renewable ‘super-infrastructure’InstarAGF’s Gregory Smith makes the case for bioenergy, explaining why its profile is ‘compelling’, both from an environmental and an economic perspective

Bioenergy, with its ability todeliver baseload power and ancillary benefits,is emerging as a flexible, competitivesource of renewable super-infrastructure”


BIOENERGY

logical factors. While many nations have been slow to implement smart climate or GHG emissions policies, cities around the world are leading the way. According to the Carbon Disclosure Project, more than 40 cities globally, including several in the US, now get all their electricity from renewa-bles, while at least 100 get about 70 percent of their power from clean sources.

Nearly 50 US cities have pledged to transition to 100 percent renewable energy for environmental, economic and public health reasons. Cities account for about 70 percent of carbon emissions in the US, with the largest 250 urban centres gener-ating almost 85 percent of gross domes-tic product. The electricity sector alone accounts for nearly 30 percent of carbon emissions in the US. This makes urban energy innovation vital to the country’s

long-term environmental viability and synonymous with sustainable economic development. With global GHG emis-sions reaching a record high in 2017, the decisions we make over the next 15 years will have an enduring impact on both eco-nomic and climate outcomes.

A COMPLETE ENERGY AND ENVIRONMENTAL SOLUTIONAs an energy source, a key challenge pre-sented by most renewables is their intermit-tent nature. Bioenergy, with its ability to deliver baseload power and ancillary ben-efits, is emerging as a flexible, competitive source of renewable super-infrastructure with the ability to play a significantly larger role in decarbonising energy sys-tems and reducing GHG emissions across the broader economy. This includes both

waste-to-energy and anaerobic digestion facilities.

New technologies, pathways and policies are reducing the costs of bioenergy, increas-ing conversion efficiencies and expanding the base of feedstocks to include agricul-tural products such as manure and solid or liquid food processing by-products, fruit and vegetable spoils and processing wastes, post-consumer food waste, packaged food waste, cardboard, plastics and films.

Nutrient-dense organic wastes are par-ticularly well suited to anaerobic digestion, which produces biogas that can be used to fuel renewable electricity and heat genera-tion, or be upgraded to pipeline-quality or renewable natural gas, or compressed into vehicle fuel.

Unlike most other renewable energy sources, bioenergy can generate both heat and electricity in a combined heat and power plant, with a range of uses to heat or cool applications in a community or an industry, thereby helping to diversify and secure local energy supply. Bioenergy is also potentially more scalable than other forms of renewable energy, given its dispatch-able nature and the variety of feedstocks available.

Key elements of bioenergy’s value propo-sition include its compelling environmen-tal profile and ability to stimulate regional economic diversification and employment. For the agricultural industry, such benefits include realising marketable by-products from its waste streams, such as nutrient solids and green carbon dioxide.

In cities, bioenergy solutions can reduce urban waste management costs. Bioenergy also improves the quality and environmental footprint of other forms of infrastructure, most notably in the waste-water sector, where the anaerobic diges-tion of sludge could offer the potential for energy self-sufficiency while lowering emissions and costs. Just 8 percent of waste-water treatment plants in the US currently operate anaerobic digesters on site. Clean water agencies are increasingly evaluating

Bioenergy: supporting greener, wealthier communities by reducing emissions, improving water quality and producing a local source of renewable electricity


BIOENERGY

how they can become more resilient and improve environmental and financial performance, opening the door to new partnerships with the bioenergy industry.

Because of these attributes, bioen-ergy has significant potential to serve as a vehicle for job creation and economic opportunity. Studies show that continuing to develop bioenergy capacity could con-tribute nearly $260 billion and 1.1 million jobs to the US economy by 2030, ranging from scientific research to power plant operations, farming and manufacturing.

Simply, bioenergy achieves consider-able additional value from products that already exist in the economy – repurpos-ing, recycling and reusing to turn cost centres into new revenue streams. We are barely skimming the surface of what is possible.

THE BIOENERGY INVESTMENT OPPORTUNITY Globally, government policies and regula-tion are strong drivers for the bioenergy market, which can include both subsidies for power systems, investments in new technologies, and increasingly stringent environmental laws aimed at curbing GHG emissions and promoting bioenergy across a variety of industries.

In the US, regulatory initiatives, such as renewable portfolio standards, which are established in about half of states, and organics recycling requirements are creat-ing the conditions for greater adoption of bioenergy. In 2015, for example, the Environmental Protection Agency and the Department of Agriculture announced a 50 percent food waste reduction goal by 2030 in a country where 40 percent of food produced goes uneaten.

Public perception is likewise a power-ful force for change. Globally, 5 billion metric tonnes of waste are generated every year from agriculture, which is the thermal equivalent of about 1.2 billion tonnes of oil, or 25 percent of current global production, according to the United Nations Environment Programme.

In North America, livestock farms are under increasing public scrutiny for their methane emissions and environmental management practices in an era where a growing number of people care about where their food comes from and how it is produced. Such farms in the US are typically large, which makes bioenergy both economically feasible and environ-mentally essential to remediating the industry’s footprint.

There are also interesting opportunities to collaborate across infrastructure and economic sectors, such as in the co-diges-tion of wastewater sludge and food waste. Wastewater treatment plants can often be made more profitable by adding food waste, which generates methane that can be cap-tured and used as an energy source, from nearby communities. This makes munici-pal food and organic waste collection more environmentally and economically viable, offering densely populated cities and regions an effective way to improve overall infrastructure sustainability.

North American communities are already innovating across the bioenergy field. At Pixley Biogas, in Pixley, California, cow manure and industrial and municipal waste creates biogas that is used as a substi-tute for natural gas to power a production facility for ethanol, which is used as low-car-bon vehicle fuel. The digestate is returned

to the dairy farm, where solid fraction is used as bedding for the cows, and liquid fraction is used as fertilizer for field crops.

This co-operation has reduced carbon dioxide emissions by 15,000 tonnes, and reclaimed 90 million gallons of water. In Gresham, Oregon, municipal sewage and food waste is used to generate electricity that covers most of the energy needs of the city’s wastewater plant, with the hot water used to provide heating and thermal energy to on-site buildings, trimming the plant’s annual energy costs. In both these examples, the blending of feedstocks dem-onstrates a growing trend in the industry that creates additional potential for bio-energy development in the coming years.

BUILDING RESILIENT COMMUNITIESBioenergy systems support greener, wealth-ier communities by reducing emissions, improving water quality, producing a local source of renewable electricity, heat and fuel, and lowering energy costs while gen-erating new sources of revenue.

The distributed nature of such systems also increases the reliability of critical ser-vices such as food, waste management, energy, wastewater treatment and trans-portation, thereby enhancing urban resil-iency. The right private sector partners, with deep experience managing complex energy solutions and the ability to prop-erly mitigate risk, can bring considerable value to the table.

Bioenergy is a vital building block for sustainable development in that it creates entirely new economic frameworks, which reduce inequality and promote health-ier communities. It also brings together seemingly disparate sectors in a common purpose: mitigating climate change and adapting to its effects. As momentum grows from Paris and beyond for stronger climate action, bioenergy represents a new wave of renewable energy opportu-nities in North America for investors, for communities and for future generations, where everything has its use and there is a use for everything. n

Bioenergy achieves additional value from products that already exist in the economy”

XXX


Q How is the energy transition playing out in growth markets?

GM: In developed markets, the transi-tion has been focused on adjusting the energy mix in order to get cleaner. In growth markets, it’s about meeting the basic human need for power and getting new deployment and generation capacity in place. For the last 20 years, the focus in growth markets has been on building new power plants and the associated infrastruc-ture, because they just need generation. However, renewable energy has recently become a big part of that.

Ten years ago, most solar and wind generation was being built in developed markets. But now that costs have fallen

in the last few years, both developed and growth markets are on par with each other in terms of how much capital is being invested in renewables.

Q Actis has invested heavily in Latin America’s energy sector.

How has this market attracted private investors?GM: I think Latin America is really leading the way in terms of establishing frameworks that draw in private investors. Some countries here have worked on developing legal, regu-latory and contractual structures to attract private capital. A lot of the focus early on was to build base-load generation, like natural gas, but that has shifted dramatically and very

Growth markets offer ‘the next generation of upside’Renewables are a huge part of the infrastructure story in growth markets, but, contrary to investor perception, these markets are offering a healthy supply of lower-risk, late-stage assets, argues Actis head of infrastructure Glen Matsumoto

There is an opportunity to invest in later-stage assets in these markets, where contracts are working and payments are being made”


GROWTH MARKETS

recently toward wind and solar. It’s reached a point where, in certain countries like Mexico, there are specific targets to develop renewa-bles. They have auctions just to have investors to bid on renewables projects to get these contracts. And these contracts make more project financing available. Lenders that finance renewables or infrastructure deals in the US are just as readily available to finance deals in Chile, Mexico, Peru and Colombia.

Q What about in the other markets Actis targets: Southeast Asia and

Africa?GM: In Southeast Asia, let’s look at India, the largest market in that region, as an example. India is targeting renewable energy capacity of 175,000MW by 2022, up from around 70,000MW currently. There isn’t a lot of natural gas, but there is a lot of coal. It does require a little more financing specialisation than in Latin America. Simi-lar to the US, there are federal and state regulations and different counterparties to cope with. They do have local financiers that have liquidity and capital to invest, and the government has specific programmes to encourage investment.

Africa, on the other hand, is less mature and very segmented. There are 54 very dif-ferent countries which all have their own regulatory situations. I would say there are 12 to 15 countries that have really focused on developing legal, regulatory and contractual structures to attract private capital. There is robust but rarely called on downside protec-tion for foreign investors going into the infra-structure and power sectors, such as political risk insurance from the World Bank or rev-enue guarantees from development finance institutions. Part of the preconception that Africa is a risky place to invest in is the lack of track record in many areas, but progress is being made and private capital is flowing in.

Q What opportunities are drawing private capital into these

markets?GM: Because of the clear supply-demand,

the focus used to be predominantly on greenfield investments in growth markets, but that is evolving and this is probably most pronounced in Latin America. Money has been going into these markets long enough now that there is a large volume of operating assets, again, in Latin America especially. Those operating assets offer an opportunity for investors to come in and buy at a lower risk level. We’re starting to see increased interest in buying operating assets that already have contracted cashflow and the ability to provide yield.

Q How can investing in operating assets factor into a country’s

energy transition, though?GM: Because there is a market now for

operating assets, there is an opportunity to focus on building truly sustainable businesses by bringing best practices into maintaining and enhancing those assets.

Fox example, you might have a solar panel manufacturer in a growth market who decides to own projects as a way to guarantee its panels will be built and deployed. Once the project is built, they recognise they’ve locked up a lot of capital in that operating asset that now has a nice contract. Now they’re ready to sell. They haven’t really been consistent in focusing on operational improvements. That’s the next generation of upside opportunity in growth markets. Operating assets have not been focused on like they have in the US or Europe.

Q Are institutional investors becoming more interested in

these opportunities because the risk of these assets is decreasing or because they’re more familiar with the markets they’re in?GM: Many investors see their infrastruc-ture allocation as safe money. They want yield and contracted cashflows, but they don’t want a lot of risk. They don’t see that part of their portfolio as being the high-risk, high-return type capital. There is a whole host of institutional investors that have maintained that growth markets are just too risky for their infrastructure allocation. So, they’ve stayed away.

But now there is an opportunity to invest in later-stage assets in these markets, where contracts are working and payments are being made, where you can identify the creditworthiness of a power purchaser. It’s a much lower risk than the percep-tion of what growth market infrastructure is about. You’re seeing investors include growth market power infrastructure spe-cifically for those reasons. They recognise operating assets are lower risk and they’re getting compensated much more for any incremental risk because of the markets they’re in versus for similar deals in the developed world. n

Latin America is really leading the way in terms of establishing frameworks that draw in private investors”

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