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Renewables investing outstrips other AIC sectors

21 April 2021

Investment companies in the renewable energy infrastructure sector raised £7.7 billion over the past five years, as investors flocked to the strong yields and opportunity to invest in a greener future.

The Association of Investment Companies said the renewable infrastructure sector had raised more than every other AIC sector during the period, with the prospects for the sector remaining bright going forward.

Exciting themes for renewables

James Armstrong, managing partner of Bluefield Partners, said the ongoing cost reduction of installing renewable energy, particularly solar and wind, means that producing renewable energy is now becoming cost competitive with fossil fuels. Combined with government support for low carbon technologies this will result in a “significant increase in renewable and storage technologies on the UK’s energy system over the coming decade.”

Meanwhile, with a number of governments around the world pledging net-zero targets over the coming decades, there will be growing opportunities for infrastructure investment.

Richard Crawford, director of infrastructure at InfraRed Capital Partners, commented: “What we find most exciting is the ambitious decarbonisation targets that governments in our core markets across the UK and Europe have set themselves. This has required and will continue to require massive investment in clean energy production – wind turbines, solar farms and supporting grid and storage infrastructure –as well as the continuing electrification of energy usage.

“At the same time, retail and institutional investors are also looking to decarbonise – in this instance, their own investment portfolios. They want to invest in companies that have strict ESG criteria.”

Ricardo Piñeiro, partner at Foresight Group, echoed the sentiment: “The most exciting development in the UK and European solar sectors and therefore for our portfolio is the ongoing commitment to decarbonised economies in the markets the company operates in, and the emergence of subsidy-free solar. This trend is expected to create an attractive environment for further investment in solar power plants in the UK and internationally, either through renewable energy support mechanisms or increasingly on a subsidy-free basis.”

The pace of renewable energy adoption

Renewable energy has been gathering vast attention of late, particularly with President Biden’s announcement of a $2 trillion green plan to support the US economy while tackling climate change.

Whitney Voûte, head of investor relations at US Solar Fund, called the US one of the world’s most established and attractive investment markets for solar power production, with supportive regulatory and policy frameworks, excellent conditions for solar and a deep market for long-term power purchase agreements.

Voute said: “Power purchase agreements provide power price certainty to investment-grade corporate offtakers and reliable cashflows to solar investors. With President Biden making bold fiscal policy commitments to back his administration’s climate change pledges, the US has established a clear path to carbon-free electricity generation within 14 years. These are welcome plans which will further support the already buoyant solar sector.

“However, delivering them in this short time-frame means an urgent need for even more capital to accelerate the roll-out of utility scale solar power and other renewables.”

Chris Tanner, co-lead investment advisor to JLEN Environmental Assets Group, said: “In the Europe and the US, renewable capacity is being added at a greater rate than fossil fuel capacity. In other parts of the world this is not the case, but in the medium term we expect that renewable generators will become the electricity plant of choice in these markets too. With this increased roll-out of renewables, issues around intermittency will become more prominent, and so we also expect further focus on carbon capture usage and storage to decarbonise baseload generation, as well as technologies to enable grids to handle the added complexity.”

Armstrong said the 2020s will become the decade of renewables, with clean energy being adopted at a faster pace than previously seen.

Armstrong added: “This is because of a confluence of factors combining to provide irresistible momentum: the lowering cost of renewables makes it the most economic option and government support and public pressure creates the scale and the impetus. The 2020s will be the decade of renewables and storage and should provide the platform for a net zero energy system.”

Risks to the sector

However, as with any investment sector, there will be a number of risks for investors to consider.

As companies and energy providers seek to meet anticipated demand, investment managers warn that the cost of power and over-supply could prove potential headwinds.

Tanner explained: “The long-term outlook for power prices is a key risk for the sector. This will be impacted by various macro trends, such as increased supply of electricity from the roll-out of renewables meeting increased demand from the electrification of transport and other sectors of the economy, including production of green hydrogen.”

Crawford said: “A risk to the sector is the oversupply of renewable electricity ahead of an expected increase in demand as a result of government targets, such as the UK government’s commitment to quadrupling offshore wind capacity by 2030. Flooding the market with a plentiful supply of renewable electricity from new farms without supporting demand for the power produced risks pushing down returns for operators, and their investors, imperilling future investment.”

Crawford added: “It is therefore good to see the government begin to adopt a ‘whole economy’ approach to decarbonisation – by looking beyond power generation to other sectors of the economy such as transport and heating. This will require adequate rollout of electric vehicle charging infrastructure and the uptake and use of green hydrogen, produced through electrolysis and powered by renewable electricity, in homes and industry.”

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