“It comes soon after the Energy Secretary has scrapped the ban on onshore wind and unblocked the production of cheap solar energy,” Gordon writes.

New solar farms and wind turbines are expensive as the press release numbers indicate. Moreover, it’s clear from the posited GBP60 billion/GBP8.3 billion ratio that the private investment sector is intended to be the major contributor to this project.

In the recent past, accurately 10 or 12 years ago, some of first structures enabling institutions to invest in renewable energy made an appearance – in the form of investment trusts. At the time, the investment case appeared impressive: most of the developed world, notably the EU, had started out on the long road to net zero, investors such as insurance companies and pension funds were attracted by the long (c.25 year) life of a trust which tended to match their liabilities, the positive ESG characteristics appealed to the institution’s stakeholders, and moreover there was the anticipated rate-of-return of something between 5 per cent and 7 per cent per annum in the pre-Covid, pre-Russia/Ukraine war period when, for example, UK government securities or gilts, were yielding next to nothing.

Initially, propelled by these considerations, some renewable energy Investment Trusts traded at a premium to net asset value but today most of the sector is suffering deep (-10 per cent, -15 per cent) discounts to NAV and this is particularly true of single-focus trusts – exclusively solar for example – more so than their diversified competitors.

It is not entirely clear what prompted this (at least temporary) reversal of fortune, but one certain factor was the rapid rise in Bank of England interest rates from 0.1 per cent in December 2021 to 5.25 per cent at the time of writing today. Suddenly investors in Trusts, like many others, found themselves able to achieve similar yields in highly liquid bonds and it may be that such liquidity was required following the cash calls arising from the disastrous Liz Truss ‘mini-budget’ of September 2022, which in turn caused some investors to move to reduce the levels of gearing in their portfolios.

Whether or not liquidity issues prompted Investment Trust investors to begin trading their holdings, risk should not have been a factor.  Renewable energy Trusts are inevitably backed by long-term National Grid contracts or other quasi-governmental guarantees. While not quite gilt-edged, they are rightly perceived by most investors to be safe long-term assets whose duration, in many cases, matches an investing institution’s liability profile.

One issue that may be consequential, and this applies to all Trusts, not just those focused on renewable energy, is PRIIPS disclosures. Brought in by the Financial Conduct Authority in 2015, the aim of the Packaged Retail and Insurance Based Investment Products regulation is to encourage efficient markets by helping investors better to understand and compare the key features, risk, rewards and costs of different PRIIPs, through access to a short and consumer-friendly Key Information Document (KID). 

A problem here, specifically as far as investment trusts, which are exchange-listed vehicles, are concerned is that the KID disclosure appears to reveal the presence of additional fees and  charges whereas, in reality, these are baked into the share price. It has, however, been suggested that this misunderstanding, which the FCA is apparently now working to correct, has discouraged institutions whose investment criteria preclude them from accepting investment trust fee levels which PRIIPs imply.

Despite these issues, this is not a negative story. In short, the renewable energy Investment Trust sector is showing signs of recovery partially in the face of an anticipated reduction in the Bank of England base rate (following downward moves by the ECB, Sweden and Switzerland in June), and moreover because energy generation’s direction of travel in the UK, Europe, and increasingly in other parts of the world, is one way: towards net-zero and thus renewables.

According to the UK National Grid, in 2019 zero-carbon electricity production overtook fossil fuels for the first time, and on 17^th August 2019, “renewable generation hit the highest share ever at 85.1 per cent (wind 39 per cent, solar 25 per cent, nuclear 20 per cent and hydro 1 per cent).”

Additionally, the National Grid tells us, “On 15 May 2023 the UK produced its trillionth kilowatt hour (kWh) of electricity generated from renewable sources – enough to power UK homes for 12 years based on average consumption. While it took 50 years to reach this milestone, based on current projections it will take just over five years to reach the next trillionth kWh.”

Probably in recognition of these facts, the discounts to NAV of renewable energy Trusts have begun to shrink, particularly for diversified funds. Some analysts are predicting an imminent re-rating in the renewables Trust sector.  In other words, the market appears to be re-embracing its original financial and ESG values, although whether the premiums briefly witnessed by the first investors will reappear remains a matter of conjecture.

Many are committed to supporting the global economy’s transition to decarbonisation and have stakeholders to whom it is critical that this commitment is demonstrated not only by word but by deed.

The issue has always been that it is complex and challenging to invest in renewable energy assets such as wind farms and solar farms. Very specialist expertise in the infrastructure is required. Planning, constructing, maintaining and operating these assets requires very long-term planning and investment. The upfront costs are enormous and the future price of energy which drives potential returns is unpredictable.

For that reason, it has tended to be only the very large strategic investors globally who have had the appetite to actually build and operate renewable power assets. There has been the option to invest in private equity funds which specialise in the renewable energy space, of course, but those investments have often been negatively impacted by the withdrawal of government subsidies to the space or price volatility in energy markets.

Therefore, what many institutional investors have been looking for is a way to allocate to the renewable energy space without actually having to buy and operate the assets, and which would also yield attractive and predictable long-term returns. 

We have been advising on renewable energy M&A for over 20 years and in recent years we have been developing this very proposition, which is essentially a new asset class that hasn’t existed before.

It is based on investing in long term power purchase agreements (PPAs), the same contracts which we had negotiated for many renewable clients over the years in our M&A business. In essence, if you own a renewable energy asset it is desirable to have some long-term predictability in terms of the electricity price you will receive for the energy. The daily spot price can fluctuate dramatically and is impacted by macro events globally, as we have seen with the war in Ukraine, so it is important to lock in some of the future pricing.  

Also, if you are a power producer, who necessarily has the obligation to provide a certain level of energy to your consumers, it is helpful to have that long-term predictability in terms of price. For example, if I am a UK power producer, I may wish to enter into a PPA with an industrial off taker of electricity to provide a price floor for at least some of my electricity production. 

Now, these PPAs are highly technical. You can only conclude them if you have extensive experience in the space and of the operators. Where we saw an opportunity was to enter into these agreements ourselves with the producers and then to bring in external capital to fund that. That was attractive both to the providers of capital and also to the generators themselves, because it was increasing the liquidity in the market as well as providing crucial funds to these generators to invest in more green energy production.

What investing in these PPAs delivers in terms of returns is long-term predictability which in some ways is similar to fixed income. These are often state-owned companies which are protected by local regulation and part of the crucial local baseload electricity supply and which will therefore will not be allowed to fail.

On top of that, there is significant additional alpha. Our approach produces a higher equity return for our investors but at a lower electricity market price risk than they would get for traditional renewable energy assets (e.g. wind farms) in the same area.  This is due to the structure, the fact that are able to take a shorter-term view and that there is no capex or opex to be invested and that we can hedge out electricity market price risk.

We have obviously built up a view over the last 20 years about which renewable sectors are most attractive from an investment perspective. We are firm believers in Nordic reservoir hydropower. You have these reservoirs or lakes which can store huge amounts of water and that creates the opportunity to run the turbines when the pricing is optimal. That is true battery storage and a massive advantage over other forms of renewable energy like solar or wind which only produces energy when the sun is shining or the wind is blowing. 

Also, the technology has been around for decades and is highly reliable, the plants themselves are usually inside of mountains with constant temperature and humidity and so are straightforward to maintain. And finally the counter-parties are state-owned utilities in Norway or Sweden so there’s less credit risk. 

With appropriate risk mitigation we can also apply to structure to high producing wind projects, like some bigger offshore or onshore wind farms.

We have built an asset management business to capitalise on our two decades of experience in order to make this happen. Rather than traditional direct equity or debt financing of generating assets, we offer investors the opportunity to invest via a fund into vehicles which enter into the PPAs and which then pay out dividends into the fund.

The result is stable long-term returns that are higher than simply owning the underlying asset for investors and which achieve an important social and environmental good, because we are providing valuable capital for the green energy producers. We think it is an attractive way for institutions to support the transition to renewable energy globally while also undertaking their fiduciary responsibilities to deliver above-market returns.

Muller argues that shunning fossil fuel producers only cuts off the finance necessary to help them shift from being the biggest emitters of greenhouse gasses today, to major suppliers of clean energy in the future.

In a CIO Special Report, Energy Transition: the quest for emissions-free energy, DB finds that renewables power-generation capacity is growing faster than non-renewables. with capacity increasing by 130 per cent over the last ten year; much faster than non-renewables growth of 24 per cent.

But globally, wind and solar generation still only accounts for 10 per cent of total electricity production. One forecast suggests they will need to grow to around 40 per cent of electricity generation by 2030 and over 75 per cent by 2050, with parallel deployment of other zero-carbon generation, flexibility, storage and networks, to deliver zero-carbon energy systems at scale.

According to Muller this means “huge investments in wind, solar, energy storage and transmission lines amongst others, will be needed to decarbonise the energy supply”. 

He says: “Consequently, we expect these industries to experience substantial growth over the next few years, partially at the expense of industries like Oil & Gas as we gradually phase out fossil fuels. We believe the energy sector and certain utilities like those based on gas will undergo several challenges in the future as burning fossil fuels for electricity accounts for most of the world’s carbon dioxide gas emissions and will have to be reduced.”

Muller says many energy firms’ financial performance will be affected over the long term, with substantial downside risks resulting from their reliance on fossil fuels.

Stranded assets

However, he argues that simply divesting from fossil fuel companies will result in stranded assets and preclude these organisations from helping to get renewable energy over the requisite production line.

“Financial markets may be overlooking the potential of these companies to earn competitive returns on their decarbonisation investments, providing opportunities for valuation-focused investors with multi-year investment time horizons. The global energy transition may therefore benefit some companies that financial markets are currently neglecting, based on possibly excessive discounting of specific sectors, perhaps including energy and gas utilities,” Muller says.

The DB report also makes the case that major Oil & Gas companies are preparing to change their business models to become energy companies providing a range of fuels, electricity and other energy services. 

This means entering sectors, most notably electricity, where there are already a variety of actors with specialised knowledge, and where the majority of low-carbon investment differ significantly from conventional oil and petrol projects in terms of scale and financial characteristics. 

Oil & Gas companies’ expenditure outside traditional fossil fuel resources has reached 5 per cent of total spending in 2022, reflecting their interest in supporting renewable electricity, and Muller says this figure can only “increase further over the upcoming years”. 

Finally, Muller notes that existing utilities have multi-decade development track records and established pipelines for future projects, and he says these companies are skilled managers of large and complex energy projects, which means “their expertise should benefit them as the energy transition progresses, for example, with offshore wind projects”.

He concludes: “Energy transition investment will need to be seen within a bigger picture. There will be transition risks in this process: established energy companies will have to work hard to adapt to the changing business environment if they want to avoid becoming stranded assets. 

“Within transition industries such as Oil & Gas, those companies that are better at managing the transition may deliver better financial performance than their industry peers over the medium term as well as making a long-term contribution to our future wellbeing.”

Dogger Bank will be the world’s largest offshore wind farm when completed and remains on track, including reaching Financial Close by the end of 2021 for the 1.2GW Dogger Bank C phase which won a CfD in the 2019 auction and is currently jointly owned 50/50 by SSE and Equinor. 
 
Equinor has also sold a 10 per cent stake to Eni as part of this transaction, so once complete, the new overall shareholding in Dogger Bank C will be – SSE (40 per cent), Equinor (40 per cent) and Eni (20 per cent). The transaction is expected to complete by Q1 2022 subject to regulatory approvals and customary purchase price adjustments.
 
A consistent combination of equity partners across all three phases of the project will enable further synergies across both the construction and operations phase of the Dogger Bank wind farm. 
 
SSE Renewables will continue to lead on the development and construction of Dogger Bank Wind Farm, and Equinor will operate the asset on completion. SSE intends to use the proceeds to support the delivery of its net zero-orientated strategy and will set out further details on its capital expenditure plans at its half-year results update on 17 November.
 
SSE’s strategy is to create value for shareholders and society in a sustainable way by developing, building, operating, and investing in the electricity infrastructure and businesses needed in the transition to net zero. SSE typically sells down stakes to retain 30-40 per cent equity in an offshore wind project for multiple reasons. It enables partners to bring their specific capabilities to bear at the optimal point in the project lifecycle for their contribution and risk appetite, while facilitating capital recycling into low-carbon electricity asset growth options and securing developer premiums to realise early value. It also reduces the overall risk exposure on large-scale projects and avoids a large increase in net debt that is not earning.
 
Gregor Alexander, SSE’s Finance Director, says: “SSE welcomes Eni as an industrial partner to the Dogger Bank C project. The sale of a stake in Dogger Bank C to Eni represents good value for shareholders and will enable us to continue to recycle capital into creating more low-carbon electricity assets. Together with our partners we are building the world’s largest offshore wind farm, creating value and tackling climate change. As the UK and Ireland’s clean energy champion we see significant opportunities to drive further growth in the transition to net zero and partnering in this way will help us to realise this potential. It is further testament to the ability of the SSE group to capitalise on the opportunities ahead.”
 
On 26 November 2020, SSE and Equinor announced they had reached financial close on the first two phases of Dogger Bank Wind Farm, a ground-breaking project off the north east coast of England. A 20 per cent stake in each phase was sold to Eni (10 per cent each by SSE and Equinor), which completed in February 2021.
 
Once the three phases are complete, which is expected by March 2026, Dogger Bank will be the largest offshore wind farm in the world. In total it will generate around 18 TWh, enough renewable electricity to supply 5 per cent of the UK’s demand, equivalent to powering six million UK homes.
 
Dogger Bank Wind Farm is the largest of SSE Renewables’ projects currently in construction. SSE Renewables is currently also leading the construction of the Seagreen offshore wind farm (1,075MW, SSE share 49 per cent), which will be Scotland’s largest on completion, and the wholly-owned Viking wind farm (443MW), the UK’s most productive onshore wind farm. Together these flagship renewable energy projects are driving SSE Renewables’ significant growth to 2025 and demonstrate the quality and value of its development portfolio. SSE Renewables has an aspiration to reach a net run-rate of over 1GW of new renewables assets per year during the second half of the decade.

Similarly to the first project off the coast of Brindisi, Kailia Energia, the project developers behind Odra Energia are about to begin a voluntary preliminary consultation process aimed at providing a better understanding of the scope of the environmental impact study which will be carried out.
 
A request for the maritime concession will also be filed with the Ministry of Infrastructure and the Port System Authority of the Southern Adriatic Sea.
 
The maximum installed capacity envisaged for the Odra Energia project is around 1.3 GW. The estimated annual production is about 4 TWh, equivalent to the consumption of more than one million Italian households and the avoidance of emissions into the atmosphere of more than two million tons of carbon dioxide.
 
Floating offshore wind plays a key role in the energy transition process. The wind farms that deploy this technology will play a key role in achieving the national decarbonisation goals set for 2030, contributing significantly to the energy independence of the country, while protecting the environment.
 
Floating technology allows the positioning of wind turbines in deeper waters, such as those of the Mediterranean Sea, as well as the construction of wind farms without the use of piled foundations and further away from the shore compared to more traditional bottom-fixed offshore wind farms. Floating wind farms are more efficient as they harness the wind further from the coast where it is more abundant whilst also minimising the impact on the marine and onshore environments during all the phases of the project.
 
In addition to generating clean energy, the Odra Energia project proposes a collaborative and value-sharing approach with the communities in Puglia located near the proposed wind farm. 
 
As for more traditional projects, and in line with what has been done for Kailia Energia, the project developers have already started a series of meetings with stakeholders in the Lecce area in order to establish a continuous relationship of openness and dialogue on the project proposal, so as to explain its specificities and convey its benefits:
 
•    stable jobs in the medium-long term: during the manufacturing, assembly and construction phase of the wind farm, it is estimated that 1,500 direct jobs will be created, a number that could grow to around 4,000 during peak periods. After the wind farm comes into operation, it is estimated that more than 150 stable jobs will be created for maintenance activities, of which about 80 per cent will come from local resources;
•    local sourcing: the supply of goods and services for the construction and maintenance of the floating offshore wind farm will primarily involve local companies, with enhancement of the local workforce and expansion of skills related to energy sustainability;
•    positive effects on the tertiary sector: important opportunities for local businesses, during both construction and operation phases;
•    port development: the project will rely on ports in the region, both for construction and maintenance activities, offering the possibility to diversify the nature of infrastructure, the quantity and quality of services offered in support of floating offshore wind potentially also for other floating wind projects in the Mediterranean Sea;
•    innovation, research and development: an opportunity for universities and technological districts to come into contact with cutting-edge tools and technologies.

SUSI Partners, on behalf of its Energy Transition Fund (SETF), has signed an agreement with developer BIWO Renovables and their commercial partner Latsolar Energy Investments to acquire a portfolio of distributed renewable energy assets in Chile. 

The portfolio comprises both solar and wind assets for a total capacity of 200+MW with projects currently in late- development stage and expected to start construction in early 2022.

Under the agreement, SUSI and BIWO/LatSolar will commit to a long-term partnership for the development of renewables projects, with BIWO continuing to provide asset management services during construction and operation of the assets. BIWO is a Chilean developer with more than ten years of experience in delivering small-scale distributed renewable energy projects to the rapidly growing Chilean clean power market. LatSolar invests in, develops and manages utility-scale renewables development projects in Latin America.

The projects in the portfolio qualify for Chile’s PMGD price stabilisation regime for distributed resources. Over the last decade, Chile has successfully implemented policies to support the transition towards a clean energy system and, as a result, has become one of the largest clean energy markets in Latin America with new capacity additions today being almost exclusively covered by renewable energy assets.

For SUSI Partners, the transaction marks the first investment in a Latin American market, further expanding the firm’s increasingly global investment footprint. It was executed on behalf of SETF, SUSI’s flagship evergreen equity fund launched in 2020. The fund invests in sustainable energy infrastructure in OECD countries, covering the wide spectrum of investment opportunities arising from the energy transition, including clean energy generation, energy efficiency measures, and energy storage and integrated customer solutions.

Commercial operation has begun at the 22-turbine wind farm in Ninh Thuan, a joint venture between AC Energy and BIM Group.

Completion of this particular onshore wind project is the final milestone of a significant technical challenge to build a wind farm in a salt production hub, covering an area of 2,500 hectares. The wind farm is now providing power to the salt facilities and the grid, powering thousands of homes.

It will produce 327 gigawatt hours per year once fully operational, enough to power around 50,000 homes and avoid 298,551 tons of carbon dioxide (CO2) consumption annually.

K2M provided its wind development expertise to the project, working for two years towards end-to-end delivery, providing owner’s engineer services that saw its teams assist in technical specifications, multi-contract negotiation, wind assessment, design reviews, bankable reporting, and construction follow-up.

As part of the project, K2M – which was able to draw on the company’s wider expertise in Europe together with local Vietnamese specialists – issued 800 technical notes and memos, managed four contractors and up to 600 staff who were working on site.

Patrick Architta, President – Asia Pacific, K2 Management, says: “We are thrilled to have been able to play such an important role in the development of this particular wind project, and to have had the chance to add value through our end-to-end owner’s engineer services. K2 Management worked on a design, a layout and construction methodology adapted to the complicated sea salt aggression in respecting the environment of the natural existing salt farms.

“After the success of the Dam Nai wind farm project, two years ago, in the same region, in the middle of rice fields, K2 Management has shown precisely what renewable energy can achieve in transforming regions and decarbonising industry.

“These power assets will not only provide green power to thousands of homes, but will also preserve natural sea salt and rice production, two industries that are vital to local economies in Vietnam, and decarbonising them is a huge step forward.

“It shows that with strong vision, a clear technical plan and outstanding delivery, co-located wind and solar farms can provide clean energy to homes and businesses – securing the long-term health and prosperity of local people and the planet.”

The landmark green energy infrastructure project will see 100,000 tonnes of food waste collected from local households and business and processed by an anaerobic digestion plant. This will produce green gas for 4,000 homes in Attleborough.

The project includes the financing of four digestion tanks, a food waste reception hall and depackaging unit, plus a gas upgrader. Construction is anticipated to be completed in March 2022. The upgraded AD plant will produce up to 1,000 cubic metres of green gas per hour.

The project is being used to prove the concept of a sustainable circular waste-to-energy economy while also reducing the carbon footprint. The project is breaking new ground in the clean energy sector, as it will see green gas piped directly into homes and businesses that are generating food waste.

It is being financed using some of the direct lending capital from several Prestige Funds including Prime Alternative Finance which is focused specifically on direct lending within the UK agricultural economy and with a bias towards impact lending within clean energy infrastructure.

“The Attleborough project is a large-scale example of what we are now regularly achieving through direct lending activity in the UK,” says Craig Reeves, founder of Prestige group. “Projects like these demonstrate the material progress our strategy is already making in reducing greenhouse gas emissions in the UK. Our investors are already seeing capital making a measurable benefit in the battle against climate change.”

“It’s a true closed loop,” comments Marc Graham, Project Development Manager at Privilege Finance. “This is unique because a typical gas infrastructure would mean household gas would come from a mix of resources, but in this instance local home and business owners will be able to trace the gas production back to a renewable energy generation source.”

Methane produced from food waste and other sources is a greenhouse gas which is 28-34 times more powerful than CO2, according to the United Nations Economic Commission for Europe.

According to the Waste & Resources Action Programme (WRAP), inedible food waste from UK households and businesses is around 2.85 million tonnes and is associated with more than 75 million tonnes of GHG emissions.

The plant at Attleborough is a clear example of how GHG emissions can be reduced through the recycling of food waste and the capturing of the methane within the digester for processing into green gas.

Further carbon emissions savings are made by the project because all the Norfolk food waste collections are being made inside the county, reducing unnecessary waste miles associated with transporting it long distances across the country.

The Latin American markets for renewable energy have seen significant growth over the past five years, with several countries pledging 70 per cent renewable energy use by 2030. While hydro power currently dominates Uruguay and Brazil’s energy mix, wind and solar projects are being developed to take advantage of strong resources and bolster the grid during periods of low rainfall. However, developers and asset owners in this region face many challenges when assessing the performance of their projects, from grid integration to the enormous scale and variation of data from disparate projects.
 
Following a three-month trial period, Cubico has signed a deal for Clir to monitor, optimise, and report on performance for three projects in Brazil and two in Uruguay. Clir will assess performance on a per turbine and project basis, and then benchmark this data across the wider portfolio to support optimal asset operation.
 
During the trial, Clir proposed a number of actions based on analysis of the data leading to production gains and improved operation protecting asset health.
 
By using machine learning to analyse multiple data streams, including near real-time and historical SCADA data from the turbine and grid, geospatial, and weather records, Clir is able to pinpoint whether underperformance is due to low resource, environmental interference, or fixable technical errors. This insight can then be used to inform operations, model future revenue, and identify opportunities to negotiate existing terms on debt financing, or insurance, based on forecasts backed up by real project data.
 
Didier Frávega, Director, Latin America, Clir, says: “We are delighted to work with Cubico to provide them with a true understanding of project performance and value based on the data. Our initial trial provided Cubico’s teams, both on the ground and back in head office, with unparalleled insight into not just the occurrence of underperformance across largescale wind projects – but crucially, its causes.
 
“Latin America is a key market for renewables, and by breaking down the data of existing assets, our platform will provide Cubico with comprehensive analysis of their investments in the region, accessible anywhere in the world.”
 
Charlie Plumley, Performance Manager, Cubico, says: “At Cubico we are keen to apply innovative solutions and are fully invested in ensuring our projects are proactively managed to provide market leading results. Clir’s impressive data analytics capability and ongoing support provides us with rapid consultancy-level insight into project performance and value.
 
“With this in-depth understanding of asset performance accessible to all stakeholders, we will be able to more accurately predict future energy yield, validate decision-making, drive improvements, and ultimately create additional value for Cubico.”
 

The deal, which was initially agreed in February 2021, see’s CTGE take ownership of 11 wind farms and one photovoltaic field across two portfolios – Cefiro and Windrose – located in the Castilla y León region of Spain.

Despite the rapid growth of renewable energy in the last few years, with investments reaching USD174 billion in the first half of 2021 alone according to BloombergNEF, for many institutional investors without experience investing in these assets, it is vital to collaborate with experienced consultants throughout the lifetime of a project, from development to management, to mitigate risk and navigate the global renewable energy market.

Exus originated, structured and managed the Cefiro and Windrose portfolios for Masaveu, starting in 2015 and 2016 respectively, and continue to manage the assets today. Before CTGE’s acquisition, Masaveu owned 100 per cent of Cefiro and 60 per cent of Windrose, with 30 per cent owned by Belgian family office Korys and the remaining 10 per cent by minority stakeholders.

Carlos Tello Garcia, Co-Founder and Chief Operating Officer, Exus, says: “We are proud to support our clients Corporación Masaveu and Korys on the hugely successful sale of this portfolio. The assets have achieved strong returns year-on-year throughout the duration of their ownership. We look forward to working with China Three Gorges in more depth as we continue to manage their new assets into the foreseeable future.”