For a Fund Manager, especially one with a specialist fund that is aligned with a specific world view, it is encouraging to see media reports that resonate with the pitch, in recent months we have not only had a resonance but a crescendo of reports supporting the acceleration of sustainability in the clean energy sector. We were delighted to comment in the recent article by Business Journalist, Jillian Ambrose in the UK Sunday Telegraph on 30th July, The electric jolt that roused Big Oil and we note that it corresponds to a growing number of complementary reports.
For a number of years independent commentators have been charting an exponential increase in flows of capital and investment in sustainable energy and a corresponding decrease in investment in the conventional power sector. In our own investor meetings we are increasingly hearing about fears of stranded assets in the coal, oil and nuclear sectors. We agree with the Telegraph that it is hard to identify the tipping point, but given the influence of institutional capital in the power sector it probably reached that point when the large global institutions started to decarbonize their portfolios.
So where are the opportunities for investment after the tipping point? Primarily they will exist where they existed before – the restrictions to investment into utility scale renewables are lifting. In the past, we used to estimate how much capacity of variable generation could be accommodated by a network before it became unstable. Grid stability is now enhanced by demand side response technologies and new system management techniques. Meanwhile new technologies, management techniques and responsive commercial arrangements are creating a whole new asset class while facilitating large flows of capital into further deployment of renewable energy.
Equally energy storage is rapidly reducing in cost opening up a whole new technology class with exciting prospects for investors. The market is working hard to catch up with the technology. It is still not clear what an investable project utilizing storage will look like. The simple answer would be to estimate returns based on the arbitrage between peak and trough prices, but then the rapid success of the asset class is likely to self-cannibalize the value proposition. Capacity contracts are promising but many institutional investors may prefer longer term clarity on income than currently offered. In any case, given the demand for investable solutions and the volumes of capital available for investing, it seems clear that the rapid development of the technology will likely be matched by the equally rapid development of the commercial structures for projects.
Fund Managers must work hard to remain at the fore of this market and continue to create business opportunities for investors. While the future for conventional renewable energy investment funds is more secure than ever, investors may also seek access to the new system-based opportunities and take their returns from a wide range of technologies and markets. In the world beyond the tipping point of interest in sustainable energy and energy systems, the exponential growth of investment into the new energy space is likely to continue unabated.
October 16, 2023