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Investment opportunities in the new energy market

December 5, 2019

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On Thursday 5 December 2019, Glennmont Partners hosted a seminar in the UK Houses of Parliament with former UK Energy Minister Baroness Verma on future investment opportunities in the new energy market.

From left to right: Peter Dickson, Partner, Glennmont Partners, Baroness Verma, former UK Energy Minister

The seminar brought together key stakeholders from the renewables sector, investors and policymakers to explore some of the key challenges the industry faces going forward and identify possible solutions.

The overarching theme was that the renewable energy sector must maintain its trajectory of growth if the UK is serious about meeting its net-zero target obligations. Feed-in tariffs, green certificate systems and contracts for difference have reduced price risk and provided healthy returns in renewable energy projects for many years, resulting in lowering costs of energy produced and a rapid increase in capacity. Renewable energy is now in many geographies the lowest cost source of power, and consequently subsidy systems are being discontinued.

The focus of the session was to look at how private investment is necessary to sustain the current momentum in the clean energy market and brought together a number of experts to analyse and debate the emerging risks in an unsubsidised market and present some mitigation strategies.

The Committee on Climate Change

To help set the scene we heard from Baroness Brown of Cambridge, Deputy Chair of the UK Government Committee on Climate Change (CCC), whose net-zero 2050 recommendation became law earlier this year.

The Deputy Chair’s keynote provided an insightful analysis of the political situation regarding different elements of the environment and what the change in legislation, from 80% to 100% carbon reduction, will mean for the way our economy operates.

Baroness Brown of Cambridge, Deputy Chair of the UK Government Committee on Climate Change (CCC)

In her presentation, Baroness Brown outlined various pathways for the country to reach different levels of carbon reduction. The common theme was that it will require not only complete system changes regarding energy, industry and transport, but also behavioural shifts to reduce consumption of carbon-intensive products.

According to the CCC, the UK will need to increase offshore wind production from 10 GW to somewhere between 75 GW and 100 GW, drastically increase the use of hydrogen, and rapidly develop carbon capture and storage capabilities, amongst other changes.

Baroness Brown stressed that while it is not going to be easy, it is both possible and necessary to reach net-zero, concluding that “when so much is uncertain, the need to act on climate change is certain”.

State of renewables

Angus McCrone, Chief Editor of Bloomberg New Energy Finance (BNEF), provided a clear overview of the global energy market, with a focus on recent investment patterns into different forms of energy. According to BNEF there are now 30 countries worldwide which invested over $1bn in renewables last year, up from 16 in 2008.

Much of this growth has occurred in Asian markets such as China and Vietnam. In Europe, investment levels have slowed somewhat since 2011 in light of the removal of feed-in tariffs and subsidies by European governments, but remain steady at around $60bn per year. In the UK, the pattern is quite similar, with offshore wind accounting for the majority of approximately $8bn invested in renewables.

Angus McCrone, Chief Editor, Bloomberg New Energy Finance

In his conclusion, Angus suggested there were two major trends that will be key in the future energy market; the emergence of Power Purchase Agreements (PPAs) for green energy and the continued reduction in levelised cost of electricity combined with the improving efficiency of wind and solar.

Challenges and opportunities

There was a general consensus from the speakers that while we have seen some progress in terms of decarbonisation, significant structural hurdles still exist to achieving greater carbon reduction. In their speeches, Nick Screen, Director at Baringa, and Mark Simon, Chief Executive of Eelpower, outlined some of the obstacles that the industry will need to overcome.

First, renewable energy sources are variable and undispatchable. Neither battery storage capability nor the national grid framework can currently support an energy system that is made up of largely renewables.

Eelpower’s Mark Simon highlighted the urgency which storage technology needs to be developed given that renewables are predicted to provide 85% of electricity by 2050.

Similarly, Simon stressed the need to design a grid that is better connected to storage facilities and argued for further investment while the technology is still in its infancy.

Mark Simon, CEO Eelpower

The very low marginal cost of production of power from renewable sources creates a deflationary effect on wholesale power prices which, unless mitigated by other measures, can lead to very low, or even negative, power prices. This issue was raised by Nick Screen, Director at Baringa, who discussed how such low prices pose risk for both contracted and merchant renewables and constitutes a challenge to regulators and power traders alike.

One proposed solution suggested by Statkraft’s Duncan Dale is in the form of corporate PPAs. Such mechanisms have proved successful in North America and are growing in value in Europe, particularly in Spain and Italy for solar and in Scandinavia for wind, and across the rest of the world.

Baroness Brown particularly emphasised the potential to balance the grid with hydrogen. She expressed some surprise that there is not more active work under way on the development of hydrogen as an energy storage medium, particularly when produced through electrolysis, rather than thermal, processes.

Duncan Dale, VP at Statkraft

Conclusion

There was general acknowledgment from the panel that Government policy for renewable energy over the past 20 years has driven huge growth in the sector and that this success has generated further hurdles to overcome.

Such hurdles will be overcome by a combination of: commercial tools, such as the Statkraft trading proposals; physical mechanisms, such as Eelpower’s storage projects providing steady and secure supply; and further regulation to ensure that generation projects are properly remunerated for the service that they provide.

New and emerging technologies and energy carriers such as Carbon Capture and Storage (CCS) and hydrogen will be required to bring the large capacities to the market that will be required to hit the decarbonisation targets adopted by the UK Government.

Included in the debate were policy recommendations for establishing new market designs to unlock flexible, resilient and low-cost energy systems and eliminating subsidy for carbon and intermittently generating assets.

The discussion did not shy away from the enormity of the challenge industry is facing, but importantly demonstrated how reaching net-zero is achievable through a focused programme of private and public investment. This is something that was reinforced by the CCC’s Baroness Brown in her final comments, where she stated that the solution is achievable, that it will be cheaper and easier than is assumed, and to point out that all parties are aligned to agree that there is no choice.

Glennmont will continue play its part in support of the decarbonisation agenda and we would like to thank everyone who participated in our discussion, and especially our speakers for their excellent contributions.

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