The climate emergency has brought the renewable energy sector to the fore as part of the solution for a low carbon future.
It’s underpinned by a growing array of sustainable infrastructure, stretching from offshore wind turbines to large-scale solar parks.
And while Covid-19 lockdowns have further raised public awareness of climate change, the need for greater investment in renewable energy infrastructure is becoming more pressing as governments aim for ambitious net zero goals.
Dane Wilkins, head of renewable energy infrastructure at JLL, explains what’s driving investor interest in sustainable infrastructure and where the biggest opportunities lie.
• Why renewable energy infrastructure investment now?
As an asset class, renewable energy has grown up dramatically over the past two decades. It’s gone from being seen as an alternative culture to having serious investment potential, with BlackRock raising over US$1 billion for its third renewable energy fund.
We’ve also seen major oil firms step into the sector. BP has an electric vehicles charging arm, Chargemaster, and a partnership with Lightsource to own and operate utility scale solar parks. Public awareness of where energy comes from has grown and corporates have made some big announcements around their own energy usage.
At the same time, traditional investment norms are changing – and not just because of the evolving sustainability mega-trend. In recent years, large investment managers have increased their allocations to the wider real assets sector with growing numbers classifying infrastructure and real estate as “real assets”.
• What’s the big draw for the growing number of investors?
The flight to quality and a general scarcity of high-yielding investment opportunities means renewable energy infrastructure is attractive over the long term.
Investors like long-term, predictable income that’s inflation-linked. At the same time, legacy assets also benefit from government subsidies – and that further enhances the sector’s financial viability and attractiveness.
• Which areas of renewable energy have the most potential?
Institutional investors are well-known for their preference for low-risk, passive investment that generates solid returns: solar matches that appetite perfectly.
Equally, offshore wind, where typically a single asset has a high build-out cost, provides opportunities for investors looking to deploy large ticket sizes.
Geographically, natural resources mean northern Europe has been an obvious location for low cost off and onshore energy. Meanwhile, southern Europe has naturally seen greater build and deployment of solar, because of its low cost of production. Major, high-quality schemes, such as Iberdrola’s 500megawatt solar plant are emerging in Spain, where new build has been greatly encouraged by the government.
• What key challenges are on the horizon?
As more countries transition away from oil and gas to renewables, the marginal cost of production in their overall energy fleet is falling. Long term returns could come down, so that needs to be factored into investment theories.
That said, the amount of electricity needed to be generated will increase as we shift to clean energy. As long as demand outstrips supply, price inflection won’t be an issue.
Improved benchmarking and greater awareness of the risk-adjusted returns potential of this asset class can help drive the sector forward and give investors a greater handle on their investment strategy, as well as inform those looking to allocate for the first time.
• How are new investors joining the sector?
Partnerships are an obvious route – a number of institutions, including HSBC’s pension fund, have joined forces with existing and new platforms. Again, it’s about speed of deployment and route to market. Large volumes of capital are looking for a conduit into the renewable energy sector.
A place in the boardroom alongside experienced, blue-chip operators from the energy sector offers significant benefits for fledgling investors. In that scenario, being part of a consortium or club can allow for liquidity and exit strategies if needed.
• What’s the outlook for the next decade?
Greater demand for renewable energy – not least from corporates – will continue to drive the sector forward, as will global political pressure and new regulations to reach net zero.
New technology will help improve efficiency across the renewable energy infrastructure sector. As ambitious projects come online around the world and investors become more familiar with the sector, we’ll see more capital heading into the infrastructure that powers Europe’s homes and businesses.
Click to find out more about why global real estate is taking up the sustainability challenge.