For some time, the trajectory of renewable energy infrastructure trusts appeared inexorable: the march to decarbonisation was inevitable, government backing a given and the regulatory environment supportive. However, in spite of some significant financial backing for renewable energy development, global governments appear to be wavering on their commitment to net zero, and the public backlash against green initiatives increasing.
In the UK, this has taken the form of renewed oil and gas licences a move that United Nations secretary general, António Guterres, labelled “moral and economic madness[1]”. Climate commitments have become increasingly controversial in the US. In May, the European People’s Party in Germany appeared to be considering withdrawing its support for the European Commission’s Green Deal.
Against this backdrop, has the outlook for renewables shifted? Is it plausible that commitments to renewable development will ebb – along with subsidies and other government supports? And if so, does it change the outlook for the popular renewables sector?
Still getting their share of investment
There are a few (mostly) uncontroversial points. The first is that climate change is already happening as Europe bakes under another record-breaking summer[2], and ocean temperatures hit new highs[3]. At the same time, most countries are not on track to hit their decarbonisation targets[4]. Demand for energy continues to grow. The most recent IEA Energy Investment Report showed energy consumption has grown from 122,857TWh in 2000 to 178,899TWh in 2022, a rise of 46%[5].
As a result, investment is high – the IEA estimates that investment in energy will be around US$2.8 trillion in 2023. A significant share of that is still going into renewables, with the Inflation Reduction Act in the US and Fit for 55 in the EU directing capital towards renewable energy infrastructure. The IEA report showed investment of US$1,740bn in clean energy in 2022, a rise of US$123bn on the previous year[6].
Key to solving net zero and energy security
For James Armstrong of the Bluefield Solar Income Fund, the long-term picture hasn’t changed – and if anything the case for renewables is stronger: “There are three issues: the cost of energy, energy security and the drive to net zero. Wind and solar are the cheapest forms of energy, they increase energy security very rapidly and they are solving net zero.”
Richard Crawford, fund manager on The Renewables Infrastructure Group, is also unequivocal: “It is abundantly clear that we can’t rely on piped gas and have to find other supplies, such as good wind resources.” While onshore wind options have been stymied by the ‘NIMBY’ problem, offshore wind is more powerful and faces fewer restrictions.
Decarbonisation is happening
Equally, the process of decarbonisation is already well under way. Ben Guest, fund manager at Gresham House, says that, in general, oil is used for transportation, gas is used for heating and electricity is used for everything else. Electricity can be generated by renewables, so the aim is to electrify energy consumption where possible and grow the use of renewables for electricity supply.
He adds: “The Department for Energy Security & Net Zero has laid out how we use energy and created five-year budgets for emissions. We know how we consume our energy and what we consume it on, which means we already know what we need to decarbonise.”
“Around 40% of all our electricity comes from renewables. And we are a long way down the road of electrifying our energy consumption. For example, of all the new cars sold this year, less than half are fully-reliant on fossil fuels[7]. This is a good start, eating into consumption of oil.”
Clear cost advantages
Guest disputes the popular view that the consumer will inevitably have to pay more for a decarbonised energy supply. “We’ve lived in a world with a finite number of commodities. We’ve depended on non-local production. The cost has just gone up and up. They are volatile and exposed to shocks, as has been seen last year.” In contrast, he says, solar panels, wind turbines, heat pumps are deflationary technologies – the cost is going down as the demand is going up. There is increasingly an economic argument as well as a climate argument for moving away from fossil fuels.
As subsidies fall, so does political sensitivity
In considering whether governments’ wavering commitment matters, it is important to ask whether the renewables industry still needs subsidies. Not particularly for solar, argues Guest, where costs have come down exponentially. However, to get offshore wind up to capacity, there will need to be help with costs. Crawford says: “Solar is generally sufficiently economic that it can be built without subsidies, but we are not wholly there for wind. Offshore wind farms often need subsidies.” Equally, he says, the regulatory environment needs to be helpful, so investors cannot dismiss government sentiment entirely.
Grid infrastructure remains an issue
Equally, there are still some blockers. All managers highlight the necessity of investment in the grid because of the intermittency of renewable sources. Stephen Lilley, manager of Greencoat UK Wind, says: “New capacity is in Yorkshire and Scotland, but we need to get power down the country. We need storage capacity and to keep the grid stable.”
To date, battery investment has lagged that of investment in renewables and National Grid has been slow to adopt battery options. However, more investment is going into battery production and deployment. There is a European Battery Alliance, and the Nordic countries are providing a showcase for collaboration and investment.
While the overwhelming focus is on wind and, to a lesser extent, solar, there are other options emerging. There is considerable debate on nuclear. It forms a tiny part of the current energy mix, is expensive to build and slow to come on stream. More interesting, says Lilley, are areas such as bioenergy. Schroders Greencoat has made investments in Rotherham and Port Talbot in this area, although not for Greencoat UK Wind. Others are looking at higher risk, potentially higher growth investments such as hydrogen.
Strong as ever
With the demand picture intact many of the arguments for these trusts still stand, particularly given the recent widening in the discounts. In general, these trusts derive their return from power prices and inflation-adjusted subsidies, plus any capital growth in the assets. Operationally, these trusts appear to be as strong as ever. Crawford says: “In the first half of this year, we saw the trust’s best cash flow generation ever.”
“Around half of our revenues come from subsidies indexed to inflation (both CPI and RPI, depending on the type of subsidy). This, along with high power prices, is why our cash flow has been so strong.” He points out that while UK gilts provide a real return of just 1%, TRIG’s real return is as high as 5%.
In all the politics around net zero, there also needs to be a consideration of the costs of not taking action – and not just for the climate. Lilley says: “Gas is expensive, and there is considerable political risk. Renewables are competitive economically”. Even if the political wind is changeable, the economic arguments are becoming increasingly powerful.
[1] https://www.theguardian.com/environment/2023/jul/31/new-oil-gas-licences-rishi-sunak-un-climate-crisis
[2] https://www.axios.com/2023/07/20/world-heat-wave-records-us-europe-china
[3] https://edition.cnn.com/2023/08/04/world/ocean-heat-temperature-record-climate/index.html
[4] https://www.nytimes.com/interactive/2022/11/08/climate/cop27-emissions-country-compare.html
[5] https://ourworldindata.org/energy-production-consumption
[6] https://www.iea.org/reports/world-energy-investment-2023/overview-and-key-findings
[7] https://insideevs.com/news/675861/uk-plugin-car-sales-june2023/