Stable and increasing demand
Initially, it was thought that Covid-19 might divert attention from government and investor’s focus on low carbon energy [2]. However, it is now suggested that low carbon, climate-resilient growth is the key for unlocking lasting economic and social benefits [3]. This, coupled with a low risk profile and strong resilience to the crisis means that renewable projects make them highly attractive.
The demand for governments to drive investment in low carbon infrastructure as part of pandemic recovery is growing. As many countries begin plans to rebuild [4] their economies, this demand is bolstering longer-term project plans, locally and globally.
The transition from fossil fuel sources is not straightforward and investment into decarbonisation is key. Decarbonisation in the power sector means reducing the carbon intensity , it is a crucial part of meeting emission reduction targets [5].
In recent years, renewable energy sources, such as wind, solar, bioenergy and hydropower, have played a pivotal role in reducing greenhouse gas emissions, with offshore wind energy sitting at the core of Europe’s carbon-neutral plans [6] - the European Commission pledging to increase output between 230GW and 450GW in 30 years [7]. Scaling up to this level requires a visionary approach already demonstrated by larger players such as Shell, EDF and Meridiam [8], [9], . Investment into decarbonisation therefore becomes a vital part of ensuring supply can meet demand. It is also an opportunity to invest in the research and develop of sector verticals, facilitating long term deployment of green energy.
The heating market has also been driven by emission reduction goals. Many regions across Europe have moved from gas to biomass and electric alternatives [10] e.g. Scandinavia [11], while countries such as the Netherlands and Germany are pioneering solutions such as hydrogen, the tried and tested ‘cleaner’ substitute. More capital and subsequent projects are essential for building new infrastructure to help hydrogen expand across more territories – with evidence that this is already gaining momentum (recent transactions in this space include the acquisition of Elenia District Heating by a consortium comprising DIF Capital Partners, Aberdeen Standard Investments and LPPI (DC Advisory acted as sell-side advisor [12]) among others [13].) This transaction demonstrates the influence that M&A is having in this sector.
Verticals in transport infrastructure have similarly accelerated following the demand for sustainable alternatives - councils across Europe are now commissioning entire fleets of electric buses, and more people are swapping their petrol-fueled cars for electric substitutes [14], [15] and – resulting in new investment opportunities for electric vehicle ecosystems, such as charging stations [16]. Furthermore, investor-owned ferries such as Wightlink [17] and Scandlines [18]are introducing hybrid vessels to comply with the recently introduced International Maritime Organisation 2020 standard.
As technology, societal demands and government pledges continue to transform the distribution of clean energy, we see no sign of end users slowing down their demand for greener alternatives, and investors are best placed to benefit from this demand whilst being part of the longer-term solution.
New, subsidy-free commercial landscapes
The European decarbonisation space was slowly transforming into a subsidy-free landscape, but Covid-19 has meant measures that were introduced to accelerate energy transition could be rolled back as governments attempt to stabilise the market. Before Covid-19 many governments were already rolling back support schemes in order to reduce costs and foster competition, leaving investors to look for alternative contractual frameworks as government-backed projects were reclining.
Infrastructure verticals have felt this in different ways:
In the power space, the use of corporate power purchase agreements (PPAs) have become increasingly prevalent as subsidies are phased out. These PPAs provide investors with protection against competition (fixed or staged price for output) and operators with a hedge against unforeseen cost burdens. However, as new projects now have to stack up in a subsidy-free environment, investors need to ensure opportunities aren’t missed due to risk aversion and should become comfortable with either the credit risk of the corporate off-taker, or merchant pricing exposure (uncontracted revenue).
Whilst transport is not completely subsidised, governments are starting to introduce enhanced subsidies and concession agreements to encourage increased electric vehicle usage, whilst overseeing the phase-out of manufacturing diesel and gas vehicles - many European countries have announced plans for this phase-out between 2025 and 2040 [19].
These verticals will continue having a knock-on effect on demand for the infrastructure that supports electrical alternatives. This introduces new investment opportunities and a changing risk profile as governments turn to the private sector for the capital and innovation needed to enhance the industry. This collaboration between public and private industries will ensure that capital-intensive.
Predictable and recurring cash flows
We believe that investors and developers’ appetite will remain high as the sector transitions to low carbon solutions. This appetite has not been dampened by Covid-19 but rather reinforced as investors look to invest in sustainable finance [20], despite governments re-calibrating financial support.
These asset types and their long-term cash yields offer stability. Maintenance is typically required infrequently and, unless drastically significant, innovative updates do not result in the asset becoming obsolete. The attractiveness of clean energy and access to greener alternatives should continue to influence investment in the medium to long-term. This ongoing attractiveness enables investors and operators to yield sufficient returns in the form of low, long-term cash flow volatility and inflation-hedged total returns [21].
A key long-term factor to take into consideration with investment in renewables, is that once the world fully transitions to a renewable-focused reality, the stability of network volumes will become increasingly volatile. To ensure the climate problem can be solved and managed by future generations, the market will need to continue innovating and finding solutions that mitigate the risk of further, irreversible damage.
Conclusion
As countries look to rebuild and recover from the pandemic, decarbonisation looks to be key part of these policies - not only proving to be the most environmentally beneficial way but also economically. This focus allows investment into forward looking, sustainable assets that provide a wider landscape of opportunity.
We expect that the trends highlighted above will continue to drive sector growth, investment activity and spark ongoing discussions worldwide. To capitalise on this opportunity, investors and operators should remain up to date with market activity and monitor how these sub-sectors and verticals are shifting the landscape, including:
- Monitor the opportunities and challenges imposed by new government support schemes, updates and reforms;
- Monitor the introduction of verticals that help transform the landscape and provide opportunities to investors; and
- Identify investment opportunities that can provide access to new markets, unlocking long-term growth potential.
Helping to tackle the challenge: Our pledge
DC Advisory is acutely aware of the impact that our clients’ projects have on the environment, and are eager to support projects that positively drive impact for not only our clients and their investments, but for the environment and communities. In addition to our recent joint venture with Green Giraffe (international renewable energy M&A and debt experts), we continue to dedicate ourselves to ensuring our clients gain access to the latest ‘green’ capital and debt structures which help provide pathways to environmentally-conscious investors.
If you’d like learn more about our recent transactions and green financing considerations, get in touch with our infrastructure experts, here >
This publication is not a research report, should not be construed as one and has not been produced by a research analyst. Additionally, this publication does not constitute or form part of, and should not be construed as, an offer to sell or issue, a solicitation of any offer to buy, or a recommendation with respect to, any securities. Accordingly, you should not base any investment decision on this publication, and should obtain independent financial, legal, and tax advice with respect to any such investment decision. DC Advisory does not make any express or implied representation or warranty as to the accuracy or completeness of the information contained herein and shall have no liability to the recipient or its representatives relating to or arising from the use of the information contained herein or any omissions therefrom.
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References
[1] What’s in store for infrastructure assets after Covid-19 – Trustnet, May 2020
[2] Decarbonising air transport after Covid-19 – Frontier Economics, 2020
[3] Can low-carbon investments help economies recover from coronavirus? – Weforum, March 2020
[4] Over 200 businesses call for climate-focused COVID-19 recovery – Current News, June 2020
[5] What is “decarbonisation” of the power sector? Why do we need to decarbonise the power sector in the UK? – LSE, January 2020
[6] Our Energy, Our Future, How offshore wind will help Europe go carbon-neutral – Wind Europe, November 2019
[7] Our Energy, Our Future, How offshore wind will help Europe go carbon-neutral – Wind Europe, November 2019
[8] EDF Group accelerates its development of battery storage and electric vehicle (EV) charging infrastructure by acquiring Pivot Power – EDF Energy, November 2019
[9] Smart boxes to reduce electricity consumption in France, The Major EU, January 2020
[10] Efficient district heating and cooling systems in the EU – European Commission, 2016
[11] Efficient district heating and cooling systems in the EU – European Commission, 2016
[12] DC Advisory advised Elenia Lampo Oy on its sale to Aberdeen Standard Investments, DIF and LLPI – DC Advisory, August 2020
[13] DC Advisory, Transactions, 2018
[14] Number of electric buses in Europe has increased from around 200 to 2,200 in 5 years – Green Car Congress – October 2019
[15] Four European cities leading the way in eco-friendly transport – Euronews, June 2019
[16] Electric vs fuel: why the government is encouraging more people to switch to electric cars – BBC, October 2019
[17] Wightlink’s new flagship pioneers hybrid technology in the Solent – Wightlink, December 2017
[18] Zero emission: ferry operation covered by pure battery power on Rodby-Puttgarden – Scandlines, 2019
[19] The end of the fossil fuel car is on the EU agenda – Transport & Environment, October 2019
[20] Building back better: A net-zero emissions recovery Green COVID-19 recovery packages will boost economic growth and stop climate change – University of Oxford, May 2020
[21] Investing into Infrastructure – Deutsch Asset Management, May 2017