An introduction to investing in renewable energy infrastructure

Investing in renewables: Market drivers

There has already been huge growth in investment into renewables – for example, the UK’s renewable energy production grew from 6% in 2010 to 31.5% in 2019 and there have been a number of days in recent years when no fossil fuels were burned in the supply of the UK’s energy needs.

While this is a great achievement, the transformational changes needed to reach low carbon targets are still at an early stage.  The investment required is vast – global investment into the industry is predicted to be around USD16 trillion by 2030 – but there are two compelling and motivating forces:

• Climate change is an issue at the forefront of everyone’s minds. So, there is both social and political impetus accelerating the drive towards renewable technology. 
• Supply and demand are experiencing seismic change. The societal drive for cleaner energy to power homes and transportation is leading to greater demand. Meanwhile, the closure of ageing coal and gas fleets is restricting fossil fuel supply.

What is renewable energy?

Renewable energy – or clean energy, as it is also known – is a broad term that encompasses energy collected from natural sources that are constantly replenishable. There are three main areas of renewable energy supply:

• Solar: solar production can range from a small portfolio of rooftop panels, that can power an individual household, to commercial farms the size of 50 football pitches, able to supply enough energy to power a small town. 
• Wind: wind turbines have the potential to generate up to 12 megawatts of electricity depending on their size. Split into ‘onshore’ and ‘offshore’ projects, those built in the sea can be huge but costly. 
• Thermal: in this context, ‘thermal’ means the production of heat and/or power either by burning waste (biomass) or via the decomposition of organic material (anaerobic digestion) utilising resources such as dedicated energy crops, woodchips or even chicken waste.

These three technologies have all matured over the last decade and can demonstrate a consistent generation track record. They are also proven to be dependable, affordable and have the potential to improve people’s lives due to their positive environmental impact.

While not an energy source, storage represents another key component in the growth of renewable energy. One of the difficulties with the production of renewable energy is that there is often less control over when and how much is produced. In order to ensure excess production is not wasted, storage technologies – such as batteries and hydrogen – are important tools for the industry, although both are still at an early stage of development.

Investment characteristics: Stable and consistent source of revenue

The search for yield from traditional asset classes remains challenging, as the outlook for interest rates worldwide is likely to remain low for a considerable time. In this environment, alternative assets such as renewables offer an attractive diversifying option for investors.

The cash flow from operational renewable energy generation is characterised by long-term, predictable returns that typically increase with inflation. The stability of this revenue is down to these basic characteristics.

• Weather patterns are predictable (over the long term, rather than on a day-to-day basis).
• A mature track record of generation means the size of future output can be forecast with reasonable certainty. 
• Many governments provide long-term, guaranteed purchase contracts for renewable electricity generation at a fixed and inflating price. While helpful in enhancing the predictability of income, it should be observed that assets with such subsidies often represent the lowest returns in the renewables market.

The stage at which an investment is made can have a big impact on potential returns. Most renewables projects pass through three investment stages:

• development, which involves sourcing a suitable plot of land, as well as obtaining the relevant permits, licences and authorisations to enable construction;
• the construction of the site;
• and operational – where the site is up and running and generating electricity.

The potential for the highest returns comes from investing before an asset becomes operational, although the level of returns can be country dependent. Additionally, investing at different stages also comes with greater associated risks, such as delays to construction caused by third parties or unforeseen weather conditions.

Key risks

As with all investments, there are risks associated with investing in renewables. The primary risk is the changing price of power (affected by a number of factors such as where in the world the assets are located), but there are also aspects like grid curtailment (where not all of the power is used) and generation efficiency (how efficiently technology can convert sunlight or wind into power). A key way to mitigate any of these underlying risks is to work with an established investment team, experienced in building diversified portfolios that offer a mix of technology (both subsidised and unsubsidised), geography and investment stage.

Investing in renewable energy with Octopus places your capital at risk, you may get back less than you invest.

Renewables: Here to stay

The energy market is still at the early stages of this vital, transformational change driven by a political and social desire for cleaner, sustainable energy to meet the world’s growing demand for power. Investors hold the key to achieving this renewable energy future. An allocation into this asset class will not only support the fight against climate change, but also has the potential to provide a stable return stream that acts as a much-needed defensive diversifier.

We believe investing now is not just an option, but a necessity. As this introductory guide has outlined, investing into renewables can provide a range of risk-return profiles dependent on technology, investment stage and geography and as such it’s important to get a deeper understanding of exactly where you want your exposures to be. Our specialist teams are happy to help and provide information, so do get in touch to talk about whether renewables could be a good fit for your investment strategy.