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Opportunities and challenges in renewables investing
While progress is being made in most countries with the development of new renewable energy projects, competition is increasing, government subsidies are coming down and returns are moderating, according to a study by Frontier Advisors.
In a global comparison Australia does not rate particularly well for returns from either wind or solar. We also seem likely to fall short of the Renewable Energy Target by 2020. Australia needs to generate 15,500 gigawatt hours (Gwh) of new renewable energy to meet the 2020 target of 33,000 Gwh. To put that in perspective, we currently have 17,500 Gwh being generated. The Clean Energy Council, which gathers the data, says there are 30 projects in development but they will generate only about 3,500 megawatts (there’s 1,000 megawatts to a gigawatt).
So, there is a lot of room for more infrastructure investment in renewable energy in Australia, at least in terms of potential demand. Australia generated 17.3 per cent of its electricity using renewables – hydro, wind and solar – in 2016 and the rest was largely from brown and black coal.
The Frontier study, entitled ‘Renewable Energy: Don’t be a Fuel’ is contained in the consulting firm’s latest edition of ‘Frontier Line’. The authors are Michael Sofer, who heads Frontier’s quantitative solutions group, and Benjamin Woolley, a research associate.
They say: “Because of the different pricing regimes and the levels of competition around the world, the returns on offer for investment in renewable energy can vary widely. This level of variation is not typically seen with other asset types.
“However, one consistent trend has emerged: expected returns are moderating. This is being driven by increased competition and low bond yields. In addition, some regulators are moving towards more competitive subsidy mechanisms (for example, reverse auctions). “Interestingly, while reduced subsidies may reduce the ability to generate outsized profits, it also means investments are less exposed to regulatory risk and potential upside from increasing electricity prices. Further, decentralisation of the energy market has resulted in an increasing number of transactions with an expanding range of investment characteristics.
“This provides a ripe opportunity set for skilled managers to selectively identify investments with attractive risk/return profiles.”
Generally speaking, wind provides better returns than solar in the eight countries (in a study by BlackRock and Palisades Partners) which produce both. The best returns come from Mexico for wind and Italy for solar. Both are over 11 per cent. Australia is ninth out of 10 for returns from wind and fifth out of eight for solar.
The study says that, from an investment perspective, renewables can be a good compliment to an existing portfolio. They provide access to long-dated cashflows, a link to inflation and portfolio diversification.
But returns are varied and falling in some markets, emphasising the importance of highly active and experienced management. Skilled underwriting is critical.
“Looking forward, a critical ingredient required for continued investment is certainty and stability. In the past, policy confusion created volatility in the asset class which deterred investors and slowed development,” Frontier says. “This is likely to be less important as renewable technology becomes less reliant on subsidies and is viable in its own right. Also, policy is becoming more mature and there is general recognition that clear, cohesive and consistent policy is paramount for investment.”
