Horses for Courses

Winning the renewables race is all about location, according to Richard Lum, Co-CIO at Victory Hill Capital Partners.

The transition to a low-carbon economy is creating a once-in-a-generation dislocation in energy markets, fundamentally bringing the longevity of current energy infrastructure into question. For example, whereas energy systems designed for oil, coal and gas were predicated on centralised power generation, there is now a burgeoning need to upgrade or reform power grids to a distributed model, accommodating the growth of renewable energy sources as we progress towards net zero goals.

This gap between legacy energy infrastructure and a sustainable, low-carbon future provides an opportunity for astute investors. But capitalising upon uncertainties like supply security and price volatility at peak times is not as simple as swapping every coal-powered energy plant for a wind farm. Globally, the energy transition is taking place at varying speeds in different locations, leading to profound differences in how renewables assets perform.

These differences are partly due to inherent regional characteristics that render some methods of clean energy generation more effective than others depending on where you are. For instance, France’s robust nuclear power infrastructure, supported by strong policy and regulation, has lessened the demand for new sources of renewable energy in its electricity grid. Or China, where expansive land mass and suitable climate conditions have allowed renewables developers to build 2,919GW of solar capacity.

But identifying beneficial investment opportunities requires more than locating wind farm projects where there is wind, and solar fields where there is sun, or ‘copying and pasting’ one lucrative project framework into regions with physical and regulatory similarities.

The value drivers are local

While a broadbrush approach to green infrastructure investment might go some way towards meeting global energy needs, the drivers of value are inherently local. Taking a broad approach could come at the cost of investor returns, ultimately jeopardising the long-term financing prospects for the transition. Investors will need to evaluate each project at a granular level, assessing its merits in consideration of its location by looking at everything from weather, geography, politics and regulation, to the stage of the energy transition journey that the country is currently in.

In other words, varying market conditions mean that to fruitfully participate in transition projects globally, investors must account for the fact that renewable technology will perform differently in different places, with direct knock-on effects on performance and investor returns.

A good example is the Australian energy market, which has historically been dominated by coal power – a highly consistent, yet highly polluting power source. As Australia progresses in its energy transition, its power mix is becoming increasingly reliant on solar power – an abundant, dependable, but also intermittent power source.

This leads to volatility in power prices, particularly at peak demand times during the evening, and also curtailment issues, where the grid is unable to take on the volume of electricity produced at certain times, causing solar farms to waste up to 50% of their output. In this environment, batteries can prove a particularly good investment as they allow projects to capture solar energy during the day and distribute it to users during peak demand at night.

The UK, in contrast, is undergoing an energy transition heavily dependent on wind power, which constituted 29% of the UK’s total electricity generation in 2023. Similar to solar, wind energy is an intermittent source of power that could benefit from energy storage solutions. However, the UK’s underlying electricity market is far more liberalised than Australia’s, meaning electricity sold on in its wholesale market is efficiently priced and competitive, making for a more challenging landscape for battery storage to achieve stable revenue yields over time.

In other words, the same technology used to fill the same need would be a returns play in the UK, while in Australia it would be a yield play. For those investors with the capacity to remain wide awake, monitoring these assets around the clock, there are rewards to be reaped, but those ill-prepared for this run the risk of substantial losses.

Picking the horse to win the course

Staying abreast of what the underlying value drivers are in different markets is a critical part of how to find alpha in the energy transition. It is fundamental for investors to engage at a local level if they are to take advantage of the global shift to low-carbon power and understand how each market will impact the return characteristics of different renewables technologies.

There is no one-size-fits-all approach to achieving a more sustainable global energy mix. Regional factors that shape how the transition is executed are as varied as the tools that it is being undertaken with, and investors must adopt a diversified, geographically differentiated approach to ensure that they pick the right horse for the race.

Those investors who commit to maintaining deep market awareness and a thorough understanding of the limits and possibilities of available technology needn’t compromise on returns, or impact.

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