Global renewable energy assets represent the fastest-growing infrastructure sub-sector, worth $US333 billion ($430 billion) last year, and can offer bond-like stability “if done right”.
That is the house view of private markets and real-asset manager Capital Dynamics, the world’s largest solar asset investor.
On a recent visit to Australia, Tim Short, Capital Dynamics’ New York-based director of clean energy and infrastructure, told a gathering of local superannuation fund investors that renewable energy assets can provide a bond-like, long-term stream of stable cash flows, suitable for any large institutional investment portfolio.
He said 2017 was a record year for renewable energy investment, topping $US333 billion, with deal counts higher, but lower in value, than any other infrastructure class – making it the fastest-growing sub-sector by deal volume.
Super funds must get on board
The price signal to build new solar and wind projects around the world is now strong and driving a surge in investment in the sector, he said, noting that nearly half of all new global infrastructure investment is now being directed into renewable energy projects.
Large superannuation funds need to get familiar with renewables ahead of expectations that trillions of dollars are going to flow into the sector, Short said. The biggest driver of renewable energy projects is now economic, with most models putting wind and solar in line with – or even more competitive than – thermal generation.
“I think you could throw away the feelgood aspects of renewables and the reason you’d still be interested in them is, when they’re done correctly, they’re a bond-like, long-term stream of stable cash flow with low correlation to the long-term macroeconomic environment,” Short said. “They are, in effect, an investment in the future energy infrastructure of the world. That risk/return profile is why it’s suitable for large superannuation portfolios in our view, when it’s done correctly.”
Demand is rising as states, cities, countries, and large corporations like Apple and (Google parent) Alphabet move to 100 per cent green-energy mandates. Growing appetite for green-powered data centres is another source of increased demand, driven by the growth in blockchain, cryptocurrencies, the ‘internet of things’ and data-mining technologies.
Another driver of demand for renewable energy is the boom in electric vehicles as Britain, India and China set a goal to have zero combustion-engine cars on their roads. Added to this is a 20-year cost reduction over four years for batteries, thanks to LG, Panasonic, and Samsung. And China hasn’t even come to the party yet as a source of battery manufacture, Short said.
Most of the investment into renewables is coming from the US, UK and Europe but Australia invested $9 billion in renewable energy projects last year – much of which is yet to come online.
When markets have a price signal to build and projects take only 18 months, their impact hits quickly and investors need to protect themselves during volatility and disruption, Short said.
As mechanisms to protect against volatility, renewables that have fundamental value and are genuinely contracted for the long term will make good investments, he said.
“During a boom, your airports and seaports will do better but when the economy’s going the other way, there’s going to be a lot of stability in this asset class,” he said. “We see it as an excellent complement to a super portfolio that offers a slightly different risk/return trade off, with low correlation. It’s an interesting asset class in future investment in the infrastructure of the world.”
Short’s London-based colleague, Capital Dynamics managing director Simon Eaves, said many renewable-energy projects were too small for large infrastructure investors and that those earmarked for an infrastructure portfolio needed to be isolated from energy markets.
Demand was strong internationally with a huge gap between demand and supply in emerging markets, and ageing thermal assets in the US and Britain.
“We’re a firm believer in the fact that you shouldn’t be taking merchant price risk,” Eaves said. “Our assets have lived through the US and UK, where prices have come down 60-70 per cent. If you haven’t had a long-term protection on your assets, those assets would be dead in the water from an equity perspective. If you just come at it with a scattergun, you won’t end up with the portfolio people expect, from a risk/return perspective.”
Short and Eaves presented to the 2018 Conexus Financial Real Estate and Private Markets Conference, held in Melbourne last month.