Major asset owners should take full ownership of any renewable energy generation assets they invest in to avoid devaluing those assets through complications associated with meeting fluctuating demand for energy, and through potential interruptions to generation.
Octopus Australia chief executive Sam Reynolds told the Investment Magazine Fiduciary Investors Symposium in the Blue Mountains last week that in addition, investors should take a portfolio approach to investing, including solar and wind generation assets, along with battery storage capacity.
Reynolds said the estimated required capital investment in the energy transition is around $500 billion. He said that asset owners, while cautious about investing in the sector, should not be put off by relatively under-developed energy policy, or concerns about the potential returns available.
“If you’re looking at a transition, you need to be looking at wind, solar and storage in your portfolio,” Reynolds said.
“Wind and solar generate different times of the day. Wind in this country is generally at night; solar obviously during the day. Storage is there for cloud cover and unexpected wind changes et cetera. You need to have a portfolio. It also means you need to own 100 per cent of the assets [so] you can run them like a portfolio.”
Reynolds said it is possible to have fractional ownership of green generation assets but how well that works in practice relies heavily on the quality of the power purchase agreements (PPA) in place.
“For us, though, if you want to do a long-term energy transition strategy, you should have a mix of wind, solar and batteries in your assets so that you can start to look at a 24-hour period of renewable energy and start to sell the market a product.
“If you’re selling the market solar [in the] middle of the day, and it generates from 9am to 4pm – seven hours – it’s not the most valuable thing you can sell them, because rooftop solar generates at the same time.”
In this case, for example, battery storage comes into play to allow energy generated between 9am and 4pm to be stored and sold at a time when prices are higher. Not owning 100 per cent of the solar generation of the battery storage capacity can complicate that process.
Suppressed appetite
Reynolds said investor appetite for renewable energy assets has been suppressed by a range of factors, including the lack of a properly joined-up energy policy from the federal government.
“State governments are getting on with it a little bit faster,” Reynolds said.
“The federal government is coming out with some good policy, though, some longer-term thinking, which is helping.
“I just think when, especially if you’re a global pension fund or you’re looking into Australia [and] where to put park your capital, if the federal government of that nation isn’t joined up, where if you’re looking to park billions of dollars – which is what Australia needs – you may have another look at somewhere else until the government can give you something more positive.”
Reynolds said some investors are also wary following the events of 2016 and 2017, when “a lot of investors did pile into the market, and probably with a little bit of an uneducated view on investing”.
“We did the same, quite frankly,” he said. Octopus now has more than $8 billion invested in renewable energy assets in Australia.
“We came from the UK and went very heavy into the market. We were lucky enough to change our strategy very quickly, to look at the grid in a different way.
“There was reason for caution; what we’re saying now is everyone has learned a lot in the last five, six years of how to manage the transition. It’s concentrated on Australia, but this transition – the things that we’re dealing with on the grid and other things – is coming for other nations around the world, Australia has had five years to deal with it and has increased the has changed the way we look at investing.”
Reynolds said there inevitably will be volatility as the energy market transitions to renewable generation capacity, but “the winners in volatile markets are those that can move early and get things going with the right strategy”.
“I think now is the right time,” he said.
“A low investment market is a requirement to get more investment in so that it does create a good opportunity in our view – and you shouldn’t be giving up returns for investing into energy infrastructure.”
