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With renewables hot on investors’ minds, looming net-zero targets are giving the asset class a hefty tailwind. The market, however, is still relatively immature – with major roadblocks to work through before it fully takes off.
There will be opportunities along the way, but investment teams cannot forget to do their homework for the part of their portfolio that is, or could eventually be, dedicated to renewable energy.
Still, kicking off H2 2023, investment teams are saying that increasing allocation to renewables is necessary to meet goals and futureproof portfolios with the 2050 net-zero transition target upcoming for the European Union (EU).
“Dramatically increasing the share of renewable sources of electricity in the global energy mix is the only credible way to achieve the existing net-zero commitments from governments and corporates,” said Michael Steingold, Director of Private Markets at Russell Investments.
This view was shared by other investment professionals, who were looking to new policy to guide the way. “In the EU, we see the increasingly positive policy environment as a key potential tailwind for renewable energy,” added Madeline Ruid, a Research Analyst at Global X.
“Dramatically increasing the share of renewable sources of electricity in the global energy mix is the only credible way to achieve net-zero commitments.”
Despite continued concerns around pace and scale, Steingold said he felt that renewable energy generating technologies – like wind and solar – were “critical starting points” due to their present-day availability. In the longer term, however, he saw a shifting environment with new production technologies likely to emerge to provide a better baseload production. Nuclear, was one example he gave.
Nuclear energy has been a hot topic in recent months. The controversy around the 2020 EU Taxonomy’s inclusion of nuclear energy and natural gas recently came to a head on 21 June, when the General Court of the European Union dismissed an action brought by a Member of the European Parliament (MEP) challenging the sustainability of activities related to nuclear power and fossil gas.
For insurance investment teams this hubbub means that the current intrigue about renewables is likely an early wave – and one that will likely give way to more complex value generation process.
It’s an area, said Steingold, where diversification is particularly valuable because it mitigates the key risk in operational-stage assets – which is the variability of each resource (for example, solar irradiance, wind resource, and water flow) due to weather and other factors. Investment returns will also vary by sector, and, as always, investors will benefit from a diversified approach.
In the UK and EU today, the most attractive opportunity is battery storage, added Steingold. “[It’s] an important tool for an electricity system operator to keep supply and demand of electricity in balance,” he said. “It’s becoming increasingly critical as the intermittency of supply increases alongside the growth of wind and solar in the production mix.”
He said he felt another attractive area was US-focused opportunity – especially after the passing of recent legislation, like the Inflation Reduction Act (IRA), which created long-term incentives for solar and green hydrogen.
However, there are impediments – some technical, and others more theoretical.
A senior investment professional at one of the UK’s largest asset management firms told Insurance Investor that the major hitch to increased investment in renewables was ideology – or the old idea that energy was a commodity investment, rather than a manufactured good.
What was needed, said the individual, were cold hard facts about new growth options in renewable energy. “The market is likely mispricing this transition right now, as well as in the close future,” they said.
“Generally, returns to wind, solar, batteries, and heat are likely to
offer significant growth options.”
They added that the companies that remained tied up in oils and gas investments ran the risk of “chronically declining returns”. They would also likely miss out on new innovations in manufactured energy. “The ideologues are those clinging to business as usual: oil and gas investments. The pragmatists are the ones moving on.”
However, returns will be difficult to pinpoint exactly, especially as markets continue to mature. “Generally, returns to wind, solar, batteries, and heat are likely to offer significant growth options,” said the source.
This trend was indicative of a bigger shift away from commodity investments toward retail manufacturing opportunities, with a potential systemic downturn approaching. “The fat years will lessen, and the lean years will lengthen,” was the prediction.
For investors looking for long-term solid returns, the new manufactured energy system could be a good match.
The major roadblock, agreed Ruid and Steingold, was permitting timelines – which are often lengthy and convoluted.
Clean electrification was the “backbone” of the net-zero transition, said a January report from the Energy Transitions Commission, but required enhanced regulatory, administrative, and societal action to mitigate unnecessary delays caused by common planning and permitting barriers in renewables deployment.
The report, titled ‘Streamlining planning and permitting can accelerate wind and solar deployment’, found that putting into place simple measures to streamline planning and permitting could reduce project times by more than 50% for wind and solar projects.
“Offshore wind project timelines could be reduced from 12 years to five-and-a-half years, onshore wind timelines could be reduced from 10 years to four-and-a-half years, and utility-scale solar timelines could be reduced from four years to just over one year,” said the paper.
“Implementing these actions would remove a key barrier to clean electrification and accelerate the transition to net-zero,” it added. “Clean electrification will provide over 60% of all energy consumed in 2050, up from 20% today.”
“Governments, including the US and EU, are exploring ways to
improve permitting timelines.”
Ruid said she was hopeful current hitches could be worked through. “Governments, including the US and EU, are exploring ways to improve permitting timelines,” she added.
This predicted shift means that there will be new growth opportunities for insurance investment teams looking to draw in more sustainable returns – both in terms of temporal longevity and ESG reputational risk.
This April, after 18 months of EU Council and Parliament negotiations, a provisional political agreement was reached to revise the 2018 EU Renewables Directive and raise the share of renewable energy in the EU’s overall energy consumption to 42.5% by 2030 – with an additional 2.5% indicative top up that would eventually enable consumption to reach 45%. The revisions also outline measures to simplify renewables permitting in the EU.
“The Council and Parliament negotiators provisionally agreed on more ambitious sector-specific targets in transport, industry, buildings and district heating and cooling. The purpose of the sub-targets is to speed-up the integration of renewables in sectors where incorporation has been slower,” said the press release.
The 2018 Directive was part of the Clean energy for all Europeans package, which aimed to help decarbonise the EU’s energy system in line with the European Green Deal objectives. These include a 40% new renewable energy target for 2023 and 36-39% new 2030 energy efficiency targets for final and primary energy consumption.
The EU has been a global leader in renewables since then – and it also has Paris Agreement emissions reduction commitments to consider. “Renewables will play a major role in the transition to a clean energy system,” said the European Commission in 2016.
For investment teams at insurers, this means increased allocation to the asset class is likely to become a growing trend – one that will require additional resources and come with new headaches and ever-expanding opportunities.
With renewable energy generation just one part of a larger opportunity to cultivate growth with net-zero transition investments, investors are taking note, slowly deploying capital and gearing up for a larger energy shift in energy production.
“Investments in these categories are also likely to be more resilient over the long
term against changes in both production modes and electricity prices.”
This “opportunity set”, said Steingold, also includes other items, like renewables-enabling investments – in areas such as grid enhancements, storage and transmission connections, and “usage-side” investments (electrification of transport and industry and energy efficiency upgrades).
“Investments in these categories are also likely to be more resilient over the long term against changes in both production modes and electricity prices,” he added.
Ruid said that, in her view, wind and solar power systems would likely remain the primary renewable energy technology of choice for investors – particularly because they are suitable for a wide range of locations and use cases.
“Solar power systems are highly scalable and can be used to power a single residential home or an entire neighbourhood,” she said. “We believe that continued technology advancements of both wind and solar power system technologies can further improve performance, efficiency, and cost-competitiveness.”
With enhancements on the horizon and regulation rapidly evolving, the renewables market is beginning its journey to maturity – with many significant investment opportunities along the way for savvy investors.
