Key takeaways

  • Notwithstanding the short-term challenges of COVID-19, government and investor sentiment towards the energy transition is robust, with sustainability concerns gaining momentum around the world.
     
  • Many investors and corporates are looking to invest in the energy transition, but investment returns within renewables generation are being squeezed.

  • In the coming decade, we expect the smart money in energy markets to shift from renewables generation to system support, in areas like intermittency and variability, reliability, grid capability, and sustainability.

  • Advances in technology are providing ways to address these areas and exploit opportunities to invest capital.

  • For those with a holistic view of the energy system, and an understanding of the technology and the needs of the key participants, investment possibilities abound.


Introduction

Renewables have become a major part of the electricity generation mix (with a 28% global share in 2020). Beyond the obvious investment in plant capacity, this has required significant advances and spending on grid flexibility and resiliency.

But there is much more to do. Delivering the Paris Agreement to cap global warming at 1.5°C requires a 75%-80% renewables share of generation by 2050. This level of intermittency demands much more fundamental shifts in the market and grid structure.

Notwithstanding the short-term challenges of COVID-19, government and investor sentiment towards the energy transition is robust, with sustainability concerns gaining momentum around the world.

In the coming decade, we expect smart money in energy markets to shift from generation to system support in areas like storage, energy management systems and services.

This Executive Insights explores the set of high-value challenges to overcome in getting to an 80% renewables share and the investment opportunities such challenges present.

Investing in generation is becoming increasingly challenging

Public and political commitment to energy transition is driving substantial investments in renewables generation, with major contributions from renewables developers, major energy players (e.g. Shell, Total, BP, Centrica, EDF, RWE), infrastructure funds, pension funds, sovereign funds and others. The total value of low carbon transactions in the oil and gas sector alone increased from some $1.5 billion per annum in 2010-13 to $3-$5 billion per annum in 2018-20.

But as the class matures, finding appealing opportunities is getting tougher. Multiples on operating assets have expanded considerably (up to 25 times earnings), and margins on new projects are being compressed by increasing competition, tougher auction conditions, less attractive offtake arrangements (Power Purchase Agreements replaced by merchant risk) and material risk of electricity price declines in the longer term. 

Happily, there is a range of high-value system improvement imperatives within the energy transition that require large-scale capital investment over the medium to long term. 

Key market dynamics creating new opportunities 

The challenges of moving to a renewables-dominated energy mix are well documented and include: 

  • Variability and intermittency: Renewables generation can be both variable (functioning at different levels over short timescales) and intermittent (functioning only periodically). It is dependent on non-dispatchable resources, resulting in a mismatch between production and demand requirements on a daily, monthly and event-driven basis. Unless managed effectively, this can create fundamental inefficiencies, including excessive unused capacity, potential blackouts and pricing fluctuations. When renewables are no longer offset by a much larger base of controllable generation, these issues become significantly more difficult. 
     
  • Grid structure/quality: Most renewables differ from fossil fuel electricity in that they are de-centralised sources of energy. The increasing move away from a centralised to a more distributed network — with, in addition, two-way flows of electricity — causes congestion and additional complexity, and has put increasing strain on (often ageing) transmission & distribution (T&D) networks, requiring upgrade and restructuring. Management of new output characteristics and profiles, including proactive customers (both industrial and individual ‘prosumers’), has also created challenges and opportunities. 
     
  • Life cycle impact: The rise in renewables generation is creating a material sustainability challenge, with significant and rising quantities of waste from decommissioning/refitting renewable assets. (Germany, Spain and Denmark were each expected to dispose of 6,000 to 12,000 wind turbine blades in 2020.1) Full life cycle analysis and comparison of new energy technologies are difficult, with some market experts suggesting ‘green’ technologies are often not as zero or low carbon as implied, especially once the supply chain is considered. For each stage of the value chain, there are investment opportunities and business models that are exploring new technologies addressing this challenge and underpinning broader circular economy tailwinds.

A variety of investment opportunities are emerging across the value chain

As the transition gathers pace, these challenges are attracting increasing investment and innovation focus. System technology (including grid support, efficiency, storage, etc. — often collectively referred to as ‘Energy 4.0’) is advancing rapidly, and there is a growing range of opportunities for investors to participate. We have set out a range of themes and examples in a structured framework below.

Optimisation of renewables generation

(Resolving intermittency/variability challenges; improving reliability/efficiency)
Opportunities:

(a)    Intermittency/variability

-     Storage technologies and business models

-     Batteries and related infrastructure (e.g. Tesla grid-scale battery solutions in Australia, vehicle charging stations)

-     Hydrogen (e.g. electrolysis, storage, fuel cells and engines) (e.g. recent acquisitions made by Hensoldt and Worthington or the Snam/De Nora deal in 2020)

-     Electric vehicle-to-grid (V2G) or vehicle grid integration (VGI) solutions (e.g. Virta, Origami Energy, Marubeni, Smartest Energy and Grid Edge are rolling out a new proof of concept for V2G )

-     Aggregation and virtual power plants (e.g. recent acquisition of NextKraftwerke by Shell)

-     Demand management/demand response at the end-customer level (industrial, commercial and individual ‘prosumers’) using new technologies and software, solutions, and services

-     Players like Enernoc and Opower are offering customer-centric solutions for demand response, load control, dynamic pricing, etc.

-     Offers linked to increasing smart-metering and sub-metering roll-out in a range of countries, receiving increased interest from financial investors

-     Smart procurement offers using new software and technologies

-     Use of energy trading and financial vehicles/approaches to hedge availability, with accompanying digital automation solutions

-     Over the medium to long term, electricity market structures are likely to evolve to place a higher premium on availability, providing further support for this type of initiative

(b)    Reliability and efficiency

-     More efficient components and systems (e.g. solar tracking systems, inverters, mounting systems) serving renewables generation

-     Services/Operations & Maintenance to maintain and improve renewables (e.g. offshore wind services)

-     Predictive asset management and monitoring systems for generation equipment

-     Related digital and other services/engineering/software, including for remote services

Solving T&D grid structure issues

(Distributed energy and multi-source/multi-directional flows, creating instability and complexity in the T&D network)

Opportunities:

-     Smart T&D equipment and systems to stabilise the network and improve power quality (for example, Italy’s TWO Terna has a strong focus on increasing digitalisation in its 2020-24 strategic plan)

-     More sophisticated ’smart’ T&D equipment like switchgear with integrated digital elements (e.g. for remote measurement and monitoring) being developed by major players like ABB but also smaller OEMs

-     System equipment specially adapted to renewables (e.g. energy-efficient renewables transformers)

-     Other developments in power electronics and automation and control

-     Storage-based systems to provide short- or longer-term system backup

-     Predictive asset management and monitoring systems, including related software

Full life cycle impact and sustainability of renewables

Opportunities:

-     Opportunities to improve material usage and develop new technologies that change resources requirements, or new sustainable raw materials supplying the energy sector

-     Sustainable logistics and sourcing for the renewables supply chain

-     Solutions for recycling and reuse of battery, solar photovoltaic and wind turbine assets (e.g. in November 2020, the world’s largest-scale lithium-ion battery recycling facility was funded; the plant is a JV between Northvolt and Hydro)

-     Solutions for sustainable decommissioning of renewable assets (e.g. full retrieval of offshore wind turbine foundations vs leaving segments buried in the seabed)

Conclusion

With a broader range of energy transition participation options and attention shifting to system support areas (e.g. intermittency and variability, reliability, grid capability, and sustainability), specific opportunities will need careful evaluation.

  • How well-proven, effective and broadly applicable is the underlying technology?
  • How does it create value?
  • How well differentiated is the solution? Does it have a privileged position?
  • Who are the customers, and how well is the business positioned to serve them?
  • How is the solution likely to be impacted by any future regulatory change?

Additional Sources

IPCC, ‘Special Report: Global Warming of 1.5°C
IEA, ‘Global Energy Review 2020
Carbon Brief, 2020
Solar Portal, 2020

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