A look to the future

Following on from the relative hiatus in activity in 2018 with the withdrawal of government backed support mechanisms leading to transaction volumes being down 35 per cent compared to 2017, we predict a boom in renewables transactions this year albeit with a change in:

• Investment type with a move away from onshore wind;
• The rise of the electric vehicles and associated infrastructure;
• Risk profile with investors accepting merchant risk and entering corporate PPAs; and
• Geographical reach.

New wave of investment

The Climate Change Act requires the UK to reduce emissions by at least 80 per cent of 1990 levels by 2050. The government has set legally binding carbon budgets which require emissions to be capped in order to meet the 2050 target.

Despite these caps, renewable power is currently masking disappointing contributions from renewable heat and transport, which stood at 6.21 per cent and 2 per cent of the UK’s energy consumption respectively in 2016. If the UK is going to meet its 15 per cent Renewable Energy Target by 2020 and the carbon budgets there will need to be a shift in these areas.

In addition to the government ‘stick’ of the emission caps there is also the ‘carrot’ of high yields and capital growth which, when taken together, means it is becoming increasingly attractive for investors.

You don’t have to look too hard to find yields of 8 per cent and even up to 12 per cent on renewables bonds. So, whether carrot or stick is driving investment, we anticipate an increase in transactions in this sector in 2019 and beyond.

A wind of change

New projects in onshore wind and solar have slowed significantly in recent years with the withdrawal of Renewable Energy Certificates (ROCs) and feed in tariffs (FiTs). We predict that onshore wind developments will continue to decline, despite currently being the cheapest form of renewable energy. The withdrawal of subsidies, together with the blot on the landscape mentality, means that the only viable option for onshore wind is repowering existing farms.

We have already seen an increase in offshore wind, particularly off the coast of Scotland where the conditions are optimal for this type of energy generation. The growth and activity in this subsector is set to prevail in 2019 with the continued UK government support and technological advances making the operation and maintenance more cost effective and robust PPA contracts being agreed.

Whilst several investors and advisors to the sector believe the cost efficiencies and technology will plateau some fairly heavy hitters in the sector, for example Octopus, have publicly stated their belief that the downward trajectory will continue, again lending credence for the prediction that offshore wind is one to watch in 2019.

We have already seen a switch in investment and risk profile for the likes of Greencoat, EDF and Macquarie, from the onshore wind market to investment in and acquisition of offshore wind projects. However, offshore wind is a huge capital commitment and for the small to medium sized yield companies that want to retain control of their funds and projects, offshore wind is unlikely to feature in their investment portfolio.

The Blue Planet effect

Public, media and government support for the reduction of plastic waste is growing following the likes of Drowning in Plastic and the Blue Planet highlighting the devastating effect this is having. Also, with China’s increasing reluctance to take the UK’s waste, a viable alternative must be found.

So, with the public sentiment clearly behind the reduce, reuse, recycle mantra, we predict waste to energy will be an exciting space. However due to the unproven technology and associated risk and the large project capital requirement, waste to energy deals that get away in 2019 will not be common. Albeit this is an area to watch and will certainly take off in the more medium term.

The electric dream

Electric vehicles (‘EV’) are a sector to watch in 2019 and beyond where we predict some investors previously active in onshore wind and solar will look outside the ‘core’ renewable energy technologies to this new area of opportunity.

We predict the number of EVs in the UK will grow rapidly over the next few decades. According to a report by Aurora Energy Research Ltd the number is forecast to increase from 140,000 EVs in 2018 to 17 million by 2040. There are over 100 new EV models arriving on the market in the next three years, with the Porsche Mission E, the Aston Martin Rapide E, the Kia e-Niro and the Mini Electric all being launched in 2019.

The increase in EVs will have a knock on effect on electricity prices, the generation technology mix and carbon emissions. Smart charging of EVs should decrease electricity price volatility and reduce the range of wholesale electricity prices. However, initial studies into behavioural trends have found that people are reluctant to utilise smart charging due to the problem of range anxiety — they want to know their car is ready to go as and when they need it.

As only about 60 per cent of households in the UK have access to private parking (and so charging) at home, there is a bit of a chicken and egg situation evolving. The public need comfort that if they buy an EV they will have the ability to charge it and potential developers and investors in infrastructure want to know that there are sufficient EVs on the road to warrant investment in the EV charging space.

A tricky conundrum, but we have seen significant investment in this area with the likes of Shell and BP entering into the EV charging market; and at the same time we have seeen car manufacturers investing in innovation.

By Sheena McGuinness at RSM