In order for the European energy transition to be successful, investors will need to look for assets that connect energy systems across countries and continents, thereby unchaining themselves from the fickleness of weather patterns, Foresight says.
The transition from a fossil-fuel-based economy to a sustainable, renewable energy-centred one is well on its way. But often governments are somewhat constrained in their efforts to facilitate the transition beyond their jurisdiction.
Yet, if we are to create an efficient, stable and secure energy system, governments and investors alike will have to look beyond a nation’s border and develop an interconnected and diversified infrastructure system that spans across countries and, more importantly, across different weather systems so it can draw on energy supply wherever it is produced.
“We should make the best use of renewable resources and have the most efficient overall system that can deliver low carbon on the one hand, but equally lowest cost to consumers on the other, with the highest levels of security of supply,” Richard Thompson, a Partner and Member of the Investment Committee at Foresight Group, says in an interview with [i3] Insights.
“Increasingly, we have a view – and governments have a view – that you don’t just need to create energy within your borders, but you need to wire up these systems into bigger interconnected systems. That can be across continents; it can be across groups of countries.”
The clean energy system really starts to work when you have a system that is connected in an area that is bigger than the weather; a system that has a footprint spanning different weather systems, so that it's uncorrelated – Dan Wells
Dan Wells, also a Partner and Member of the Investment Committee at Foresight, adds: “The clean energy system really starts to work when you have a system that is connected in an area that is bigger than the weather; a system that has a footprint spanning different weather systems so that it’s uncorrelated.
“In Europe, that will be things like solar in the south of Europe and then onshore wind in the north of Europe, and then offshore wind both in the North Sea and, in the future, in the Atlantic, probably off the west coast of Ireland.
“Those two – Atlantic offshore wind and North Sea offshore wind – are actually uncorrelated. They’re far enough apart to be different kinds of systems essentially.”
But to realise this vision, there are a number of obstacles to overcome. Geopolitical issues aside, there are capacity issues with the existing grid, as well as issues with energy distribution.
For example, there are currently long queues in certain markets to connect assets to the grid. The United Kingdom is a case in point. Developers who are building an asset from scratch right now might have to wait up until the 2030s to get connected.
Foresight is trying to address some of these bottlenecks by investing not only in renewable assets, but also in long-term storage and the grid itself.
“On the grid side, a big focus for us is international interconnectors, so high-voltage, direct-current cables in order to connect systems and be bigger than the weather,” Thompson says.
“One project we’ve invested in through the first fund is a 750-megawatt interconnector that will connect Ireland to the UK. And that’s a project that has got strong political support both on the UK and Irish side.”
On the grid side, a big focus for us is international interconnectors, so high voltage, direct current cables in order to connect systems and be bigger than the weather – Richard Thompson
Foresight acquired a majority stake in the MaresConnect interconnector project through its energy transition fund, Foresight Energy Infrastructure Partners. The cable route is about 245 kilometres in length and will run underground and under the sea between Dublin in Ireland and Bodelwyddan, Denbighshire, in Wales.
MaresConnect is widely considered to be an essential contribution to the European Green Deal, a set of proposals to make the European Union’s (EU) climate, energy, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55 per cent by 2030 compared to 1990 levels.
“Ireland has very bold plans to increase their offshore wind. It has some of the strongest offshore wind resources in Europe and Ireland wants to be an exporter of power to make the most use of those renewable resources,” Thompson says.
“But in order to do that, given it has a relatively small power market, it needs interconnection to Europe, either directly to continental Europe or through the UK. So the project that we’ve invested into has been named in Ireland’s National Energy and Climate Plan. It is essentially Ireland’s roadmap document to how it will meet its 2030 decarbonisation target.”
Long Term Storage
Expanding and updating the grid is a massive challenge in itself, but switching to renewable energy is not just about the distribution of energy, it also creates issues around the availability of energy at times of peak demand.
To counter this issue, energy providers will need to develop more long-term storage assets to balance the fluctuations in demand.
“One bottleneck is that we need more storage on the grid, but we need storage at different timescales. In the early phases of the energy transition, we needed lots of really short-duration storage, second-by-second, hour-by-hour balancing to time shift energy supply,” Wells says.
“For example, when you’ve got a big solar output in the afternoon, you might want to time shift it a couple of hours into the evening when there’s been a peak load.
“But as you get to deeper levels of decarbonisation and you get more of your power coming from these variable resources, you need longer-duration storage. We see that as a bit of a bottleneck and we’re putting long-duration storage in the congested areas.”
One of the oldest forms of electricity storage is pumped hydropower. It uses two water reservoirs at different elevations that can generate power as water moves from one reservoir to the other, passing through a turbine.
One of the challenges with pumped hydro projects is they can't be built everywhere. You need the topography, typically about 200 metres of height differential, to build a lower and upper reservoir – Richard Thompson
Water is then pumped back into the upper reservoir, after which the process can be repeated. The system acts as a giant battery because it can store power and then release it when needed, while pumping water back up when energy demand is low.
“Over 90 per cent of the world’s electricity storage capacity is pumped hydro. It’s an established, well-understood technology and has the highest round-trip efficiency of any long-duration storage technology,” Thompson says.
Typically, pumped hydro recovers about 80 per cent of the energy used for pumping, but when used in combination with wind and solar, pumped hydro often uses surplus energy that would otherwise be wasted.
“One of the challenges with pumped hydro projects is they can’t be built everywhere. You need the topography, typically about 200 metres of height differential, to build a lower and upper reservoir,” Thompson says.
“We have made two investments so far into development-stage pumped hydro projects. They’re both mid-sized projects, not mega-projects. They’re 300 megawatts each and provide about eight hours’ storage duration.
“Both projects utilise former mining sites for the lower reservoir, so it’s part of the restoration of the sites and removing almost a scar on the landscape with something more aesthetically pleasing.”
Nature Restoration
Using abandoned mines for pumped hydropower is a good example of Foresight’s efforts in nature restoration and one of the reasons why its Foresight Energy Infrastructure Partners fund qualifies as an Article 9 fund under the EU’s Sustainable Finance Disclosures Regulation, the deepest shade of green you can get in sustainable investing.
But it is not just about the use of the land on which an asset sits when developing new projects; nature restoration also looks at the broader landscape in which an asset is positioned. To help with assessing a new project, Foresight has developed a nature recovery blueprint in partnership with the UK’s Eden Project, an educational charity and social enterprise to teach people about the importance of biodiversity and the impact of pollution.
As part of the blueprint, Foresight establishes a baseline for a site and canvasses the existing flora and fauna. It then considers how it can improve the landscape.
“Nature restoration at our energy assets is a really important part of the program. We think there is a responsibility for asset owners in the energy space to be thinking about the land that sits underneath [their assets], in particular wind and solar projects,” Wells says.
“There are estimates that somewhere between 3 to 5 per cent of global land mass might sit under renewable assets by 2050. And there’s lots you can do with renewables to help enhance and restore nature, whether it is growing mushrooms under solar panels or restoring habitats around wind farms.”
Pumped hydro often requires some form of alteration to the existing landscape, but Foresight is careful not to invest in projects that jeopardise existing ecological habitats.
Where we're investing in hydro, we typically wouldn't be investing in assets where we're building a dam and flooding a valley. We would be looking at assets that have kind of lower environmental impacts – Dan Wells
“Where we’re investing in hydro, we typically wouldn’t be investing in assets where we’re building a dam and flooding a valley. We would be looking at assets that have kind of lower environmental impacts,” Wells says.
“For example, in pumped hydro, we are utilising mining sites for the lower reservoir and then building an upper reservoir on the side of a hill so you’re not flooding large areas. And then as part of our work on the asset, it’s about how we increase the biodiversity there. We can plant certain species of plants and flowers and increase the biodiversity of the site that way.”
As a long-term investor in natural capital investments, Foresight is highly experienced in protecting and enhancing biodiversity, with over 58,000 hectares of land under management.
Hydrogen
Many renewables, such as wind and solar power, tend to be non-controversial sources of energy from an economic standpoint as in many instances they are already more efficient than fossil fuels. But a more contentious energy source is hydrogen.
Critics of hydrogen argue it simply cannot achieve the scale to become a competitive source of energy. Its application to heating or transportation is still at a very early stage and in the case of passenger vehicles the race seems to have been won by electric vehicles.
But Foresight believes the future of the energy system will look like a big orchestra, where every instrument plays a different role. Hydrogen certainly will have a key role within this.
Wells points to the increasing incentives for hydrogen production across the globe. For example, in the US the Inflation Reduction Act is incentivising hydrogen production through tax credits, while other countries, such as Japan, have legislated import subsidies.
“Green hydrogen definitely has a role to play, but investors need to be focused on what that role is. Green hydrogen has the most effective role to play in areas like industrial decarbonisation, essentially as a method for producing green steel in the future,” Wells says.
“In other industrial processes, we look for green hydrogen assets where you’re essentially building the generation in close proximity to the demand, including particular types of transport, such as heavy-duty goods transport. So you’re not building an asset and shipping it halfway around the world.”
Harnessing Foresight’s Australian Footprint
The European energy transition strategy can opportunistically invest up to 20 per cent of the fund in Australia and North America. Wells and Thompson, therefore, collaborate closely with their Australian colleagues, who are located regionally and have over 15 years’ experience in investing in renewable energy projects.
On an annual basis, the Foresight team reviews about 900 opportunities for the fund, including a significant number in Australia. Foresight currently manages over 430 infrastructure assets globally, and since 2018 has completed 25 investments in a separate $1 billion Australian diversified renewable energy strategy, with a good mix of technologies and geographies and a strong development pipeline.
“In building a well-diversified energy infrastructure portfolio, investors need to incorporate complementary risk and return profiles to capture the potential for significant diversification benefits across sectors and geographies, enhancing risk mitigation across both short-term and long-term investment horizons,” Wells says.
“Furthermore, deploying capital into storage and grid assets alongside renewable energy generation can be seen as essential for maintaining system flexibility and reliability, especially as the penetration of renewables continues to increase.”
This article was sponsored by Foresight Group. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.
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