Investing in renewable energy assets in Australia is about much more than large scale solar systems. Wind farms and emerging technologies are key to building diversified renewable energy portfolios, Foresight says
Australia is the sunniest continent in the world; it has the highest solar radiation per square metre of any continent. You might think that the energy transition away from fossil fuels to sustainable forms of energy generation would include a lot of solar in Australia.
And that might be so, but this is not the place institutional investors look for future opportunities when assessing the energy transition, infrastructure manager Foresight Group says.
In fact, out of the three mature renewable energy sectors in Australia – hydro, solar and wind – solar makes up the smallest part of Foresight domestic renewables fund’s portfolio.
Paradoxically, this is partly due to the success of solar among consumers.
There was a solar boom of energy projects, where people said they were low risk and more or less plug and play. But I think the experience was that the delivery of those utility scale projects was much harder than people expected
“Solar is only a very immaterial part of our current portfolio,” Daniel Beaver, Executive Director at Foresight, says in an interview with [i3] Insights.
“Consumers at home have really embraced rooftop solar in Australia, whether it’s on the East Coast or the West Coast. That amount of rooftop solar has created a large amount of aggregate solar supply and that has changed Australia’s energy mix,” he says.
Whereas before the solar boom most of the energy demand was in the middle of the day, as businesses operated at full steam, while evenings and early morning saw lower demand, today the abundance of solar panels have created a dip in the middle of the day when solar generation is at its peak.
The high demand has now shifted to the mornings and evenings, when people come back home and use electrical devices, but when there is little or no solar generation. The success of solar take up by consumers had a dramatic impact on the price of solar power.
“There was a solar boom of energy projects, where people said they were low risk and more or less plug and play. But I think the experience was that the delivery of those utility scale projects was much harder than people expected,” Beaver says.
“We thought the market had overshot the risk profile for the return and we took a more conservative approach to construction and delivery risk during that period,” he says.
Sources of Uncorrelated Renewable Energy
Currently, renewable energy accounts for 35 per cent of total electricity generation, but to grow this to 82 per cent by 2030, as part of the Australian government’s target, significant investment is still required, as much as $300 billion by some calculation, and this creates investment opportunities.
Foresight has been investing in renewables in Australia for 20 years, historically via Infrastructure Capital Group. The business it acquired in 2022 was one of the first institutional investors to develop, build and operate renewable assets.
Today, Foresight manages more than $1 billion in renewable assets and plans to double this in the next three years.
With the ubiquity of solar energy on the rise, the Foresight team has been looking for projects that were uncorrelated to solar power generation, including wind, hydro and more recently, battery energy storage systems (BESS) .
Diversification by technology, geography and offtaker provides strong portfolio construction opportunities with predominantly neutral or negative correlations between the technologies and states, thereby mitigating individual asset risks.
Battery storage will also provide a critical role to balance the market by soaking up periods of excess renewable supply and shifting it to when it’s needed.
Wind and hydro are particularly large allocations in the portfolio, as they are mostly uncorrelated to other power generating asset so they get higher value capture prices on those assets. In addition, they are located in different states.
When it comes to wind farms, location determines a large part of the return on investment. Some of the best wind regions in Australia are in South Australia, Victoria and Western Australia and most of Foresight’s assets are located in these high demand areas.
They are not just sites with high wind resources but also have proximity to strong grid connection and enjoy existing community support, which are criterial success factors for new developments.
Taking one of their Western Australian development projects as an example, consultation channels include a Community Consultative Committee and ongoing engagements with landholders, the local council, traditional owners, local businesses and neighbours. The designated Foresight Community Liaison Officer held over 600 engagements in the asset area in the past 12 months alone.
Because tier one sites were snapped up earlier, it's probably a little bit more challenging to develop new ‘greenfield’ projects. The wind resource might not be quite as good, and you're having to build new and expensive grid connections and build a project in a new region which impacts multiple stakeholders
“Our existing projects have been there for a long time, and our teams live and work within the community. We ensure high standards and there is ongoing stakeholder engagement to maintain the social licence to operate within the community,” Beaver says.
“Because tier one sites were snapped up earlier, it’s probably a little bit more challenging to develop new ‘greenfield’ projects.
“The wind resource might not be quite as good, and you’re having to build new and expensive grid connections and build a project in a new region which impacts multiple stakeholders,” he says.
Having assets located in these tier one locations puts Foresight in a better place to face any competition, even as wind technology continues to improve.
Turbines continue to get larger and some of the newer ones that have gone into operation are sporting diameters of almost four times the length of a Boeing 747-400. But Beaver says this doesn’t mean sites with older turbines become obsolete.
“We’re probably more insulated, or at a competitive advantage, because at the end of a project’s life, we would be looking to re-power the site. We would look to take a two-megawatt turbine and make it a six-megawatt turbine. So, we continue to expand, but also invest in our existing footprint,” he says.
Diminishing Impact of the Inflation Reduction Act
The Inflation Reduction Act (IRA) in the US, was the Biden administration’s great push into the energy transition. It earmarked US$369 billion (AU$520 billion) for projects to support the transition to a zero-emission economy.
But this act also meant it detracted renewable energy projects and resources away from other countries, as contractors and suppliers sought to benefit from the subsidies on offer.
But with Donald Trump taking over as President of the US, the act has taken a back seat. The Trump administration reportedly took more than 50 actions to scale back or wholly eliminate federal climate mitigation and adaptation measures since the end of January and its biggest target was the IRA.
Although a concerning development, it may redirect some capital back to Australia, Beaver says.
“There was a lot of capital chasing the IRA, and not just capital, but also equipment suppliers,” he says.
There was a lot of capital chasing the IRA, and not just capital, but also equipment suppliers
“Where there’s a dramatic change in government policy, it creates sovereign risk and people will re-evaluate investing in those markets. For Australia, it could be positive and viewed as a preferred investment destination, since there is long-term support for renewables,” he says.
Beaver points out two policies in particular that support investment in renewable assets in Australia, including the Large-scale Renewable Energy Target, which is part of the Renewable Energy Target, and the Capacity Investment Scheme, a governmental revenue underwriting scheme to accelerate investment in renewables.
“If you look into the Australian market from the outside, you see a range of players that have already invested here and government policies to support it. Perhaps, if we can redirect some of the equipment that was earmarked for the US [to Australia], we might get better pricing on our new projects too,” he says.
Is There an Investment Case for Nuclear?
In Australia, another debate around the energy transition is the viability of bringing nuclear reactors online as a form of low emission energy generation. But the reception of this idea by infrastructure investors has been somewhat lukewarm, as many feel the cost and timeframe involved alone make nuclear undesirable.
The CSIRO’s GenCost 2023-24 Report estimates that the planning, development and construction period of a new reactor would be around 15 years. Beaver says that 75 per cent of Australia’s coal-fired fleet is already beyond its designed life and many would need to be replaced relatively quickly.
“We’ve got a near-term problem to solve with the retirement of coal-fired generation and nuclear cannot be delivered in that timeframe. There are lower cost technology solutions available today,” he says.
“The time scales are quite acute, so we need investment in renewables, storage and firming assets now. Coal assets are at the end of their lives, they’re inflexible and they’re not able to work in what is a more dynamic market with variable renewable energy.
“These coal plants are susceptible to unplanned outages, which then are creating blackouts and price spikes. We saw that a few years ago in Queensland with the Callide Power Station, which had big implications for the rest of the Australian market,” he says.
The Callide Power Station experienced an explosion in 2021, which caused part of the station to be taken offline and almost half a million Queenslanders lost power. It was one of the worst power outages the state has ever seen.
“Keeping coal online really goes against having a reliable, competitively priced and secure energy market. Delaying coal-fired power station closures also requires large taxpayer subsidies to keep them going,” he says.
Beaver is also concerned about delays and overruns that have been part of many nuclear projects in other markets. This results in a risk profile that is unattractive to many investors.
“I can’t see an investment case where nuclear is financed by the private sector,” he says.
“There are some good case studies, such as Hinkley Point C in the UK. Hinkley Point was going to be the first new project in 30 years. It’s nearly double its budget; it was originally going to cost £18 billion and now estimated at £34 billion. It was scheduled for 2025 and it now might come online in 2031.
“That gives you a feel for the scale of the dollars that need to be invested, but also the delays. If you look at those numbers, then there’s no private investor that’s going to step into these projects.”
Renewables have a very different timeframe. It takes about two years to build a wind farm, while battery plants can be constructed in less time than that. The familiarity with the technology and the large number of existing projects in wind energy also means that current contracts include penalties for delays to the constructor.
“If there is a delay or an overrun, then the contractor or equipment supplier has to pay damages and so there is protection for the investor. For mega projects such as nuclear and pumped hydro being built by government, it’s ultimately taxpayers underwriting the risk and shouldering the cost overrun and performance burden” he says.
Investment Opportunities in Emerging Technologies
The energy transition will require not just established renewable technologies, but also need investment in new and emerging technologies to cope with the broad overhaul of, not just the energy market, but to a large extent the broader economy as well.
We are not talking about carbon capture and storage technologies just yet. These technologies are still nascent and lack scale to apply with any meaningful impact.
Chevron’s LNG plant in Western Australia is a good example.
The Gorgon project intends to capture 80 per cent of carbon dioxide produced by the plant and store it deep underground. But technological issues and delays have resulted in only a third of the emissions being buried. And of course, the company has no control over the emissions being released when its end clients actually burn the LNG upon consumption.
More promising emerging technologies are new types of batteries and forms of energy storage, Beaver says. “For new acquisitions, we’re looking predominantly for more in wind and storage, but our team is also looking at emerging technologies.
“I think the most exciting area of new emerging technology is long duration storage. This is where most of the market is focusing. Governments are trying to incentivise these technologies to fill a market need”.
Two years ago, Foresight invested in two early-stage pumped hydro projects, 210MW/1600MWh Glenmuckloch in Scotland and 296MW/2175MWh Silvermines in Ireland. Foresight did so with the expectation that the respective governments would introduce regulation to enable those assets to become investable
“Due to our scale, we can put money towards those sorts of emerging technologies and developments,” he says, and we expect these to be a driver of strong future returns.
“We see origination as a key component of success and the ability to create further value by building, developing and operating companies. Last year, our global investment team reviewed over 1,000 investment opportunities for our energy transition funds in Europe and Australia and we’re excited about the opportunities in the pipeline that will be key drivers of strong future returns for our investors,” he says.
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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