As subsidies for renewable energy fade and assets age, super funds and institutional investors face new challenges from repowering, regulation, and return. Florence Chong speaks to Birdwood Energy’s Manish Rastogi about how to mitigate some of these risks
Renewable energy has emerged as a key sector for super funds and other institutional investors looking to participate in the energy transition and to meet their net-zero targets.
The idea of harnessing wind and sunshine to power homes, factories and offices seems like a no-brainer. Yet, the sector has become captive to deeply polarising political ideology.
The biggest challenge Australia has with renewables is a political one at the moment
Today, one of the most significant risks facing investors in this sector is not financial or technological – but political uncertainty.
In Australia, the debate around renewables versus nuclear was a prominent theme during the recent election campaign. With the incumbent labour government returned to office, the issue may be temporarily set aside for the next four years.
Not so in the United States, where the Trump administration has begun dismantling Joe Biden’s renewable energy policies, which were designed as part of a broader effort to combat climate change.
“The biggest challenge Australia has with renewables is a political one at the moment. If Dutton had won the election, the question would be whether his ambition for nuclear is directly in conflict with renewables,” Manish Rastogi, Head of Funds and Investor relations at Birdwood Energy, says.
Mitigating Risk In a World of Dimishing Subsidies
Rastogi has long experience investing in infrastructure, including stints with IFM Investors and most recently Frontier Advisors, where he was its Head of Real Assets until late 2024.
He says asset owners with renewables in their portfolios, or those entering the market, are more mature now. They are under no illusion that government subsidies to incentivise renewables will continue indefinitely. “The level of subsidies is diminishing or removed,” he says.
The investment risks in renewables, he adds, can be mitigated with thorough due diligence on portfolios or individual assets. On the technical front, the key challenge is ensuring energy generated from wind or solar connects to the grid.
“The rewiring of the grid is a national priority and that is being taken care of by a distribution and transmission network operators (some of which in turn are owned by investors and fund managers) and Federal and State Governments. This will help create more capacity. But this is going to take time.
The rewiring of the grid is a national priority and that is being taken care of by a distribution and transmission network operators and Federal and State Governments. This will help create more capacity. But this is going to take time
“As more base load is removed, like coal-powered stations are being shut down, you are going to see potential impact on grid stability. This will be resolved as more renewables are built to fill the gap. The way you resolve the stability issue is by firming renewables, and you do that with energy storage,” Rastogi says.
Firming refers to making electricity from intermittent sources, such as wind or solar, as reliable and predictable as baseload power.
Rastogi notes that battery storage for renewables is evolving rapidly. The systems must be designed to cope with volatility, meet peak demand, and smooth fluctuations throughout the day. Lithium-based batteries are becoming more commercially viable and available at lower costs.
Technology continues to advance, he says, pointing to developments in California. There, battery storage durations have increased from 3-4 hours and the trend is moving toward 8-12 hours. The California Energy Commission recently awarded a grant to Form Energy, a US company, to develop an iron-air battery system capable of discharging energy for up to 100 hours.
Assessing the Future of Wind and Solar Assets
Owners of the first generation of wind and solar farms are beginning to consider the future of these assets. Rastogi explains that these projects typically have a 20- to 25-year lifespan, with power purchase agreements (PPAs) often lasting only 10 to 15 years.
“Owners must consider how to extend their PPAs or face the challenge of repowering those assets,” he says.
Repowering and retrofitting aging wind and solar projects is a complex undertaking. It often requires upgrading outdated technology, which isn’t always possible.
Rastogi recalls one project where the equipment was so obsolete that upgrading was not viable. In such cases, owners must weigh the high cost of repowering against the potential returns from new PPAs.
If repowering isn’t viable, the next consideration is recycling materials used in wind and solar plants.
“There is a lot of metal and fibre glass in those wind towers and turbines and glass and re-usable metals in solar panels. Over the next five to ten years, as the first generation of assets become redundant, we must start thinking about the circular economy in the way re-usable materials are extracted and recycled” Rastogi says.
Recycling is not straightforward. Solar panels are heavily glued and bonded, making the separation of metals, glass, and electrical components labour-intensive. There are companies attempting this, with limited success.
China may emerge as a key player in equipment recycling. However, asset managers will eventually need to embrace circular economy principles. Governments are beginning to mandate recycling.
The European Union, for instance, requires the recycling of both wind turbines and solar panels under its Waste Electrical and Electronic Equipment Directive.
Outsourcing versus Insourcing Management of Assets
Before investing in battery storage or any renewable asset, Rastogi stresses the importance of assessing both project viability and the technical capability of the manager. “This is important when something goes wrong. You need in-house expertise to fix the problem.”
He cautions against over-reliance on external consultants.
“Our view is if you’re relying on consultants for design, delivery and O&M (operations and maintenance), you may not have the full grasp of how to manage those assets well and to extract optimal yield. You also lose some of your return in outsourcing.
Our view is if you're relying on consultants for design, delivery and O&M, you may not have the full grasp of how to manage those assets well and to extract optimal yield. You also lose some of your return in outsourcing
“Investors have been focused on building up portfolios of renewables and ensuring a good proportion of the energy generated is contracted. Only then will these investments start to mimic real assets.”
Rastogi also warns investors to assess pipelines of development projects carefully, as these may contain unrealistic projections.
“There has sometimes been an element of blue sky in these pipelines in the past. Asset owners have to be wary. They shouldn’t necessarily be paying for the blue sky if the probability of bringing those projects to fruition is going to be a challenge.
“Again due diligence is key. Asset owners want to see operating assets and/or projects that have a visible pathway to development, are at a ready-to-build stage or in construction and managers with the technical capability to deliver on those assets are best placed.”
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