In this edition of New Energy Expert Insights, we sat down with Rodrigo Arias Lopez, Executive Director at Pottinger and an expert in corporate finance and capital markets, to discuss the investment outlook for the renewable energy sector.
Rodrigo has extensive experience in domestic and international corporate finance and capital markets having worked in Europe, the Americas and Australia. He advises both private and public clients across multiple industries on corporate strategy, M&A and capital raising. Before assuming his role as Executive Director at Pottinger, Rodrigo worked for Banorte in Mexico City, Bloomberg in London, U.K. and Citibank in Monterrey, Mexico.
Pottinger is an independent advisor to leading companies, state and federal governments, industry associations and growth stage companies on M&A, capital raising, corporate strategy and public policy.
What are some of the main challenges and risks currently facing the renewable energy sector?
A key new challenge in the renewable energy sector has been ensuring compliance with modern slavery obligations in the supply chain. This is now a threshold matter for developers and investors to engage with at the earliest stage of development. The Modern Slavery Act 2018 (Cth) imposes reporting obligations on certain entities to disclose their efforts to address modern slavery risks in their operations and supply chains.
For investors, this means conducting thorough due diligence to identify and mitigate modern slavery risks within their portfolio companies and investments. This includes assessing the labour practices of suppliers, ensuring transparency and accountability throughout the supply chain, and implementing measures to address any identified issues. These obligations have the potential to push out the due diligence process and make it more costly. However, it is essential for investors to ensure compliance as failure to comply can lead to reputational damage, legal liability, and financial losses.
Similarly, following the theme of corporate social responsibility, community engagement has also taken centre stage for renewable projects. This shift reflects a broader recognition of the need for sustainable and responsible business practices that go beyond purely financial considerations. Community engagement in renewable projects is seen as essential for building positive relationships with local communities, addressing their concerns, and ensuring that projects deliver tangible benefits to those affected. By prioritising community engagement, renewable energy projects can enhance their social license to operate, minimise conflicts, and contribute to sustainable development in the communities where they operate.
Finally, skills shortages is also an ongoing risk facing the renewable energy sector. There will be difficulty in scaling up renewable energy deployment if demands for skilled workers (particularly in areas such as engineering, project management, and specialised technical roles specific to renewable energy technologies) cannot be met. This scarcity will inevitably lead to delays and increased costs. Addressing the skills shortage in the renewable energy sector will require both government and industry support.
In our recent NEAN fireside chat, you noted an interesting shift in superfunds’ willingness to invest in the distribution network. What is the significance of this and what does it mean for future renewable energy projects?
In October last year, Birdwood Energy and Aware Super announced a partnership to establish the Birdwood Distributed Energy platform. Both Pottinger and the legal team at Hamilton Locke advised on this landmark deal, and we’re seeing the impact of this partnership in the market now.
This deal is significant as a financing precedent as it unlocked a new financial structure for distributed renewable projects. Historically superfunds have only invested in large-scale renewable energy projects (such as solar and wind farms) as they have been seen as a stable long-term investment. Superfunds have been reluctant to finance smaller scale projects on the distribution network due to the highly regulated and fragmented nature of the distribution network.
The Birdwood deal has overcome this issue by leveraging small projects at scale to achieve better returns (economies of scale). This has been possible partly due to the fact it is less complex and easier to connect smaller projects (less than 5 MW) to the grid as there is not the same level of regulations and generation curtailment. Further, given the due diligence required for a small project and a large project are quite similar, there are cost savings in building a series of similar assets under one due diligence framework.
This innovative financial structure has sparked the interest of other superfunds in the market and has potentially unlocked a new source of equity in the renewable energy sector. This shift could lead to increased investment in upgrading and expanding the distribution network, which is essential for integrating more renewable energy technology into the grid. It could also lead to new business models and investment opportunities in the distribution network sector, paving the way for future renewable energy projects to be more efficient, reliable, and sustainable.
In your experience, what are investors nervous about in the current market?
In the current market, investors are nervous about the bankability of Battery Energy Storage Systems (BESS). Large-scale BESS facilities can now store energy for periods ranging up to eight hours. Investors acutely recognise the need to co-locate BESS projects with renewable energy generation technologies such as wind and solar as such projects are currently not realising their full revenue potential.
One significant factor for this has been the solar ‘duck curve’, which represents an over supply of electricity during the day when there is high solar irradiance. This has led to revenue challenges for solar projects in the past. The excess generation usually results in either curtailment (wasting excess energy) or negative pricing (where producers have to pay to offload excess electricity). This, coupled with grid constraints, market and regulatory factors, lack of energy storage, transmission limitations, weather variability, and operational challenges, can all contribute to revenue losses in these projects.
However, investors have been slow to adopt BESS in their renewable energy portfolios as banks have been unwilling to finance the purchase without Power Purchase Agreements (PPAs) in place. The situation has not been helped by the general downturn in the PPA market due to pricing uncertainty and future market outlook. However, the future is optimistic and changes in pricing are expected soon as the economics of co-locating wind and solar plus BESS become self-evident. Investors are also realising there is clear first-mover advantage in adopting BESS early.
What is your market outlook for Australia?
There has been a slowdown in closing transactions over the last 18 months due to market uncertainties such as high interest rates, inflation, and global conflicts. Notably, some companies are still expanding. Generally, there have been discrepancies between investors´ and developers´ return expectations, leading to developers holding onto projects for longer periods.
The Australian Government’s Future Made in Australia agenda is generating excitement, but its impact on driving demand is yet to be fully realised. The long-term outlook suggests significant changes are needed, especially regarding AEMO’s ISP change plan, which highlights the scale of electrification required in Australia. Despite short-term disruptions, the demand for electricity remains strong and investors are strategically weighing up their short-term and long-term objectives in their decision-making processes.
The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact Matt Baumgurtel.
