Investing in the energy transition
In the race to invest in the energy transition, picking winners is difficult. Investec UK convened an expert panel to help investors navigate the clean energy horizon, and there are some interesting learnings South African investors can glean from the discussion.
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The transition from fossil fuels to clean energy is close to a tipping point. As the market evolves, investors should take time to consider the opportunities and challenges that will impact every part of our lives. To help us navigate the ongoing transition in energy markets, Investec UK hosted its inaugural conference in April on the topic: The Energy Transition in Turbulent Times.
Providing us with a fascinating overview of the main themes were:
- Ian Marchant – Chairman of Morgan Advanced Materials plc (manufacturers of materials for the semiconductor, healthcare, clean energy and clean transportation sectors) and Logan Energy (a leading hydrogen technology company based in Scotland), former Chair of Thames Water and CEO of SSE plc
- John Flaherty – Managing Director at Smart Metering Systems (a UK-based fully integrated clean energy infrastructure company)
- Laura Sandys CBE – Chair of the government’s Energy Digitisation Taskforce, Non-executive director at Highview Power, SGN and Energy Systems Catapult
- Nigel Pocklington – CEO of Good Energy (a green energy company in the UK)
- Dr Robert Trezona – Founding Partner at Kiko Ventures (a $450m evergreen cleantech investment platform)
- Harold Hutchinson – Managing Director, Alternative Energy at Investec (read all articles by Harold here)
You can watch the event here or read our summary of the main themes below.
Legacy Assets vs Clean Energy
Ian explained that the energy transition is about two distinct types of investment, legacy assets and clean energy. Investors must distinguish the two. Legacy assets are based on fossil fuels. Investors should look at how much cash they can generate and how long their energy assets might last. Renewable and clean technology businesses are often more challenging because they lack a track record. And start-ups have higher failure rates than more established firms. Spreading your risk across legacy assets and clean energy is likely to prove more successful than putting all your eggs in one basket.
Ian said that in both cases, picking winners is difficult. The rate of innovation and change makes the future hard to predict. Instead, investors should focus on identifying likely survivors. He advised looking for signs of flexibility and a willingness to pivot or adapt. Investors could spot trends early by studying countries where the energy transition was more advanced. Scandinavia, the US and Japan are particularly interesting. Companies that survive are also likely to need solid balance sheets, sound management and (for legacy assets) a credible transition plan.
The energy transition is reshaping the structure of the industry. Traditionally, households and businesses buy energy from a limited number of national suppliers in the UK. Power generation and storage is centrally controlled and still run by a relatively small number of individuals. In future, customers will be in the driving seat. They will have more choice and control, and the energy sector will be more democratic, decentralised and much more complex. Laura’s simple observation raised a laugh from the audience and highlighted the scale of the coming change: “Today we’ve got 400 people who run the energy sector and they all know each other’s golf handicap. Isn’t that fantastic?” She then explained that there will soon be millions of stakeholders, representing a total transformation of the industry.
Several speakers explained that they did not currently invest in retail energy firms, noting that many are poorly funded. Nigel said that: “Insufficient regulation led to the extraordinary situation where 60% of retail firms failed within weeks of the of the energy crisis starting”. Laura also noted that retail suppliers have failed to engage with customers to understand what they want, which has led to poor customer service. Nigel also observed that the government’s energy price cap hinders him from investing in mainstream retail energy firms. John suggested that most retail energy companies are unnecessary go-betweens adding little or no value for consumers.
“Insufficient regulation led to the extraordinary situation where 60% of retail firms failed within weeks of the of the energy crisis starting.”
Laura highlighted a severe shortage of skills and experience among senior politicians in the UK. Ministers often lack a proper understanding of technology, business and energy. And government inertia is also a problem. Regulators and politicians need clearer objectives and a more joined-up approach to writing policy. Transport and energy departments would be better off working together but often pull in different directions. Legislators consistently fail to understand the scale of change needed to hit carbon reduction targets. Planning authorities are often slow to approve new projects due to outdated processes and local objections.
Robert noted that: “The UK has a large number of old, badly made buildings that are going to be very expensive to deploy heat pumps on and we’re just not facing up to that problem”. Nigel suggested that many households and businesses still find clean technology too expensive and that the government is failing to help customers upgrade their homes quickly enough.
Laura suggested that much could be learned by studying what has worked in other industries. Many phone and broadband providers were much better at reducing complexity for customers. Energy firms that embrace new customer-centric business models will thrive as customers demand the same service standards they receive in other sectors.
Several panel members said electric vehicles (EVs) will play a leading role in the energy transition. Every home with an EV generates surplus energy that can be sold back to the central grid. This is known as vehicle-to-grid integration. Opportunities will exist for energy firms that can store and integrate energy generated by a range of sources, including EVs.
Robert noted that hydrogen fuel is exciting and expected to grow significantly over the next 25 years. Hydrogen is a zero-emission fuel likely to play an essential role in helping the steel and shipping industries reduce their carbon output. He stated that the current demand for hydrogen technology is extraordinary. He also noted that long-duration power storage was an exciting area for potential investment.
Listen to podcast: Hydrogen as an example of sustainable investing
The panel highlighted several investment opportunities in the built environment. Robert said smart technology was booming in modern homes as households demanded more control over their energy tariffs. Solar energy is also growing, and heat pumps will likely play a critical role in rural areas. John highlighted a chronic shortage of skilled installers and noted that: “If I had a few quid spare, I’d probably be investing in training centres focused on heat pump and EV charger training because that’s where the growth is.”
“If I had a few quid spare, I’d probably be investing in training centres focused on heat pump and EV charger training because that’s where the growth is.”
Finally, Ian asked the panel to imagine they were the UK energy minister for a day. What one change would they make? Nigel suggested reforming the wholesale energy sector to simplify clean energy prices. Laura would create a new independent energy agency to make better long-term decisions. Robert would demand greater tax breaks for clean energy start-ups. John would establish a national energy generator and invest in onshore wind and tidal power. He would attempt to reduce local objections to wind farms by offering lower prices to communities that approved developments. Ian would invest in education and training.
Ian jokingly concluded that: “I asked four people the same question and got four different answers. If we’d have had ten people on the panel, we would have had ten different answers.” In answering his own question, Ian explained that he would invest in training and skills, because human talent and innovation were critical to successfully managing the energy transition.
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