The Billion Euro Energy Transition Investment Opportunity
Estelle Castres, Head of Institutional Sales at Natixis Investment Managers and Raphael Lance, Head of Energy Transition Funds at Mirova, explain why institutional investors have a key role to play in financing the energy transition, the key benefits they can expect investing in this ‘new core’ asset class, and where the new opportunities exist in next-generation energy infrastructure.
ESG and sustainable investing
Responsible investment can make a difference, driving risk and financial performance, positive social and environmental change
Investing in the energy transition is not just beneficial: it is essential! Developing renewable energy, low carbon transportation and energy efficiency are the main levers that will help meet the goals set by the Paris Agreement. Institutional investors have a key role to play in financing the energy transition, which requires huge amount of capital.
Financing the energy transition means investing in tangible assets in power generation infrastructure such as wind farms, solar power plants, hydroelectric infrastructure and all associated storage solutions, as well as in energy use infrastructure: electric or hydrogen vehicle and fleets, as well as all the deployment of charging stations.
Energy transition infrastructure can offer access to a predictable, inflation-linked and stable cash flows with a low correlation to the economic cycles and financial markets. In a low interest rate environment, they can offer an attractive yield and k since building and commissioning times are much shorter than traditional infrastructures, they can offer a quicker return on investment. These investments are therefore an attractive tool for diversifying institutional clients’ portfolios.
There are massive requirements for financing: between now and 2030, nearly 1,700 billion euros are expected to be invested in Europe3
. There are already a wide range of assets associated with energy transition infrastructure What’s more, with of the shift to low carbon mobility, there are a variety of different types of infrastructure and new energy technologies meaning this asset base is likely to become even more diversified.
Mirova is one of the top energy transition infrastructure investors in Europe3
, with 20 years of experience in managing investment funds dedicated to the energy transition. Mirova manage 1.5 billion euros of assets invested on behalf of leading institutional investors in wind farms, solar plants, hydroelectric power, biomass, biogas, storage, electric mobility and soon in green hydrogen.A Wide Range of Investment Opportunities
Involved from the very beginning in the financing of renewable-sourced energy production infrastructures, Mirova has a unique perspective on this market, contributing to projects that are new, whether in terms of technology, maturity or geography.
Mirova Energy Transition in a Nutshell
Investments to energy transition represent an opportunity for institutional investors to play a role in the fight against climate change. Renewable energy is one of the fastest growing segments within the infrastructure market and clean energy production, grid connection, storage and electric transportation represent a compelling investment opportunity in the move towards a low-carbon economy.
The rationale behind allocating to core and emerging infrastructures in the energy transition market
The energy infrastructure market offers several attractive features for investors:
- A transition in motion: an increase of the share of renewable energy in energy consumption in the EU: from 9.6% in 2004 to c. 20% in 2020 –The European target is 32% by 20301 which would require massive investments of €1.7 trillion2 over the next 10 years
- An evolving industry: 1) Competitiveness: the ever-falling clean energy production cost puts renewables at parity with conventional generation sources. 2) Innovation: growing number of solutions to the energy transmission, distribution & storage challenges enable integration of existing & emerging renewable technologies in energy systems. 3) Financing: mature renewable energy technologies allow a sound cash flow predictability.
- A diversifying asset class, with low correlation to the business & capital market cycles and providing attractive yield potential
- Long-term investments in tangible assets with relatively steady, low volatile, inflation-linked cash flows
- Favorable treatment under Solvency II: SCR of 15% with look-through analysis vs. 49% for private equity type investments
Key competitive advantages
Mirova exhibits the following key competitive advantages:Experienced investment team
Pioneer in energy transition projects
- 20+ years experience in structuring & managing energy transition infrastructure fund: one of the longest track records in Europe through 4 investment funds successfully raised and deployed amounting to 1.5B€ of AUM
- 70+ transactions, representing 5.7GW of installed capacity financed in 10 European countries with 40 successful exits
- All team members have a robust background in energy transition, core skills in financing, sourcing, structuring and in asset management
An impact-driven approach
- Exposure to Core – Greenfield/ Brownfield infrastructure – and to corporate infrastructure through mobility or renewable developers, mainly in Europe
- Long-term partnerships & co-investing with industrials to create a strong alignment of interests & secure proprietary deal flow
- Responsive & flexible approach to deal structuring to best match the project developer’s expectations: equity and/or mezzanine
- J curve mitigation through investments in quickly operational greenfield projects blended with operating brownfield assets or through mezzanine that enables quick value enhancement & cash flow generation allowing early repayment to investors
- Merchant exposure managed through a diversified approach of electricity market mechanisms and securing regulated or private offtake agreements (PPA)
- Mix of yield-driven & value creation performance (revenues from the asset ongoing operation ; investments sold within 7-10 years)
- Hands-on approach to asset management: renegotiation of maintenance and operating contracts, refinancing capabilities, representation on the governing bodies of the project companies
- Build a 100% low-carbon, climate resilient (compatible with a 2°C1 climate scenario2) & maximising job creations
- Pioneering lifecycle approach to environmental, social & biodiversity risks/opportunities assessment
- Innovative opt-in impact scheme to finance non-profit projects related to fight against energy poverty & energy access & sponsor biodiversity research programmes
At a glance
- Affiliate: Mirova
- Type: Illiquid
- Asset type: Core Infrastructure (70%-80%; equally invested across Greenfield and Brownfield) & Corporate Infrastructure (20%-30%)
- Region: Europe and residually (max 10%) in OECD countries
- Sector diversification: 1) Core Infrastructure: Solar PV, Hydro, Onshore & Offshore Wind, Biomass & Biogas, Mobility, Energy storage, Hydrogen, District heating. 2) Innovative Infrastructure: Storage, Grid and Mobility. 3) Corporate: Infrastructure: Mobility, Renewable developers.
- Maturity: 12 years
- Main risks: Capital loss, Economic, market, liquidity, project, credit, electricity network, operational, regulatory, counterparty & compliance risks
Discover the Thinking of Mirova on the Energy Transition:
1 Source : International Renewable Energy Agency (IRENA)'s Global Energy Transformation Report: A roadmap to 2050.
3 Based on financial assumptions. These do not constitute a contractual commitment from Mirova and shall not engage its responsibility. Investments in real asset portfolios are reserved for specific investors, as defined by their respective regulatory documentation, and are mainly subject to loss of capital risk. Mirova reserves the right to modify the information presented at any time without notice, and in particular anything relating to the description of the investment process, which under no circumstances constitutes a commitment from Mirova.
Published in January 2021.
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This communication is for information only and is intended for investment service providers or other Professional Clients. The analyses and opinions referenced herein represent the subjective views of the author as referenced unless stated otherwise and are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material.
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