Investing in Renewable Energy Infrastructure – Leading the Way to Net Zero

A global challenge, we all own

Right now, most of our thoughts are consumed by the pandemic. But even though we are amid a global health crisis, over the longer term the greatest challenge we face remains climate change.

In December 2015, 195 nations including the UK adopted the Paris Agreement on Climate Change. The landmark agreement includes the aim to strengthen the global response to the threat of climate change by holding the increase in the global average temperature to less than 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C.

In July 2019, the UK made its intentions clear when it became the first major economy in the world to pass laws to end its contribution to global warming by 2050. (Source). i.e. become net zero

What is Net Zero?

Net zero means any greenhouse gas emissions are offset by schemes which remove an equivalent amount of greenhouse gases from the atmosphere; schemes such as planting trees or using technology like carbon capture and storage, for example.

The UK’s 2050 net zero target, one of the most ambitious in the world, was recommended by the Committee on Climate Change, the UK’s independent climate advisory body. It will require a dramatic reduction in the initial generation of greenhouse gases, and then offsetting those which remain. Renewable energy has a critical role to play in achieving this.

How do we become Net Zero?

The journey to net zero requires significant and rapid progress. The Inter-Governmental Panel for Climate Change (IPCC), a United Nations body, has mapped out 4 different potential pathways for achieving net zero emissions, all of which require a significant uptake in renewable electricity.

“In 1.5°C pathways with no or limited overshoot, renewables are projected to supply 70–85% of electricity in 2050”. (Source)

Emissions from power generation have reduced significantly. The UK has done well to date and is a world-leader in terms of decarbonising its power generation. Achievements include a quadrupling of UK renewable capacity since 2010, and in 2018 low-carbon energy rose to just over 50% of our electricity generation – a record high. (Source).

We are now in the transition from building renewable assets that had high levels of govt subsidy, to a world where assets are unsubsidised, and the revenue streams come just from selling the power generated; the market is maturing. This underlines the effectiveness of the subsidies, as it shows that they played their part in giving the renewables industry scale, which has now led to much lower costs to build renewable assets.

As the lowest cost forms of renewables, there’ll be a huge role for solar and onshore wind.

Renewable energy is critical to closing the gap to Net Zero

There’s no doubt about the size of the gap between current renewable energy infrastructure in existence today, and that required in order to achieve the UK’s ambitions for 2050.

There’s a role for government and the private sector to create a consistent and stable regulatory framework and to provide the capital required to support investment in necessary sectors. The market is experiencing once-in-a-lifetime transformational change.

Near-full decarbonisation of heat for buildings is a significant challenge

In 2017, gases from heating and lighting buildings accounted for 17% of UK greenhouse gas emissions. The majority of these were CO2 which has dropped by 11% since 1990 largely as a result of energy efficiencies in housing design and a growth in bioenergy use.

Opportunities for further emission reductions are in three main areas: switching away from fossil-fuel based heating; increasing the energy efficiency of the building stock and improving the energy efficiency of lighting and electrical appliances. The UK government has introduced the Future Homes Standard, which involves the commitment to phase out high-carbon fossil fuel heating installations from the gas grid, as well as broader aspirations and initiatives around home retrofits (to ensure that all homes achieve a much higher standard of energy efficiency, EPC band C, by 2035) and low-carbon heating.

Whilst it is estimated that the cost of achieving a net-zero position from real estate is extensive (analysis has confirmed a total annual cost compared to a theoretical ”if we do nothing scenario” estimated to be in the region of £15 billion) there are several benefits to the investment on top of reduced emissions. These include alleviating fuel poverty; improving the comfort, health and wellbeing of occupants; and unlocking the significant industrial opportunities associated with low carbon and resilient buildings. (Source)

Unlocking potential in transport will create significant change

It’s already becoming commonplace to see electric and hybrid vehicles on the road, and across forecourts of dealerships. By 2035, the UK government wants all new sales to be of electric vehicles. But will this be enough? The vehicles we use as individuals are only part of the solution, the public transport systems and logistics sectors also need to make widespread change for the results to be impactful.

If heavy goods vehicles (HGCs) converted to hydrogen and electrification throughout the 2030s, as well as transitioning railways to being powered by electricity or hydrogen rather than diesel, the commercial transport sector could make a meaningful difference.

Combined with society shifting to alternative modes of transport, and a general reduction in mileage from all forms of transport, it is estimated that a reduction of as much as 98% in emissions could be achieved by 2050.

These new forms of transport require appropriate infrastructure to support the practicalities of alternative fuels. Which brings further investment opportunities for vehicle charging strategies and manufacturing.

Inevitably, there are numerous health benefits to this change in our way of moving around. Not only would air quality improve, but the knock-on effect for personal wellbeing from reduced pollutants would be enjoyed by all of us, in turn alleviating pressure on our healthcare systems.

Institutional investors can create impact at scale

Investors across the world are becoming increasingly aware of the impact they can have in helping address climate change. They recognise that they play a critical role in fighting climate change and are transitioning their investments away from fossil fuels and into climate-saving investments.

As I wrote about in my last blog, institutional investors such as pension funds are increasingly conscious of wanting to invest in ways which will help create a world in which their stakeholders (pension savers for example) would like to live in and leave as a legacy for their children and grandchildren.

Last year our renewables team – Octopus Renewables – commissioned a survey (source) of institutional investors from across the globe, representing $5.9 trillion in assets under management. Encouragingly, respondents planned to invest $643 billion in renewable energy assets over the next 10 years. Demand for greater access to renewable energy assets had risen by nearly 40% since the previous survey undertaken by Octopus just 9 months earlier. Capital is starting to move in the right direction to help the world limit climate change.

While the majority (71%) of respondents believed they could make a material difference to the fight against climate change, a significant number (23%) had not altered their investment strategies to reflect this. 16% of respondents had made no allocation at all to climate-saving sectors, showing just how much opportunity remains.

Barriers to faster progress still remain. 36% of respondents to our survey cited a lack of renewable energy investment skills within their organisation as a factor limiting how much they felt able to do.

Octopus is a specialist investment manager with two decades of experience. We see a key part of our purpose as being to unlock investment into the alternative sectors by presenting investment opportunities which fit institutional investors’ mandates. Our teams are structured around individuals with deep experience and passion for impact investment who can help bridge the gap between assets on the ground and inclusion in an institution’s portfolio. Our capabilities include institutional investment vehicles allocated to renewable energy infrastructure, care homes, retirement communities, high growth small businesses and commercial real estate.

We recognise that institutional investors need – and want – more support. We believe that through education on underlying risks and by the broadening of investment options, Octopus can help institutions access impact investments that deliver attractive risk-adjusted returns, tailored to their objectives and portfolio requirements.

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Octopus is a leading alternatives asset manager in renewables, real estate and smaller companies. Hear from their Co-Founder, Chris Hulatt during Part 3 of our Sustainable Investment Forum Europe 2020 on the 15th September. Secure your place and regsister today for free.