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Investing in the clean energy transition: have you found the best opportunities?

As asset managers, pension funds and oil & gas companies evaluate their exposure to fossil fuels and carbon emissions, they are progressively increasing their investments in green energy. There have been a growing number of announcements from oil and gas companies, such as Total, Shell, BP, Equinor, and Repsol, committing to dates by when they will reduce or eliminate net emissions. Pension funds like Norges Bank Investment Management and Canadian Pension Fund, have made large investments and commitments to more. Blackrock and Goldman Sachs have established funds investing in renewables. As we relaunch economies post-COVID, a growing number of companies are looking to manage stakeholder value and set a successful pathway to guide them through the next economic crisis. Investing in the energy transition delivers attractive returns, particularily when risk-adjusted.

While there are many different pathways to a low-carbon future, greater energy efficiency and using low-emitting electricity is on every path. A low-risk way to engage in new carbon-neutral businesses, and one with quick returns, is through acquisitions of projects or platforms. There are hundreds of small and medium-sized businesses in the clean energy space delivering steady, predictable cash flows. There is a strong business case for investing in infrastructure, as these assets create real and long-term stakeholder value. With renewables now indisputably having the lowest cost of electricity generation, investing in them is a straightforward prospect.

So where are the best opportunities to reduce carbon footprints and consume low-emitting electricity right now?

Solar generation

Projected to have the lowest unsubsidized cost of energy by 2022, solar will be the most competitive source of electricity generation and is the fastest-growing source in North America as well as globally. The solar market has not been fully consolidated and there are many independent platforms to be acquired or invested in. These platforms cross the utility, community, commercial and industrial scales. Some recent acquisitions of solar platforms in North America include ENGIE, which bought Infinity Renewables and SoCore Energy; BP, which partnered with Lightsource; Shell, which bought a 44% interest in Silicon Ranch; Orsted, which bought Lincoln Clean Energy; National Grid, which bought Geronimo; and AES, which bought sPower along with AIMCo.

So which platforms are left? At the utility scale, some of the remaining independent platforms include Cypress Creek Renewables, Pine Gate Renewables, Community Energy, Longroad, and Carolina Solar Energy. At the community development scale, there are a few independents left, such as C2 Energy Capital, Greenbacker, Delaware River Solar, Nexamp, Bluewave Solar, and Eden Renewables. One of the last remaining large private platforms not already owned by a global utility or oil & gas major, whose portfolio is primarily wind but also has growing solar and storage assets, is Invenergy.

While the risk profile of solar projects is low, so are the margins, and consequently, there is little room for underperformance. The fast rate of pace of evolutionary improvements in panels, inverters, and trackers brings much-appreciated upside on performance, despite the higher uncertainty of a limited track record. Solar projects have been underperforming their proforma expectations, but that underperformance can be accounted for in the valuation when properly understood.

When solar plants are paired with storage, there is greater complexity and an increased risk of underperformance of the batteries, inverters, and system design. There is a greater need to understand power market forecasts in the valuation of the storage attributes if they are not contracted through a long-term offtake contract.

Energy efficiency in building

Instrumentation of buildings enabling customized use of load control, including, heating, ventilation, and cooling, has been shown to decrease energy use in buildings by 10% with a quick return on investment. There is a range of start-up firms offering software and/or hardware solutions to decrease demand charges and with innovative business models to generate long-term revenue. Some digital native start-ups that will change the way buildings are managed and energy is used include GridPoint, Blueprint Power, and PeakPower. Most office buildings and C&I buildings will undergo a major transformation over the next few years as load control technology is rolled out. As buildings become smarter, storage and EVs will be incorporated into their infrastructure to optimize the entire system.

Understanding the competition, the competitive advantages, and the business models, and locking on revenue streams are critical to making investments in energy efficiency. Repeatability and scalability are critical to the growth of these businesses. The control system is particularly critical with the incorporation of more expensive assets like storage and EVs.

Green hydrogen

Green hydrogen does not present the immediate predictable revenue stream that solar and energy efficiency do; however, there are longer-term opportunities in the market. Investments in green hydrogen are a longer-term play. As the cost of electrolyzers and renewable power decreases over the coming decade, pilot projects will increasingly be proposed. North America is anticipated as one of the first regions to adopt green hydrogen.

In the shorter term, there are some unique opportunities to site green hydrogen production facilities close to wind and solar facilities that incur heavy amounts of curtailment, such as in Texas or Ontario. The cheap power prices of renewables in Texas make production from Texas facilities more economically attractive than production from offshore wind plants in North America. While we expect that offshore wind will be able to generate green hydrogen in North America, it will still be a decade before offshore wind prices make producing green hydrogen in North America competitive with green hydrogen produced from onshore wind and solar.

Understanding the technology for hydrogen production, the pathway for transportation, and distribution and storage channels is critical to investing in green hydrogen projects. Successful investment takes unique combination of technical and market knowledge gleaned from both oil & gas and renewable industries.

Carbon capture, utilization, and storage (CCUS)

CCUS is a key technology to reduce greenhouse gas emissions at their source. CCUS also enables the removal of carbon from the atmosphere, which is one of the solutions needed to reach net-zero emission levels. The DNV GL Energy Transition Outlook 2019 predicts that 800 Mt of carbon dioxide will be captured and stored in 2050. This would require a tremendous build-out of carbon capture facilities over the next couple of decades.

There are many advancements in the capture, transportation, and storage of carbon, and understanding the technology that will capture, condition, compress, transport, and store the carbon is critical to investing in the right areas. This is an interdisciplinary understanding combining upstream, downstream, process engineering, CO2 transportation, and geoscience in unique ways.

The technical and market knowledge required for smart investments

There are many opportunities to invest in the energy transition. Now is the time when making great investments is critical to laying down a strong foundation for a low-emission future.

Coming equally from oil & gas and renewables backgrounds, DNV GL has the technical and market expertise to help firms make informed and successful investments to transition their businesses to low carbon.

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