Get ready for the rollercoaster

New Power’s April issue takes a look at some of the investor money moving into the energy industry. It throws up some interesting structural changes and some clear trends for the future.

The message? Hold on tight, things are going to change much, much faster than you expected.

First of all, we know now that renewables are not a risky investment. The most cautious of investors, pension funds and insurers, who might in the past have focused only on networks, are targeting the market. Even the UK government has spotted this trend, acting to exclude renewables from enterprise schemes that make risky investments more attractive by offering, for example, tax relief.

What is more, we have moved on from relying on government backing. At this stage, political risk remains one of the largest risks in power prices – but it applies as much to other aspects of the power price as it does to renewables. Now a long-term power purchase agreement with an industrial offtaker that wants power from renewables to hedge its power price risk is an attractive proposition. Such agreements are not yet routine – but it seems likely they will be, within a few years. It makes the arguments around whether government would be the counterparty for the UK’s Contracts for Difference seem to have taken place in another era.

 

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But all this is about the slow, long-term development the industry is used to. That’s not the big motor now. The question to be asked, is: if the power production side of the industry is looking more stable, what has happened to the venture capital that drove the renewables industry in its early years?

These investors are looking for new opportunities with a higher risk and return profile. Storage and distributed generation has been its home for a couple of years, but now ‘soft’ areas offer a more tempting target than large hardware. Knowledge industries, apps, IT and big data are among the most important destinations, and so are the consumer gadgets that support them (and, not at all incidentally, both can access those government enterprise schemes). This is going to be the game-changer for the power industry.

‘Knowledge’ innovations will change the relationship that energy consumers have with their supplier -  to the extent, in some blockchain applications, of not having one at all. As a consequence, they will change the relationships between industry players, the types of energy asset that will attract investment (think flexibility, not capacity, for example) and the direction for technology development.

If change is being driven by consumers and by capital seeking fast returns it can take off very fast. Forget industry change plans that consider the decades ahead and require years to test and trial new technologies. Change is  on an IT development cycle of a few years, and a consumer adoption cycle that can be just months. It’s a positive feedback loop that will take off fast. Instead of slow, deliberate change, we can expect new companies and technologies to bloom suddenly and as suddenly fall to earth. Fast reactions will be needed.

New Power’s April edition takes a look at this changing financial landscape from a variety of angles, from the progress of fossil fuel divestment by pension funds, to the opportunities for green finance, to new ways of thinking about security (where cybersecurity is as important as the UK’s gas sources). Subscribers can login to download the issue now.

The outcome? If you thought the industry had changed rapidly in the last few years you haven’t seen anything yet. We are on the long climb up to the top of the rollercoaster.  It’s about to move a lot faster, and get a lot more bumpy. Hold on tight.

Janet Wood

Further reading:

What’s on the slow track?

 

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