11 / 09 / 23 - 7 minute read
Decarbonisation. Net zero. Sustainability. When it comes to talking the talk, governments and organisations are very good at saying the right thing. Delivering on promises – or walking the walk – is the true litmus test though.
There was dismay in the UK recently when Prime Minister, Rishi Sunak, unveiled plans to authorise more than 100 North Sea fossil fuel licences – seemingly at odds with his government’s net zero rhetoric.
It was a reminder of the political volatility that can stall or undo the progress of the energy transition to renewable sources. Or as Wessel Schevernels – an Operating Partner at PATRIZIA Infrastructure who is involved in some of its renewable investments – puts it: “There’s a clear energy transition opportunity but there are many angles to it. The big challenge is facilitating economic development of new energy sources and technologies. But as long as oil and gas continue to be a cheap and readily available energy source, it will be used.”
And moving to renewable energy sources matters. “Low-cost renewable energy is absolutely key to net zero,” says Jane Baseby – PATRIZIA Infrastructure Associate Director – Sustainability. “Onshore wind is now the cheapest form of new power generation globally, followed closely by solar PV [photovoltaics], and together, are the most compelling pathway for energy system decarbonisation.”
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Wessel Schevernels, Operating Partner at PATRIZIA Infrastructure
Jane Baseby, PATRIZIA Infrastructure Associate Director - Sustainability
The link between renewable energy adoption and governmental policy is a strong one and is demonstrated by US President, Joe Biden’s Inflation Reduction Act (IRA), with its $369 billion of subsidies and tax credits for clean energy technologies, being cited as a key driver behind the news that solar power investment this year is forecast to exceed oil for the first time.
President Biden’s approach has been lauded by supporters of the ESG agenda. Ben Lonsdale, who as Director – Fund Management at PATRIZIA has overseen ESG implementation at fund level, believes a similar approach could be replicated successfully elsewhere: “More subsidies need to be introduced in Europe. Incentives such as tax subsidies would revolutionise the whole market.”
Despite the introduction of the IRA, the US remains one of the most polarised nations when it comes to the adoption of ESG with certain states pushing through legislation preventing pension funds from using ESG factors in their investment decisions. With growing levels of cynicism against the agenda, perhaps influenced by what’s seen as its complicated nature and vacuous corporate statements not backed up with tangible outcomes, it’s incumbent upon those who believe in ESG and the power of renewable energies to decarbonise the planet to persuade sceptics that it’s the right thing to do. This line of thought is one shared by PATRIZIA Infrastructure’s Head of Sustainable Transformation, Aaron Scott. “The constructive aspect of Red [Republican] states taking a counter position is that hopefully it allows for a balanced conversation,” Aaron says. “After all, rational debate should strengthen our society.”
Ben Lonsdale, PATRIZIA Director – Fund Management
One key stakeholder group which does walk the walk and talk the talk – or rather, puts its money where its mouth is – is investors. Sentiment towards renewable energy is strong with 50% of the 120 investors who took part in the PATRIZIA Client Survey 2023 planning to increase their allocation to renewables. More than 45% of those surveyed plan to increase their allocation towards the energy transformation, while almost 40% expect to decrease their allocation towards traditional energy.
Shawn Lal, PATRIZIA Infrastructure Investment Director
So, where exactly should these investors be placing their money? According to Shawn Lal, an Investment Director at PATRIZIA Infrastructure, Australia is a good bet. “In Australia alone, there’s a need to install a little over 30 gigawatts of renewable generation by 2030 in order to meet the government’s target of 82% renewable power generation by 2030,” Shawn comments.
“While deployment has slowed, we expect renewable energy zones – or REZs – will play an essential role in enabling delivery of utility-scale renewable and storage capacity. Rather than have all distributed energy everywhere, clusters of large-scale renewable energy projects can be developed using economies of scale, leveraging improved connection and infrastructure. REZs will also play a critical role in further unlocking private investment, attracting developers and infrastructure investors to participate and develop projects.
“You then have an enormous load of energy generation coming out of these areas which are connected by high-voltage infrastructure. So, everyone gets to share the cost and everyone gets a high-quality, brand-new connection to the grid. The investment opportunities in this space will get bigger and bigger as the projects grow in size.”
PATRIZIA’s first renewable energy investment in the country was the Oaklands Hill Windfarm in Victoria in 2011. Last year, it acquired two operational windfarms in the same state on behalf of long-standing institutional client, Prime Super. The unwavering attraction towards wind farms is a reflection of the continual advancement of wind power technology, as Shawn shares: “As wind turbines get bigger and bigger, they get more and more efficient as well.
“They're better at hunting for wind, have better technology and they’re able to vastly improve capacity factors [the amount of generation in a given year divided by the number of hours over a whole year were it to work 24/7 with constant wind]. A really good example is a lot of the wind farms that were built 10 years ago, where you’d be happy if they had a capacity factor of 20 to 30%. A 20% capacity factor means it only produced energy 20% of the time it’s been in operation.
“Now, it’s increasingly common to see new wind farms delivering 40% capacity factors or better. We recently acquired a couple wind farms in Victoria, south-west of Melbourne, where we were almost at 50% capacity factor in certain months. They're very efficient. They work 24 hours a day. They're out there for 25-30 years, and they're constantly hunting for the next breeze, which is pretty incredible technology. It's a constant iteration. Blades will get better, turbines will get better, the design will get lighter.”
Looking more broadly, the Asia-Pacific (APAC) region offers a favourable environment for renewable energy investment. Taiwan, for instance, has set ambitious targets to increase wind capacity by 2035 and Japan is aiming to reduce its 2013 greenhouse gas emissions by 46% in 2030 – just two examples in a region experiencing some of the effects of climate change first-hand and motivated to do something about it. Spotting this trend, PATRIZIA, together with Mitsui, earlier this year launched a new flagship strategy for sustainable infrastructure investments in APAC.
The EU is another hotspot for renewable energy investment, supported by the European Green Deal, approved in 2020. On this, Aaron says: “The Green Deal sets out ambitious targets to transition the European economy to be a more environmentally friendly and carbon-neutral economy. The opportunities are massive. The whole will of the EU is behind this. We are only starting to see this come into effect in the last 18 months.”
Going by recent datasets, too, it would appear to be working. Wind and solar produced more EU electricity than fossil fuels in May 2023 – the first full month this has happened on record. Wind power grew year-on-year to generate 17% of EU electricity in May (32 TWh). Renewable capacity additions, especially from solar, and falling electricity demand, have propelled wind and solar forward and caused fossil fuels to fall throughout late 2022 and into 2023; In Germany, despite the closure of its last nuclear power plants earlier this year, coal generation fell to the lowest level (7 TWh) since early 2020, driven by low demand, strong wind and solar generation and increased electricity imports.
Private investment, like that managed by PATRIZIA, plays an important role in realising the ambitions of governments. One of the four key tenets of PATRIZIA’s Sustainability Strategy is to ‘achieve net zero carbon status across our corporate operations and real asset portfolio by 2040 or earlier, with a clear ambition to execute as fast as external and our stakeholder requirements permit’.
As part of its Net Zero Carbon Strategy, PATRIZIA has set itself seven mid-term decarbonisation targets, many of which refer to renewable energy – particularly, renewable energy procurement (procure electricity from renewable sources for all landlord-controlled supplies by 2025, while encouraging occupiers to adopt renewable energy), asset level implementation (develop a decarbonisation plan that applies the energy hierarchy, including feasibility studies for onsite renewable energy, for all assets under management by 2025) and decarbonisation of heat (remove fossil fuel heat sources across all assets under Management, where practically feasible by 2030).
“With our clients, the desire to explore this goes beyond regulatory pushes,” says Aaron. “Investors are starting to challenge us to find opportunities. We look at a very detailed list of sustainable investments in the EU taxonomy.
“At the end of last year, we confirmed our commitment as PATRIZIA Infrastructure to the Net Zero Asset Managers initiative. As part of this, we set ourselves a target of reducing our CO2 footprint by 50% by 2030. Renewable energy is an obvious place to start with achieving this.
“Solar and wind is where the growth is. Our challenge will be to find those opportunities which provide the right risk-return. Carbon capture and storage will be a huge focus for us as well.”
Government support for the energy transition may ebb and flow, but PATRIZIA’s weight is fully behind it, in line with the convictions of the investors it serves.
Aaron Scott, PATRIZIA Infrastructure Head of Sustainable Transformation