Resilience and opportunity: creating value in low carbon energy markets

Downing Renewables & Infrastructure Trust Plc (DORE), on behalf of Downing Hydro AB, a Swedish entity holding over 30 hydropower sites, was proud to announce its 2024 results in the prestigious GRESB Sustainability Benchmarking assessment for infrastructure assets.  

GRESB is an independent and standardised sustainability benchmark used by investors and clients globally.

Key performance highlights saw Downing Hydro AB:

• Achieve 90 points out of 100, surpassing the GRESB average in all categories.
• Rank 1^st out of 695 GRESB participants for the performance component.
• Rank 2^nd out of 6 hydroelectric power generation managers in Europe overall.

Key strengths identified by GRESB include:

• Strong leadership and management policies in place at all levels of management: from asset and investment managers’ policies to DORE’s Trust commitments.
• Exceptionally strong capabilities in performance reporting, including for greenhouse gas emissions and wildlife habitat management.

Hannah Picknett, Head of Infrastructure Asset Management Operations and ESG, commented: “We strive to remain at the forefront of sustainable asset management, so I’m delighted that GRESB has acknowledged our robust framework around environmental, social and governance considerations in managing DORE’s hydropower investments.”

Downing Renewables & Infrastructure Trust plc (DORE) hosted its first Capital Markets event in July. The Downing team, along with industry experts, explored several key topics.

The investment climate for renewables has been rigorously tested over the past three years. Higher interest rates, supply chain inflation and higher energy costs have unsettled investors across the globe, resulting in significant outflows from renewable funds. For a deeper dive into these challenges, you can read our previous blog on this topic.

Despite these challenges, the renewable energy industry has not only shown incredible resilience but also stands to benefit from further electrification and growing demand for cost competitive, low carbon power.¹

‍State of play

Energy systems across Europe have plans for huge expansion to meet ever-growing demand as electrification gathers pace, underpinned by ambitious public policy targets to mitigate the damaging effects of climate change.

Global investment in the energy transition continues to hit new highs. As we stand at the precipice of mass electrification and new peaks in demand, including from energy-hungry AI and data centres, the opportunity for DORE is ripe in an industry that has powered through testing times and is now primed for future growth.

Hydropower – the asset and the opportunity

As at 31 March 2024, DORE had acquired 34 hydropower plants in Sweden with a total annual average production of c.215 GWh. Sixty three per cent of these assets are dispatchable, which means that the electricity they generate can be dispatched on demand.

With renewables becoming a larger and larger share of Sweden’s electricity generation, there has been a growth in intermittency that has caused increased power price volatility. What does this mean for DORE’s dispatchable assets? Enhanced by Downing’s in-house, data-driven dispatch strategy that optimises production, capture price forecasts and revenues, DORE’s hydro assets can supply electricity to the Swedish grid during periods when it is most needed and, as a result, most lucrative.  

We anticipate that Sweden’s electricity system will become increasing influenced by intermittent generation, placing a premium on those assets that can store energy and respond to fluctuations in supply or demand over short and long periods. The only technology currently capable of this at scale in Sweden is hydropower.  With no new material Swedish hydropower capacity expected in the future, we believe that this will be a value driver for existing plants in the sector for some time.

‍Diversification – grid infrastructure and the land of fire and ice

Although hydro assets play a central role in DORE’s portfolio, grid services have also grown to become an important part of it, representing 8% of the Company’s revenue by technology (as at 31 March 2024).

In June 2023, DORE acquired a fully operational shunt reactor located in Mersey, England. The reactor provides reactive power absorption to help stabilise the area’s transmission network. During periods of low demand for active power, typically overnight and during the summer, there is an increased requirement for reactive power absorption to correct the circuit faults that occur.

The Mersey area is one of many identified by National Grid as a hotspot for these circuit faults and to address this, the operator has issued attractive availability-based, index-linked Pathfinder Contracts to those that manage the assets.

Elsewhere, DORE acquired Swedish electricity distributor Blåsjön in July 2023, which services c.1,500 homes and small businesses in the north of Sweden. It benefits from predictable cash flows that are linked to inflation and interest rates.

Distribution system operators (DSOs) like Blåsjön are natural monopolies in their respective areas and the Swedish regulator encourages continued future grid investments to replace aging infrastructure, increased electrification and capacity issues, making the region attractive for potential further acquisitions as well as value-accretive, organic investment into DORE’s existing asset base.

Grid services provide long-term fixed price revenues and add strong diversification to DORE’s portfolio and will continue to be a key part of the portfolio as it scales.

Investing in Iceland

Iceland is the newest market DORE has entered. Despite its small geographical area, Iceland is an extremely attractive market for renewable energy producers – it has the highest total renewable electricity consumption per capita in Europe (over ten times that of the UK) and the primary consumers in the market are large, energy-intensive industrial firms seeking long-term Power Purchase Agreements (PPAs)².

DORE owns a hydro asset Urdafellsvirkjun, located in the west of the country. Downing’s team have secured a highly attractive offtake agreement in place which is 100% Euro-denominated, inflation-linked and take or pay until 2032 as well as a 65-year lease on the land.

The vast majority of Iceland’s electricity generation comes from hydro and geothermal and, as the country works to ensure it can meet future demand, we expect that further hydro installations will be required. With DORE’s asset management team already managing assets in Iceland and maintaining relationships with existing site developers, DORE is naturally well positioned to add further hydro investments in Iceland.  

Seizing the opportunity

With a robust portfolio and strategic investments in diverse and high-potential markets, DORE is poised to continue delivering strong, long-term revenues and supporting a progressive dividend policy. As the world moves towards greater exposure to renewable energy, DORE’s expertise and strategic positioning ensure it will be at the forefront of this energy transition.

Investors seeking predictable, cost-competitive, low-carbon power sources will find attractive opportunities within DORE’s expanding portfolio. Whether through the value of dispatchable hydro assets in Sweden, the stability offered by grid infrastructure, or the promising potential of Iceland’s renewable market, DORE stands as a resilient and forward-thinking leader in low carbon energy investments.

For more information about DORE or to speak with a member of our team, please contact us.

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The presentation slides from the Capital Markets event are available here.

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References

¹ According to IEA Renewables, 2023, global annual renewable capacity additions were up by c.50% to 510 GW in 2023.

² Source: Eurostat

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Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice. 

This article has been approved and issued as a financial promotion under section 21 of the Financial Services and Markets Act 2000 by Downing LLP. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 6th Floor, St Magnus House, 3 Lower Thames Street, London EC3R 6HD.

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‍Tom Williams, Partner and Head of Energy and Infrastructure at Downing, Investment Manager of DORE plc, outlines the monumental task ahead for the newly elected Labour government – but also the opportunity that comes with it.

The Labour Party’s victory in the general election marks a historic moment for both the UK and its energy industry. Sir Keir Starmer and his Party have pledged to invest in green infrastructure, create hundreds of thousands of jobs in the energy sector and bring Britain clean power by 2030.

But, as quickly as promises are made, they can be broken. The time for manifesto writing and commitment making has passed – now, it is time for action.

The UK needs stability

A thoughtful and stable policy environment is essential for the UK to maximise its renewable energy generation. For too long there has been flip-flopping from one unworkable policy to another, with no long-term planning or any coherent energy strategy to speak of.

From the Labour government, who have made a great start, we would like to see clarity, consistency and delivery of policies that prioritise what is the challenge of our lifetime. Supporting the transition to Net Zero is an opportunity for growth, job creation and will help to reduce household bills, and we should embrace it wholeheartedly.

The government will also need to show its support for the private sector through investment incentives that will attract much-needed capital for the renewable projects necessary to enable us to take charge of our energy security.

Although we will never be truly independent of the countries around us as we increasingly connect our energy system to that of Continental Europe and the Nordics, it is important to produce as much energy as possible from within our borders. Renewables have a huge role to play in this task, and we at Downing are playing our part with more than 6GW of projects in development.

Rachel Reeves is making an immediate difference

Ten months after Rishi Sunak’s U-turn on the country’s Net Zero plans, which included delaying the ban on the sale of new petrol and diesel cars from 2030 to 2035, and his commitment to new offshore drilling projects such as Rosebank, Chancellor Rachel Reeves is putting the UK back on track with Net Zero being an important goal. Her plans to lift the questionable moratorium on onshore wind power and streamline planning regulations for energy projects are hugely positive for the green economy.  Ed Milliband has also followed up with immediate action on unblocking the planning delays for three large solar projects, which will make a significant dent on the Net Zero targets with more to come.

The Labour government’s objective to allocate a portion of the £7.3bn national wealth fund to investment in renewable energy is equally welcome news to the industry. Key, however, will be its ability to attract private capital.

Governments worldwide are competing to create a political and regulatory environment that attracts private investment in renewable energy, and the deep pockets of the global investment community are responding. Although billions are flowing into projects globally, trillions are required. Unlike the previous government, Labour must continue in the positive way they have started, by putting policy over politics for the sake of attracting this capital and harnessing our industry’s ambition to achieve Net Zero.

How renewable energy investment trusts can support Labour’s 2030 clean energy target

Labour’s target is ambitious, as it has to be. To succeed, the government will need to tackle the gating issues: grid capacity and planning.  Without clear guidance given to local planning authorities, we will continue with the triumph of nimbyism over national interest.

Grid infrastructure upgrades will have to be executed at pace and grid connections brought forward – it will be very hard to mobilise the billions needed to transform our energy production by 2030 if you cannot connect the projects until 2040.

Over the last decade, renewable energy investment trusts have raised and deployed billions of pounds into renewable energy. The government should think of them as very effective funders of its energy policy, provided it keeps its end of the bargain: clear, consistent policy and backing up words with action.

Great British Energy offers opportunity

Labour’s plans to make the UK a clean energy superpower through Great British Energy is an overwhelmingly positive move. Labour aims to double onshore wind, triple solar power and quadruple offshore wind by 2030. Increasing renewable energy generation at this scale requires vast amounts of capital and investment trusts have a huge role to play in providing the capital to fuel this transition.

While we may not need to treat decarbonisation like “the vaccine challenge”, Sir Patrick Vallance is right that the UK should be the innovators and the implementers, helping ourselves and exporting our solutions, rather than buying them in – truly making a difference and creating a greener global landscape.

If you’d like to discuss any of the topics raised throughout the article, please get in touch.