Resilience and opportunity: creating value in low carbon energy markets
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.
The presentation slides from the Capital Markets event are available here.
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
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.
Related Articles
DORE benefits from operational performance and updated power price forecasts
DORE benefits from operational performance and updated power price forecasts
Net Asset Value and Operational Update
