INVESTING IN ENERGY

By Michael Stoneham, Partner and Laura Petrie, Partner, Brodies LLP

Investment for energy projects has gone through a significant landscape change in recent years, with private equity investors steering away from traditional oil and gas projects due to ESG policies and regulatory obstacles and significant competition for financing for renewable energy projects. However, as new technologies emerge and energy supply companies look to transition to a wider portfolio of energy sources the field for investment is also widening.

So what opportunities and challenges are there for financing energy projects?

Financing for proven technologies

The Climate Change Committee is now reporting that a reliable decarbonised energy supply system can now be delivered by 2035. This is due, in part, to the commitment of both existing energy companies and new entrants to the technology market seeking to develop more efficient clean energy solutions, but also to the availability of financing for proven technologies, principally for onshore wind, hydro and solar.

While it was reported last year that the UK Government had not set an ambition for delivering an increase in onshore wind capability, Scotland has identified a target of 12GW of new onshore capacity, more than doubling the existing built capacity, to be delivered from a mix of new build, extensions and repowering. This sits alongside its major programmes of offshore development. For businesses with an oil and gas focus that are looking to diversify or develop technology in these areas there are significant opportunities to secure finance.

Barriers to development

The primary objective of any investment opportunity is to see a clear route to returns. Therefore, projects must have a certain level of certainty in order to attract investors. In the energy transition market there are potentially three barriers to development which can have an impact on the availability of finance.

Grid connection

Projects that have connection dates lined up for the National Grid in advance will be the most attractive to investors. At present, connection dates are ranging between 2027 and 2032 meaning that the financing markets will look to engage in 2025. National Grid is looking to free up further capacity through analysis of offers that may not actively be utilised and developing a queue management system but strategically it will be of key importance to expand grid capacity generally to ensure there is sufficient capacity to align with the expected increase in both generation and use of electricity. A fifty percent increase in demand is expected by 2035, requiring the installation of five times the scale of that achieved over the last 30 years.

Planning and Consenting

The planning process can be very challenging, with the prospect of public inquiries in the planning committee objects, and of local councillors overriding (no doubt for good political reasons) any positive recommendation proposed by officials. Conditions specified in approvals can be obscure and introduce further delays. Similarly, regulatory consent is increasingly facing judicial reviews being raised by activists or other concerned parties where any element of fossil fuels remains inherent to the project (for example, hydrogen developments). Such reviews can lead to significant delays in project development.

Where developments or technology seeking finance are reliant in any way on regulatory or planning consent, these consents should be progressed as far as possible, or at least have a clear timeline, before any form of financing is sought.

Development capacity

The energy industry has always faced supply and demand constraints, whether in costs of raw materials, transportation issues or availability of suitable personnel. As the energy mix develops new technology and widens its remit, so too do these issues expand and already stretched resources are required to cover a wider base. The financial commitments of this process are a burden for developers which investment can relieve but the business models underlying new projects can be significantly impacted by rising costs and supply chain uncertainty. The diversity of taxation approach between energy sources will also play a key part in determining an investors appetite which means a diversified portfolio will make for a more attractive investment.

Investors will always be looking at ways in which costs can be reduced and delivery times guaranteed in order to protect their anticipated return. Efficient contracting and project management can assist with addressing these issues and ensuring projects are investment ready.

Where can progress be made?

Enabling quick progress towards Net Zero with investable projects means ensuring that sufficient consideration has been given to the type of projects, the delivery timelines and the regulatory or panning requirements that need to be in place. Maintaining a mix of energy sources - resourcing short term from oil and gas while fostering new renewables projects and clean technology – means that there are viable investment opportunities while also ensuring security of supply for the energy market.  www.hfi-consulting.com

HFI – India

At the moment, where geographically do you see opportunity in the Energy sector?

India I think is a complete panoply of challenges and opportunities, and I guess for me there were two drivers. First of all, the International Energy Agency recently published an energy outlook for India in the context of COP21 and the energy transition challenges and clearly these challenges are not going to be met unless India is able to meet them, and we saw that as a huge opportunity.

What role will renewable energy play in India’s future?

From a renewables perspective, India is very exciting, there is a lot of solar activity already happening in India. I suppose for me, the most exciting aspect of India is if the offshore wind industry takes off, that industry clearly has taken route to the Northwest Europe and now the European industry is looking to where it is going to be expanding into. And I think given India has a coastline of over 7,500 kilometres major developments now coming through in Tamil Nadu in the east of India and Gujarat in the northwest of India.

And of course, what will be particularly exciting is if floating offshore wind rolls forward in the same way it is now doing in Europe clearly allowing the industry to extend beyond the typical 50/60 metres of water depth. The fixed installations can operate from floating wind of course liberating the industry from that shallow water environment to allow them to move into deeper environments.

So, very exciting prospects for offshore wind in India and indeed if it flows into floating offshore wind. 

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