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Mortimer Menzel, Augusta Investment Management
Mortimer Menzel, Augusta Investment Management


Creating a new asset class in green power


Mortimer Menzel, Managing Partner, Augusta Investment Management, writes that institutional investors around the world recognise the importance of investing in renewable energy. 

Many are committed to supporting the global economy’s transition to decarbonisation and have stakeholders to whom it is critical that this commitment is demonstrated not only by word but by deed.

The issue has always been that it is complex and challenging to invest in renewable energy assets such as wind farms and solar farms. Very specialist expertise in the infrastructure is required. Planning, constructing, maintaining and operating these assets requires very long-term planning and investment. The upfront costs are enormous and the future price of energy which drives potential returns is unpredictable.

For that reason, it has tended to be only the very large strategic investors globally who have had the appetite to actually build and operate renewable power assets. There has been the option to invest in private equity funds which specialise in the renewable energy space, of course, but those investments have often been negatively impacted by the withdrawal of government subsidies to the space or price volatility in energy markets.

Therefore, what many institutional investors have been looking for is a way to allocate to the renewable energy space without actually having to buy and operate the assets, and which would also yield attractive and predictable long-term returns. 

We have been advising on renewable energy M&A for over 20 years and in recent years we have been developing this very proposition, which is essentially a new asset class that hasn’t existed before.

It is based on investing in long term power purchase agreements (PPAs), the same contracts which we had negotiated for many renewable clients over the years in our M&A business. In essence, if you own a renewable energy asset it is desirable to have some long-term predictability in terms of the electricity price you will receive for the energy. The daily spot price can fluctuate dramatically and is impacted by macro events globally, as we have seen with the war in Ukraine, so it is important to lock in some of the future pricing.  

Also, if you are a power producer, who necessarily has the obligation to provide a certain level of energy to your consumers, it is helpful to have that long-term predictability in terms of price. For example, if I am a UK power producer, I may wish to enter into a PPA with an industrial off taker of electricity to provide a price floor for at least some of my electricity production. 

Now, these PPAs are highly technical. You can only conclude them if you have extensive experience in the space and of the operators. Where we saw an opportunity was to enter into these agreements ourselves with the producers and then to bring in external capital to fund that. That was attractive both to the providers of capital and also to the generators themselves, because it was increasing the liquidity in the market as well as providing crucial funds to these generators to invest in more green energy production.

What investing in these PPAs delivers in terms of returns is long-term predictability which in some ways is similar to fixed income. These are often state-owned companies which are protected by local regulation and part of the crucial local baseload electricity supply and which will therefore will not be allowed to fail.

On top of that, there is significant additional alpha. Our approach produces a higher equity return for our investors but at a lower electricity market price risk than they would get for traditional renewable energy assets (e.g. wind farms) in the same area.  This is due to the structure, the fact that are able to take a shorter-term view and that there is no capex or opex to be invested and that we can hedge out electricity market price risk.

We have obviously built up a view over the last 20 years about which renewable sectors are most attractive from an investment perspective. We are firm believers in Nordic reservoir hydropower. You have these reservoirs or lakes which can store huge amounts of water and that creates the opportunity to run the turbines when the pricing is optimal. That is true battery storage and a massive advantage over other forms of renewable energy like solar or wind which only produces energy when the sun is shining or the wind is blowing. 

Also, the technology has been around for decades and is highly reliable, the plants themselves are usually inside of mountains with constant temperature and humidity and so are straightforward to maintain. And finally the counter-parties are state-owned utilities in Norway or Sweden so there’s less credit risk. 

With appropriate risk mitigation we can also apply to structure to high producing wind projects, like some bigger offshore or onshore wind farms.

We have built an asset management business to capitalise on our two decades of experience in order to make this happen. Rather than traditional direct equity or debt financing of generating assets, we offer investors the opportunity to invest via a fund into vehicles which enter into the PPAs and which then pay out dividends into the fund.

The result is stable long-term returns that are higher than simply owning the underlying asset for investors and which achieve an important social and environmental good, because we are providing valuable capital for the green energy producers. We think it is an attractive way for institutions to support the transition to renewable energy globally while also undertaking their fiduciary responsibilities to deliver above-market returns.

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