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How to navigate the volatile world of next-generation infrastructure & renewable assets

Nicholas Cole, Business Director, Financial Assurance, UK & Ireland, DNV
Nicholas Cole, Business Director, Financial Assurance, UK & Ireland, DNV

Infrastructure and renewable energy investments have long been popular with investors due their ability to offer a predictable risk profile with long-term, stable returns. However, as we tread a path forward along the energy transition, that traditional definition of infrastructure is being challenged, and the lines become blurred as the next generation of renewable energy, power and interconnectivity asset classes present their own unique challenges.

We have become accustomed to thinking of infrastructure as a haven with a record of stable and reliable returns relative to most other alternative asset classes. However, there are increasingly few opportunities available that provide the stability of returns that infrastructure investors have become accustomed to in the past. This has led to investors having to lower their investment return expectations or instead to seek investment opportunities in emerging asset classes or development companies, both of which push the envelope of comfort beyond traditional boundaries.

As we face the prospect of a global recession, we must also reassure ourselves of another great attribute of infrastructure; its ability to hedge against the impact of economic downturn. But the world is changing at an alarming rate and there are rather different pressures and challenges to overcome this time around. Inflated energy prices, record inflation, increasing interest rates and energy security will affect almost all asset managers and owners. In order to keep up with these changes, the requirement for a flexible strategy and approach to due diligence and asset management are crucial to ensure the next generation of infrastructure assets can continue to deliver the value and the attributes that investors have grown accustomed to.

Evolving due diligence in the energy transition age

Next-generation investments, such as electric vehicle charging networks, battery storage and hydrogen production and distribution, provide many of the characteristics that infrastructure investors look for: they're real assets with protected market positions with the potential to generate stable cash yields. These emerging asset classes come at a cost though - not only are there increased risks during the investment period, but also development challenges ahead on how best to incorporate this technology into current energy systems.

Understanding the physical assets technical risks is one thing, but the next generation requires a deeper level of understanding due to the dynamic nature of the assets. The regulatory frameworks, physical and commercial environments within which these assets exist also needs to be well understood. These external forces coupled with the speed of change of technology, raises questions around risk of such assets becoming redundant more so than it ever has before. This is particularly true where we move away from subsidies and long-term, contractual revenue streams.

The ability to understand wider market forces and to have an energy strategy means being better informed at not only a strategic level but crucially through the due diligence and transaction process too.

The increasing awareness of our climate is becoming a daily thought for the person on the street, but the impact that our climate will have on our infrastructure assets becomes a question of risk. Indeed, many renewable power assets not only need to be designed to withstand the impact of climate change in terms of their physical integrity but are also directly impacted in terms of their performance. These risks require assessment from experts outside of the traditional suite of transaction advisors, but the role of is no less important.

The importance of proactive asset management for next-generation asset classes

In the same way that next generation asset classes present different challenges for due diligence, the same is true for managing the asset through its life. The volatility of an asset’s performance and consequently its investment value means that more investment is required in proactively managing it to ensure returns follow expectations.

We also know that as the valuation of renewable energy asset classes starts to normalize and returns are compressed due to ever increasing demand in the wider infrastructure sector, the margin for risk is no longer as generous.

Projects that rely on open market prices and are subject to demand risk require very active management. The next generation asset classes will increasingly be subject to these risks and asset management teams must be suitably appraised, prepared and resourced to manage them.

As reliance grows on climate and weather to power our energy systems and provides the demand curve for a greater proportion of our infrastructure, our ability to manage the risk must be more intelligent. Wake modelling, climate analysis and long-range weather forecasting are all tools that are available to asset managers and asset owners to assist in proactively identifying and pre-empting future issues.

Adoption of these digital tools and artificial intelligence is fast becoming a necessary aspect of asset management but ensuring its suitability for the job and its ability to be an integrated and useful part of an asset management system needs careful consideration. Leveraging digital technology has often been a secondary consideration, but it should receive much more attention and investment. Making better use of data and software to identify where issues appear means avoiding outages or downtime by managing assets more intelligently.

Selection and onboarding of such digital tools and systems requires substantial due diligence and expert advice to avoid costly and onerous mistakes or redundancy.

Moving forward

As the very definition of the infrastructure asset class becomes wider and deeper overlaid with the pressures of a global economic downturn and increasing risks emerging as a consequence of climate change, the path forward isn’t the easiest. But whilst volatility presents risk it can also present opportunity.

In order to benefit from emerging asset classes, a more active approach to investing and asset management is called for. Ensuring the right resource and expertise can be called upon to acquire and manage assets effectively will ensure value is maintained through the energy transition.

Nicholas Cole, Business Director, Financial Assurance, UK & Ireland, DNV

Nick is responsible for DNV’s financial sector clients with a focus on renewables, infrastructure, and energy transition asset classes. His insight from a career spanning nearly 25 years in the investment management and banking sectors ensures DNV has deep understanding and insight of financial sector clients.

Nick has held senior roles in infrastructure and renewables investment platforms, as well as venture capital firms. Nick has invested in excess of £1bn of equity capital in start-up business ventures, environmental technology SMEs, infrastructure, power and renewables. He has served as a non-executive director on over 30 infrastructure, renewables, start-up, and fund management company boards. He has led on strategic initiatives including institutional fund raising, major portfolio acquisitions, entry into new markets, and technology.



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