In the words of Dua Lipa’s prescient 2018 song – “I’ll give you electricity, Give it to you…” which is fortunate as there is no doubt that the world needs more and more of the stuff.
Increasing Demand
Global electricity demand is forecast by the IEA to grow at 3.4% per annum through 2026, and to reach 30% of final energy consumption by 2030 from 18% in 2015. The requirements of data centres to power AI are relatively well known but there are other sources of demand: as the IEA pointed out last year, air-conditioning demand is rising sharply, accentuated by and accentuating the likelihood of extreme weather events: “Global energy demand from air conditioners is expected to triple by 2050, requiring new electricity capacity the equivalent to the combined electricity capacity of the United States, the EU and Japan today. The global stock of air conditioners in buildings will grow to 5.6 billion by 2050, up from 1.6 billion today – which amounts to 10 new ACs sold every second for the next 30 years….. Demand is rising fastest in emerging and developing economies where fewer households own air conditioners. In the United States and Japan, more than 90% of households have an air conditioner, while in Southeast Asia, only 15% do. That number drops to 5% in India and Africa. In fact, only one in 10 of the 2.8 billion people living in the hottest parts of the world have access to air conditioning or other cooling options in their homes”.
Even in markets where demand is relatively stagnant, changing patterns of generation are creating severe strains on grid infrastructure, and new markets for storage.
As for AI- Goldman Sachs earlier this year suggested that data centre demand, currently 1-2% of overall power demand worldwide, will use 3-4% by the end of the decade, doubling CO2 emissions.
A cynic- or a realist- might suggest that with no sign of the world hitting the Paris Accord targets, the best investment would be in the suppliers of the equipment used to build sea walls. Whilst Donald Trump’s re-election is seen in some quarters as a triumph for the fossil fuel lobby, and presumably will see the USA withdrawing once again from the Paris Accords, it is under Biden that the US has regained its status as top hydrocarbon producer. There are huge vested interests in continuing with solar and battery storage incentives- and that Trump does have in his backer Elon Musk, the founder of the world’s second largest EV manufacturer (after China’s BYD). Nonetheless solar power was one of the weakest sectors of the US market in the immediate aftermath of the election.
Leaving that aside- though it might be that we return to discuss mitigation at some future point- it is worth thinking about how to make investments in companies that are seeking to meet the demands. Here are some thoughts- as always, these are not recommendations and please do your own research! – but hopefully useful for investors’ thinking.
All in One
Firstly a fund: Ecofin’s Global Infrastructure Trust managed by Redwheel (EGL) has been listed in London since 2016. As of 13 November, it is trading at 185p/ share vs NAV of 212p. It has an indicated yield of 4.43% and has just under 15% gearing. The fund is 44% exposed to the USA, 34% to Europe ex the UK. Its biggest single exposure is to National Grid which we will discuss in more detail later. The other largest holdings are NextEra which claims to be the world’s largest generator of wind and solar energy, as well as operating Florida Light and Power; American Electric Power; SSE (Scottish & Southern, which owns the northern Scottish grid and associated hydro plants); Edison International; Enel (Italy); RWE & E.ON (the two major German power companies), and Constellation Energy (who claim to provide 10% of carbon-free power in the USA and have recently agreed to restart the mothballed Three Mile Island nuclear generator to supply Microsoft). EGL had (as of end August) returned 14.3% over 12 months and 107.8% since inception (the S&P Global Infrastructure Index for comparison has returned 14.8% and 54.6%).
For those interested in funds, Ecofin, now part of Redwheel, were a pioneer, before SRI (Sociable Responsible Investing) became a buzzword, of environment funds.
Grid Investment
The advantage of investing in grid operators and builders is that they are largely agnostic as to the source of the power, though green power sources, generally situated away from the legacy power stations, generally need new connections, and require them to add to their asset base, which in theory should add to returns to shareholders. National Grid (NG) is itself an interesting one-shot play on increasing demand, and having recently raised £6.8bn in a rights issue, as well as having now almost completed the sale of all its significant non-grid assets (e.g National Grid Renewables and the Isle of Grain LNG terminal), has positioned itself for investment in grid growth (they are planning £60bn of capital investment 2025-2029, almost double the total in the previous five years). The company operates on both sides of the Atlantic: its operations in New York State and in New England are almost as large as its UK operations (the asset split is 46/54). It plans to increase assets at 10% per year over the period and is targeting 6-8% EPS growth, from which it plans to increase its dividend in line with UK CPI(H). The most recent results (on 7 November, showing a 14% growth in underlying operating profit) were accompanied by a webcast which investors may find interesting. It is currently (13 November) at a price of 966p and has an estimated yield of 5.7%. Consensus earnings are 72p/ share in the year to March 2025 rising to 83p by March 2027, putting it on a PER of 13.5x dropping to 11.7x. Analyst price targets range from 970p to 1200p.
UK- Clean Energy Superpower?
What about the UK as Clean Energy Superpower? It would not be unkind to say that as things stand there is not much prospect of this. At least it has not been offered as an “Oven Ready” plan. The only clean energy superpower is China. The UK has failed even to back Rolls Royce’s mini-nuclear plants, the only home-grown technology emerging from a large domestic company. Wind turbines are (sometimes) assembled here. The UK does have some interesting fuel cell developers but having operated on limited R&D budgets they are in danger of being drowned out by the volume manufacturers (particularly the Chinese) even if their technology is differentiated. AFC (currently awaiting Adam Bond’s replacement of CEO, due in January) has now started shipping its hydrogen-powered generators to the equipment rental company Speedy and regulatory pressures towards adoption could prove advantageous, however the company continues to burn through money. The Company is also making a lot of noise about its compact ammonia cracker as a route to efficient engine de-carbonisation. In other news, Clean Power Hydrogen struggled to get its first membrane-less electrolyser through its factory acceptance test but this has now happened and if it can manage to out-license production to credible partners it may have found an interesting niche.
Hydrogen Economy
The fuel cell companies are mostly more a play on the use of hydrogen (or hydrogen in ammonia) as an energy transport mechanism- rather than being plays on increased electricity demand. The pace of the hydrogen transformation has been slower than some had hoped, and the fall in battery prices has acted as a further brake. Yet European governments (and the UK post the election) are still very committed- witness this week’s EU grant of €25m to Elcogen, one of the major holdings of the HydrogenOne Fund. The fund is currently trading at around a 70% discount to NAV, which either implies a series of write-offs of their portfolio (one investment accounting for 8% of the portfolio has just gone into administration)- or is way too pessimistic. Their latest presentation may help inform investor views.
Emerging Markets
Africa & South America may offer some interesting opportunities for investors willing to look further afield. AIM-quoted Atome plc, which is backed by Lord Levene (ex-chairman of Lloyd’s) has an agreement to use surplus power from the Paraguayan side of the massive Yguazudam for ammonia production. The Danish-based Frontier Energy is hoping to list a fund in London to take advantage of the combination of a rapidly growing population, limited grid capacity, reliance on wood and kerosene for fuel, and a lot of sun to install solar panels and battery storage facilities, particularly in East Africa- whilst their funds are not readily accessible the website makes for interesting reading.
Energy Storage and Solar Funds
Closer to home there are a considerable number of London-quoted solar and energy storage funds. All of which are trading at discounts to NAV, and mostly at or near the lowest prices since inception. We recently attended a conference at which Foresight Solar Fund, Gore Street Energy Storage and Octopus Renewables Infrastructure Fund presented. They represent differing approaches: Gore Street has heavy exposure to the USA where they have been benefitting from substantial rebates- which may well end under the next US administration on the completion of facilities. The Foresight fund is predominantly a UK solar operator, and Octopus has a mix of green generating assets across the UK and North Western Europe.
At a recent Energy Storage Day, Tesla signalled that they believe stationery power storage demand would grow to equal that of transport with a view that this might reach 10TWh globally. In the UK the energy storage business has been negatively affected by overconfidence that arbitrage profits (from buying power cheaply and selling it back to the grid when needed) would be easily gained, and by the grid operator’s conservative buying policy which has historically favoured gas generators- this has particularly impacted funds such as Gresham House Energy Storage Fund, although its management claim these challenges have now been addressed.
Here are brief descriptions of the three funds with links to their KIDs – there are many others. In all cases the NAV is based on the managements’ own appraisals of the value of their installations and projects. All of the below can be purchased via the LGB Investments platform.
- Gore Street (GSF): Most recent NAV £540.7m: 104.4p per share (30/6/2024) – Price (13/11) 51.7 – Dividend: quarterly- 7p/ share planned for this year, so indicated 12.6% yield. Total portfolio of 1,248MW of storage operating or in build, of which 39% in Great Britain, 31% in Ireland (N and S); 28% in USA Perceived as vulnerable to withdrawal of US credits.
- Foresight Solar Fund (FSFL): Most recent NAV £657m; 114.9p per share (30/6/2024) – Price (13/11) 80p; indicated dividend yield 9.7%. Owns and manages 1.044GW of solar capacity largely in the UK, plus Spain and Australia.
- Octopus Renewables Infrastructure Trust (ORIT): Most recent NAV £612m; 103.8p/ share (30/9/2024) – Price (13/11) 75.1p; indicated dividend yield 7.94%. Mix of Onshore wind (26%), offshore wind (22%), solar (31%) and biomass etc (20%) across the British Isles, France, Germany and Scandinavia.
All price, yield and other share data from Bloomberg.
Changes in power generation, changes in electricity usage patterns within and between countries, and changes in electricity distribution and storage will all create investment opportunities- we hope the above will have sparked some thoughts.
