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Downing Renewables: infrastructure rivals lack diversification from subsidies

18 November 2020

Fund manager of Downing Renewables & Infrastructure hopes to raise up to £200m for a clean energy strategy that will embrace the Nordics and non-subsidised forms of carbon-free power.

The managers of a new London-listed fund investing in renewable energy infrastructure, which Downing is hoping will raise £200m to launch next month, has said the rest of the £9.5bn sector largely lacks real diversification in a post-subsidy world.  

Downing’s Tom Williams, the asset manager’s head of energy and infrastructure, said some of the company’s 14 established rivals could turn out to be victims of their own success, as the prices of renewables assets deriving a large proportion of their revenues from government subsidies had shot up. 

Williams said they had conceived of the Downing Renewables & Infrastructure (DORE) in order to navigate that environment and the crucial new challenge of managing exposure to volatile wholesale power prices.

‘Everybody else has done really, really well in the past seven to eight years that these funds have been in existence, in some cases largely on the basis of trying to keep it simple. Single technology, single jurisdiction,’ said Williams.

‘When you’re in the hundreds of millions or billions on that kind of a strategy, it’s bit like turning a supertanker to try to then move yourself to a fully diversified portfolio.’

In the last few years newly-built assets in solar and onshore wind have been essentially unsubsidised in the UK after the government started to withdraw support in 2015. That has set up a situation where some investment companies, whose share are often trading at a large premiums to net asset value (NAV), could struggle to maintain their early returns, Williams said.

‘I think our peers have been successful. The problem is that sometimes they’ve been a bit too successful. So they’ve educated the market, they’ve driven appetite for these kinds of assets and then the pricing moves on these assets and it’s more difficult to get hold of them and give the returns that you’ve promised your investor,’ said Williams.

Diversified ‘at heart’ 

That is why Downing has tried to take an approach meaning the fund will have diversification ‘at its heart’, Williams said.

His team is looking to diversify by technology and geography, investing in solar, wind, hydro and geothermal assets across the UK, Ireland and the Nordic region, including countries like Norway and Sweden.

They will also diversify by project stage, with up to 35% of assets allowed to be in assets still under construction, which could expose investors to delays in coming on stream.

A quarter of DORE can also be invested in ‘other infrastructure’, which Williams explained broadly means smaller utilities in the Nordics, which do not make their money from selling electricity, reducing their exposure to fluctuating power prices.

That could include companies providing the wires which transport electricity, water companies or the provision of district heating.  

The fund manager explained the option to do this had been a key reason for looking at Scandinavia, given the very different structure of the utility market to the UK where giant companies like Thames Water operate.

‘What you can do in the Nordic region – where it is not consolidated, it’s a highly fragmented market – is pick up small municipal utilities which have 20 or 30 thousand customers, not 10m customers. And the cheque size that we want to write is very relevant for that market and there’s a healthy market in those opportunities,’ he said.

To Williams’ knowledge, this would be a unique feature among London-listed renewables funds.

Broadening the investable region also gives access to technologies that do not really exist in the UK, such as hydropower across the region – which provides over 90% of Norway’s electricity – or geothermal in Iceland. There is also a more developed market for corporates buying long-term power purchase agreements, or PPAs. These agreements are used by renewable energy funds to make sure, beyond subsidies, the revenue streams they ultimately pass on to investors as dividends are less variable.

‘Attractive seed assets’ 

The manager also touted Downing’s experience in renewables and the seed portfolio of assets as key draws.

The group has made more than 100 investments in core renewables over the last decade.

‘That’s an enormous number of investments and stacks up very well against anybody in the industry,’ said Williams.

In terms of the seed portfolio, they are likely to have the option to acquire £50m of solar assets, with a six-year operational track record and high level of subsidised revenue, which will bolster the dividend initially. A 3% yield would be targeted in the next calendar year, 5% in 2022 and progressive increases thereafter.  

The group are also in close discussion related to £70m of assets in the Nordics, including hydro in Norway and wind assets in Sweden,

Combined, those initial investments would account 60% plus of the target proceeds with an aim to invest the remainder by the end of 2021.

Downing has said the fund has an additional £1.5bn investment pipeline.

The range of different technologies, geographical spread and openness to different project stages means the fund should continue to have a large opportunity set, even if markets for certain kinds of assets do ‘get hot’, Williams said. 

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