This article is sponsored by RGreen Invest
With its reliance on gas and oil from overseas, the European continent has a massive need to increase the balance of renewables in its energy mix and reduce the cost of energy for its consumers.
This is why the momentum behind the energy transition that exists in Europe today is not simply about saving the planet, but about ending Europe’s energy dependence and ensuring its future energy security, says Nicolas Rochon, founder of RGreen Invest, an independent French investment management company. It is this urgent need, magnified by the Ukraine-Russia conflict, that means when RGreen Invest talks about investing behind the energy transition, its focus is first and foremost on delivering the short-term objective of meeting the 2030 targets that will provide Europe with the affordable energy to support its growth well into the future.
Is Europe maintaining its energy transition momentum amid a more challenging macroeconomic and geopolitical environment?
Nicolas Rochon
We need to electrify the market and multiply renewable energy capacity by a factor of two to reach 2030 targets. That means it is critical that we focus our attention on the mature technologies of solar and wind, as well as biomethane and green mobility (within green mobility, our focus is on the B2B segment). In the run up to 2030, we have to channel our resources into those direct solutions to reduce the cost of energy and to electrify our energy systems, taking advantage of historically low capex conditions within the renewables industry.
Once we have secured clean electricity at a cheap price and that first phase is complete, we will of course enter a second phase during which it may be possible to develop green hydrogen and other new energy transition solutions using surplus clean electricity. But for now, at least, the only way forward is to accelerate the roll out of mature energy transition technologies, while also benefiting from evolutions in batteries, which increasingly enable renewable energy generators to manage their output effectively. Recent advances and cost reductions in energy storage have made a very big difference.
What do you look for in the entrepreneurs and management teams you partner with?
We look for partners with a solid track record in the energy space, not necessarily only in renewables but in the energy industry more broadly. We want to work with teams that have 15-20 years’ experience, because we want to be sure they are not only capable of developing projects but also of building and operating those renewable energy plants effectively as well.
This is important because now, more than ever, the energy transition is an industry for specialists. In the past, it was relatively straightforward to secure feed-in tariffs with governments, guaranteeing 15-20 years of demand at a fixed price. Today, however, you need to be able to manage your production and figure out the best way to commercialise your electricity and maximise the value of the output. That requires solid knowhow, experience and a broader range of talents, which is why we are extremely selective when forging our partnerships.
To what extent is there a positive correlation between sustainability and returns for investors? Is this something that we can now prove?
There has been a lot of talk across the globe about whether ESG is inherently good or bad. My argument is that it is a redundant question. If you don’t respect ESG and if you don’t invest with the energy transition in mind, there will be no liquidity for your assets when it is time to sell. That is inevitably going to translate into a significantly discounted valuation and a poor investment performance.
Infrastructure is a long-term asset class and so, of course, we must take a sustainable investment approach. Without that, the value of your infrastructure in 15 or 20 years is frankly going to be zero, or close to it.
This isn’t about whether you can improve your returns by 1 or 2 percent by incorporating ESG into your strategy. It is about whether there is going to be any value left in your investment at all if you do not. Infrastructure is unlike any other business in that respect. There really is no choice.
How concerning is the slew of anti-ESG laws emerging in some parts of the US for the energy transition on a global stage?
Obviously, there has been some ESG bashing going on in the US, but that doesn’t concern me in the context of Europe’s energy transition because, once again, saving the planet isn’t the big motivation here.
We invest in Europe’s energy transition because we are convinced that helping the region solve one of its biggest challenges – the electrification of its energy mix and the decarbonisation of the same – is the best way to generate attractive returns, while taking limited risk.
Hitting 2030 targets will provide Europe’s citizens and governments with something they vitally need – low-cost energy to support the future growth of the continent. That is a truly compelling investment thesis regardless of any ESG bashing taking place on the other side of the Atlantic. So, it is not something that keeps me awake at night.
How would you describe current investor appetite for the energy transition?
Even though there is some anti-ESG sentiment in the US, there are also a lot of US stakeholders and investors for whom having a positive social and environmental impact remains extremely important. There are also a lot of investors in Europe for whom ESG is a top priority, of course.
Europe’s energy transition sector is undeniably a growth market, seeing strong appetite from investors and offering an opportunity that in Europe is generally in short supply. Those investors are also becoming increasingly sophisticated in their understanding of the energy transition ecosystem. They recognise that the best way to deploy capital behind the energy transition is not to invest in core, brownfield assets and plain vanilla projects with long-term contracts, but rather to support value-add strategies, to invest at the construction phase and to embrace new business models.
Achieving the electrification of the energy system is critical to the ongoing competitiveness of Europe, and to get there we need investment in small- and mid-cap projects requiring value-add ownership. That is how we generate alpha and how we achieve the most significant impact. Overall, I believe investor appetite in the European energy transition remains robust, as this represents a growing market with long-term potential, even amid a challenging broader macroeconomic environment.
Infrastructure Investor’s LP Perspectives Study reveals that many investors feel GPs should be doing more regarding climate risk mitigation. Is that a fair assessment?
That is very fair. We are convinced that climate risk is being routinely underestimated by managers in their analysis, and that is hugely important because, get that wrong and the value of your investment will eventually be eroded entirely. You must anticipate climate risk in your modelling. You must think about how global warming is going to impact your assets in 10- or 20-years’ time, because if you don’t, your investors are going to lose out.
How optimistic are you about Europe’s ability to achieve near-term energy transition targets, and what does that mean for the sector?
There is no doubt that hitting 2030 targets is a key challenge for Europe. If we are to be successful, we need to first double the region’s renewable energy capacity. If we do so, we will then be faced with myriad opportunities to develop the next generation of energy transition technologies and infrastructure, based on the access to low cost and clean electricity that we will have achieved.
If we want to hit the targets that have been set for 2050, and if we want to continue in the fight against global warming, then we must first accelerate towards the targets that have been set for 2030. There are long-term objectives at play, but those can only be met if we tackle the short-term objectives first.
Greening Africa
Nicolas Rochon on RGreen Invest’s energy transition strategy on the continent“Our Afrigreen product aims to support African businesses in cutting their energy bills and reducing their dependence on diesel, while facilitating the transition to green energy by increasing the penetration of solar, in particular. But while the development of more renewable energy is clearly critical for the African continent, it remains a tough region for energy transition investment. The market is not yet well structured in terms of supporting the small and mid-sized projects required. It can be challenging to develop and finance projects with an attractive risk/reward profile.
“As a result, our investments in Africa have so far involved debt, rather than equity. It is also an impact fund, working primarily with DFIs. This is just a first step, however. We do expect to develop equity strategies in the future, but there is a long road ahead to achieve attractive risk/reward dynamics.”