How to invest into Energy Transition: a live example – financing large scale batteries

The energy transition is a major investment theme and driver of investment opportunities for the infrastructure asset class given the ongoing and urgent global focus on decarbonising economies and mitigating the impact of climate change.

Momentum to decarbonise Australia’s energy market has accelerated as the general public, investors and federal and state governments have gained a heightened sense of urgency in transitioning our reliance on fossil fuels to greener energy in the face of global warming, increased climate events, energy security and an ageing fossil fuel fleet. Coal plants are withdrawing at a faster rate than has been publicly announced, with a significant level of capacity expected to be withdrawn by 2030. In its place, Australia will see a huge amount of renewable energy enter the system which, in contrast to baseload fossil fuels, is intermittent and volatile. Solar is not able to generate when the sun doesn’t shine, and wind power cannot generate when the wind does not blow. This poses a problem in a modern society which requires around the clock access to energy.

Utility scale battery storage allows the grid to deal with the mismatch between generation and demand and is key to delivering grid stability and around the clock energy as Australia decarbonises.

JANA’s infrastructure team has been closely monitoring the global energy transition sector to identify infrastructure managers who apply a differentiated investing approach without compromising on attractive risk-adjusted return.

As part of our focus on identifying compelling energy transition opportunities, JANA’s Diversified Infrastructure Trust (JDIT) made a commitment to Infradebt’s Energy Transition Fund (ETF).

ETF is a private infrastructure debt strategy that will be providing senior debt financing to greenfield utility scale battery projects in Australia. The fund plans to finance 6-8 battery projects that are expected to have a total dispatchable capacity of 1.5-2.0 gigawatts which is the equivalent dispatchable capacity to one of Australia’s largest coal-fired power stations. We found the opportunity compelling for a number of reasons:

• Energy storage, including batteries is critical to decarbonise the power grid and to manage the intermittency of renewable generation.
• Infradebt I has an experienced team with deep expertise in renewable energy financing and a differentiated investment approach that targets the nascent but growing market for financing utility scale batteries that have revenue exposure to the merchant power market.
• Our objective in leveraging the first mover opportunity takes advantage of nascent debt market to generate attractive risk-adjusted returns as ETF delivers equity like returns through senior debt. Investing in the sector through debt provides a greater degree of protection than taking equity exposure.
• Utility scale batteries are operationally and technologically proven and are being installed and operated by major utilities and power developers globally.
• ETF delivers positive real-world outcomes by providing a source of funding currently not available (or at the least not widely available) in the market for utility scale batteries, which will support the ongoing growth of wind and solar capacity and play a pivotal role in growing the much needed Australian battery capacity.

Conclusion

The strong tailwinds behind the energy transition and its ability to generate investment opportunities is a common theme discussed by infrastructure managers globally. This strong interest by global investors in the energy transition also creates an environment of aggressive entry valuations and under-pricing of risks in the sector.
JANA’s infrastructure team remains focused on identifying compelling opportunities such as Infradebt ETF that can generate attractive risk-adjusted returns through a differentiated investment approach.