Published in Private Equity International, November 2020.

Q) Given all that has happened with the Covid-19 pandemic, and the talk of the need for a ‘green recovery’, could you start by talking about how profound you think the shifts will be?

Tim Short: Prior to the pandemic, environmental concerns were gaining traction. What is now clear is that the pandemic has heightened people’s awareness of sustainability issues and we are seeing that manifest across the way businesses operate and governments set policy.

From the perspective of businesses, the reporting of an organisation’s carbon footprint and ESG standards is fast becoming a pre-requisite. This means that inevitably, the focus will be more on putting capital towards cleaner and greener businesses, which will be a real driver of change.

Aaron Church: We are seeing increasing interest from infrastructure investors in the energy transition sector as the scale of the investment required becomes apparent, and regulations / subsidies, market demand and project economics become more supportive.  For the coming years, market forecasts are showing exponential growth across a range of these energy transition sectors.

For example, in the Netherlands, we are seeing a significant and increasing amount of capital being deployed in solar rooftop, EV charging and non-fossil fuel heating solutions.  In due course, we also expect to see the use of on-site energy storage and load balancing solutions by companies to help improve energy efficiency and relieve grid constraints driven by the energy transition.

Q) From your perspective as investors, what opportunities could arise as a result?

AC: One example is related to the e-commerce boom driven by Covid-19. While the trend towards online shopping has been established for a number of years, we have seen a surge during lockdown and many people believe this change in buying behaviour will persist. This will likely lead to growth in distribution centres and delivery vehicle fleets.

Distribution centres tend to have large, flat roofs and hence are well suited to deploying large scale solar rooftop installations.  Many cities (and consumers) are putting pressure on last mile delivery operators to deploy low-carbon vehicles which is increasing demand for electric delivery vans and their associated charge points. Deployment of these solutions often also requires investment in upgrading the distribution centre’s on-site electricity infrastructure, and can benefit from the use of ‘smart’ load balancing software to better manage the different loads throughout the day.

Q) Tell us more about some of the investments that 3i Infrastructure has made in supporting the energy transition and reducing CO₂ emissions, and what characteristics attracted you to them?

TS: In 2016, we invested in Infinis, the UK’s leading generator of low carbon power from captured methane. By capturing the methane from landfill sites, Infinis is not only able to generate renewable electricity, it is also providing an essential service by preventing methane from escaping into the atmosphere. In carbon footprint terms, it prevents emissions equivalent to 6.5 million tonnes of CO₂ annually, which is comparable to that of over 600,000 UK households. Infinis generates nearly 1,500 GWh of electricity a year and is one of the few companies in the UK that has a net negative carbon emissions footprint.

We were attracted by the long-term predictability of its generation profile and the associated cashflows, as well as the scope to co-locate new forms of sustainable generation. For example, we are building out solar panels across the landfill sites.

AC: Joulz, which we acquired in 2019, provides critical onsite electrical infrastructure for businesses in the Netherlands. Joulz’s infrastructure is essential for the operation of those sites and key to facilitating the installation of energy transition solutions such as solar rooftop, electric vehicle (EV) charging and non-fossil fuel sources of heating and cooling. Businesses in the Netherlands are increasingly interested in installing these energy transition solutions and need to navigate a complicated patchwork of regulations, subsidies and taxes. Joulz can not only deal with that complexity for them, but also design, install, finance and maintain the different technologies for its customers - enabling them to focus on their core business and avoid the need for large upfront investments.

Q) How have 3i Infrastructure’s renewable energy investments performed in recent months?

AC: Our portfolio company, Valorem, a renewables developer, has continued to perform strongly despite Covid-19. Since our acquisition in September 2016, Valorem has grown its renewable assets base from c. 180MW to c.460MW, increasing its EBITDA by c. 20% pa and has moved from solely owning wind farms in France, to now developing wind, solar and hydro activities in France, Finland and Greece. This growth continued during the Covid-19 lockdown with the signing of several greenfield projects and the competitive refinancing of part of the operating portfolio. Valorem’s assets benefit from long term Feed-in-Tariffs so revenues were not affected.

TS: The general decline in economic activity has been profound and we saw a significant fall of around 10% in UK electricity demand. This had a knock-on effect on electricity prices although the impact on Infinis has been limited due to its progressive hedging strategy. Infinis’s operating model of many geographically dispersed generating sites, well-suited to lone working for its engineers, has proved robust and the business has been above budget throughout the pandemic.  

Several recent periods of significant imbalances on the national transmission grid have brought into focus the issue of security of supply and we see increasing opportunities for Infinis’s flexible generating sites to help support the public policy push for more actively managed networks at a localised level.

Q) What is your longer term outlook for the energy transition and the green recovery?

AC: The shift towards greener and cleaner is very clear and with such a strong movement in this direction the question becomes more a matter of how quickly we move.

During lockdown, we have seen a new way of thinking, with people realising that things can be done in radically different ways and this mindset and openness to exploring new solutions looks set to continue, and indeed, accelerate.

However, the rate of change will ultimately come down to the health of the economy post-Covid, and the ability of governments to continue with the subsidies that are accelerating many of these changes when under pressure to manage significantly higher levels of national debt.