SW: With rising energy costs, especially across Europe, do you see renewable energy providers as a part of the problem or the solution? What do you believe is needed for the renewable infrastructure sector to make a more material difference?
RS: In answer to the first part of your question, putting the additional power generation capacity onto the grid is no bad thing, especially when prices are rising, regardless of what form that is.
Importantly, renewable energy today, onshore wind and solar, is now cheaper than all of its fossil fuel alternatives. As far as we see today, with gas prices shooting up, the economic argument for renewable energy only gets stronger. Let’s not forget the cost of solar and wind generation has been falling dramatically over the past decade.
We own a company that makes solar inverters. These are attached to solar panels and they convert the energy coming from the sun picked up by the panel into electricity. The company reports that every year they’re still getting 7% to 10% out of their costs because material science is improving.
We’ve seen a jump in raw material prices this year which includes steel and copper. Everything has pretty much gone up, much of it because supply chains were cut during the pandemic and are now starting to reopen again. It takes a while for supply to catch up with demand. As a result, we’ve seen inflation across the board in manufactured goods.
The longer term trend in renewable installations and their costs coming down from a technology standpoint still remains today and we expect that to continue.
Going back to your question, adding additional low cost and as a kicker, net zero carbon electricity onto the grid as we see prices increase, is no bad thing. I think that in today’s environment having more renewable energy would be even better. But these things take time to produce and install, and we still have a way to go to get there.
The mismatch in the interim is clearly a concern. At the moment it’s requiring gas to fill that gap, which is carbon intensive. But hopefully, as the years go on, we will continue to see more and more renewable installations.
The UK has been quite a leader in this field. Some of the world’s largest offshore wind farms are off our shores – Hornsea 1 and 2, off the coast of East Anglia. Hopefully, Hornsea 3 and 4 will start to get approvals as well. That’s incredibly positive. Now, the concern with completely renewable energy generation replacing existing forms of energy is the fact that it doesn’t yet provide baseload power. And what do I mean by that? It provides energy when the wind is blowing and when the sun is shining but this isn’t ideal if you basically need electricity when it’s dark and not windy. As alternatives for example, coal, nuclear and gas can effectively provide that. Renewables can’t.
We need to step up infrastructure. How can renewables provide the battery storage? You install battery capacity that can store the energy from wind and sun when it’s not required, and you can use it when it is required. Battery energy storage is being rolled out but again, these things take time. Grids almost everywhere are seeing that renewable energy, given its reducing costs, offers a competitive advantage, even if you take away the environmental considerations. The installations are going in.
Longer term, I think we’re likely to see more and more battery technology coming into the system. That means we can harness renewable energy for when it’s required, i.e. not just to use it when it is available.
Of course, electric battery storage is a newer technology and still expensive today but is likely to reduce in time.
To summarise, renewable energy storage is not a part of the problem, it is definitely part of the solution. But putting in place infrastructure takes time. It’s not going to be the answer today or tomorrow or even in the next couple of years. But coming to the next decade, I believe it definitely is as we continue to see the level of capacity going into the system increase and we have the backup battery energy storage to support it.
SW: It was very positive to see the US re-enter the Paris climate deal in 2021. But, how much of a concern to you is it that President Biden’s signature Build Back Better programme (which includes a great deal of the green infrastructure spending) looks stuck in the US Congress?
RS: Biden’s infrastructure bill has already made it through which involves around $1.1tn in spending over 10 years. This includes some measures for renewable energy. However, his signature or landmark legislation has been the ‘build back better’ programme, which is much larger.
There are some concerns now with inflation rising, whether the US government needs to be putting even more fiscal stimulus out into the system. But I’d go back to my answer to your previous question. Renewable energy prices continue to fall. Especially in the US that has not yet built an offshore wind farm. Onshore yes they have, but offshore, absolutely zero. You look at the capacity of the US and how large it is and being surrounded by oceans on both sides. And yet they’ve only just started auctioning the first licences, so we’re not likely to see the first installations before 2025. This just shows how far behind they are.
While ‘build back better’ would be fantastic to have and would help some of these projects to happen sooner, the fact is that the economics work now. There’s plenty of capital out there. The USA is a capitalist society after all and plenty of companies are bidding for these projects to ensure that they can be well in place when the first installations start to go ahead.
Thinking about ‘build back better’ then, I don’t think it’s dead. We need to think about it in terms of this would just provide support to the growth that’s already there. Is it disappointing if it doesn’t pass? Absolutely. But does it mean these projects won’t happen? Absolutely not. They’ll just take longer.
But there is hope for the bill. The Democrats currently control both Houses of the US Congress, the Senate, where they have a 50/50 position and the vice president holds the tie breaking vote. And the House, it’s already passed the House. It just needs to get through the Senate. The two senators holding it up aren’t against it. They just say, look, you call it ‘build back better’ but this includes health care, it includes pre-K, i.e. kindergarten and even maternity leave which has nothing to do with infrastructure or ‘build back better’. They simply said this shouldn’t be put together as one bill, given it’s so large, but to split it up and put it through its individual committees.
While some of the areas of the bill might be contentious, the infrastructure plan isn’t.
So no, I don’t think the bill is dead, especially not the infrastructure part of it. Without it growth would slow down, but we’re still likely to see it happen and the positive impacts of it are likely to be considerable.
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About Randeep Somel
Randeep joined M&G in 2005 as a fund managers’ assistant on the equities team. At different stages between 2013 and 2019 he was fund manager or deputy manager of the Global Themes, Managed Growth, Global Recovery, Global Select, Pan European Select and Positive Impact strategies. In November 2020, he became manager of M&G’s newly-launched Climate Solution strategy. Prior to joining M&G, Randeep worked for State Street in a fund accounting role. He graduated from Birmingham University with a degree in economics in 2003. Randeep has the IMCand is a CFA charterholder.
