Faced with the prospect of lingering inflation for the first time in many years, investors globally are searching for opportunities to lessen its impact on their portfolios. Historically, infrastructure has been a hedge against inflation, and now early movers are seeing potential in energy storage – with the added benefits of a shorter time horizon than many infrastructure investments and the near certainty of ESG bona fides and measurable impact.
“The opportunity is clear for investors,” says Benno Klingenberg-Timm, Head of Global Sovereign Markets, APAC, UBS Asset Management. “Investments in energy storage provide inflation protection by the nature of the asset class. By leveraging sustainable energy infrastructure that already exists or is being built, you’re contributing to greening the grid faster. Add the potential for significant returns and it quickly becomes apparent that this isn’t the same old infrastructure or ESG investment.”
Institutional investors typically like to see an established track record before allocating to investment opportunities, but energy storage is a space where things will quickly develop. Those looking to take an investment view on what’s being called the “Great Energy Transition” must anticipate that the time required to establish a track record (lengthy or otherwise) will likely exceed the window for reaping the most potentially significant benefits.
“It’s a relatively short investment period compared to traditional infrastructure – we’re looking at five years instead of the standard 10,” says Klingenberg-Timm.
Another intriguing aspect of this opportunity is the access it provides relatively smaller investors. “Smaller pension funds and midscale investors sometimes find themselves unable to access something attractive like energy storage, because the mega-sized investors eat their lunch from the outset,” says Klingenberg-Timm. “But the scale of the space at this point might preclude very large investors who won’t move until they can get a $500 million ticket or something along those lines. That scale will be achieved in the next two or three years, but in the meantime, relatively smaller institutional allocators have access.”
Energy storage is a new arena for many investors. With increasing frequency, a newly created team at UBS Asset Management is engaging with investors to share knowledge on the sector. Institutional Investor also caught up with Ken-Ichi Hino, the Portfolio Manager for Energy Storage Infrastructure at the firm.
II: There’s a lot of conversation around the “great energy transition” these days. In that context, what’s the investment opportunity like in energy storage?
Ken-Ichi Hino: The complementary aspect of energy storage with renewable energy is a big opportunity. The simplest example, the wind doesn’t always blow to turn turbines, and the sun doesn’t always shine for solar energy. Simply stated, the opportunity is the deployment of energy storage to help match supply to demand as more and more renewable energy is incorporated into the electric grid.
This opportunity is sometimes greatest for energy grids in smaller energy systems, such as archipelago states or countries. Hawaii, for example, has a great solar resource but needs energy storage to complement solar to create a stable and reliable system. In general, the smaller the system is, the greater the need proportionally for energy storage. When you look out 20 or 40 years and see the exponential and ongoing growth of renewables, you can understand how energy storage becomes a global opportunity rather than being limited to some of the early use cases we’ve seen so far.
about the energy storage opportunity.
What are some of the technologies that the extend the opportunity for investors?
There’s broad range of subsectors for investment that benefit from some shared tailwinds. For example, electric vehicles are projected to account for most battery usage but that’s a broader trend that energy storage for the grid can continue to piggyback on. We’re going to see improvements in technology for the duration of batteries, thermal energy storage, and compressed air – and as the amount of renewable energy increases, we’ll need half-day or even seasonal energy storage rather than the handful of hours efforts have been focused on to date. There’s a diffusion spectrum of technologies that align with renewables, and we’re bullish on a place for a lot of these other technologies. As an investment team, we seek to match each market’s energy transition path with the right technologies at the right times to maximize value– rather than trying to force any one technology into a use case, market, or timing for which it’s not well suited.
What’s the team's process for identifying opportunities?
The ripest fruit in the U.S. are the California and Texas markets. Those two markets have reached that complementary tipping point – a lot of renewable energy enabling lots of value creation for energy storage. In addition, their deregulated market structures allow for advanced analytics to help optimize how energy storage is used at any given time. The ability to create that value is in the hands of the asset owners, and that’s not the case in regions of the country with different regulatory structures and/or without liquid pricing.
Do you view the opportunity more globally, too?
There’s an S-curve as we map out cost and value, and there are a variety of expansion opportunities. China has been more aggressive recently with its clean energy targets. Japan is another country that has historically been reliant on imports. Clearly, there’s an opportunity there for energy storage to provide stability and higher quality electricity as the grid transitions. All the smaller Pacific islands with isolated energy grids could also benefit from improved energy storage. From a technology perspective, South Korea and Japan were the early movers and leaders in manufacturing and production, producing the batteries that go into the most popular electric vehicles. There’s a rich history of technology leadership and innovation across Asia, which really bodes well for the deployment potential.
Are investors excited about energy storage right now, or taking more a wait-and-see attitude?
A little bit of both for pretty much everyone. Our strategy and deployment approach are unique in that they have elements of familiarity to a broad base of potential investors, but the combination of the various elements is unique. We are investing in real assets, but it’s not the same established wind and solar investing. We have higher value applications and innovation that draws other kinds of investors – such as private equity dollars seeking returns differentiated from classic infrastructure.
Geopolitics must matter in this space more than some other sectors. Does that dampen the opportunity at all?
A complicated thing about the energy world is no matter how micro you want to get there are macro factors you must consider. Globally, we’re seeing that in the European response to Russia’s war in Ukraine. In the U.S., there have been extensive debates over shale gas and exports of LNG. As with other sectors, in the power sector, individual events can have multi-layered impacts. The reality of the situation is in most U.S. and European markets today, when gas prices go up electricity prices go up, too. When our projects are eventually operating, they’ll be correlated with natural gas prices in many ways, making them great inflation hedges in the markets that we’re looking at – as long as we maintain an appropriate risk-reward exposure.
The current war in Ukraine may also speed up the deployment of renewables. If renewable integration and grid security and reliability all accelerate, that would provide strong tailwinds for energy storage, particularly in Europe.
We’re in an inflationary environment that many thought would be transitory – turns out that’s not the case. Please tell us some more about why investing in energy storage makes sense right now.
Energy storage projects are technologies that are functionally very different than wind or solar or natural gas generation plants. To expect them to utilize the same contract structures that other technologies do isn’t logical, and utilizing legacy contract structures can incur high levels of risk on project owners. One of the unique aspects of energy storage assets is that they have two-way upside, in that financial performance can improve via either lower prices, through reduced charging costs, or higher prices, through increased revenues from selling energy. This makes these assets robust to a broad variety of market environments, which means market exposure doesn’t incur the same kinds of risks as it would for technologies that don’t have two-way upside. In turn, this allows our strategy to potentially provide a low-risk hedge against near-term inflation without committing to long-term market risk.
In addition, like other real asset classes, location is everything for energy storage. Because we are still in the early days of constructing stand-alone energy storage, there are very attractive high-value and defensible locations still available – but that won’t be the case for long. We fully expect competition to increase and for the market to grow, which will bring down returns over time. We are focused on maximizing the value of the high-returning opportunities that are available to us right now and look forward to navigating the dynamic opportunities available to energy storage throughout the energy transition.
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