In pole position for profit

There has never been a better time to invest in utility infrastructure, but how can energy companies ensure they stand out from the crowd in the battle to secure funds?

The appetite to invest in utility infrastructure projects is greater than ever. Such projects are backed by highly-reliable funding streams and serve as robust and “Brexit-proof” forms of investment.

A varied asset portfolio and a strong understanding of the key legal elements to consider could help energy companies claim their slice of the available profits in this area.

So what does this mean in practice and how can they put themselves in the best position to secure funding?

In recent years, the shift towards renewable sources of energy such as wind and solar has clearly helped cut carbon emissions. However, the increasing proportion of renewables in the energy market brings with it the need for more flexible power generation to balance the frequency of the grid. Balancing services can also provide energy security in the event of a large-scale blackout, such as the one that left almost a million homes without power in August. The market for small-scale (generally below 50MW) utility projects is strong, and Brexit uncertainty is making them a more secure investment than ever.

The need to improve the grid’s resilience in a blackout, and increase the UK’s energy security post-Brexit, is also leading investors to turn their attention to developments in battery storage. Such developments could prove essential if the UK’s access to EU interconnectors becomes more challenging in the months ahead. This technology would also help mitigate the inevitable troughs and harness the peaks associated with renewable power generation.

Funding options

There are a number of possible funding options for those looking to diversify their renewable portfolios through investment in these kinds of projects. With traditional private equity finance notoriously competitive to secure, energy companies are increasingly relying on corporate power purchase agreements, which involve securing long-term contracts with major end user organisations. The reputational and CSR benefits of renewable PPAs for major corporates are clear, and reserve power can also help balance the portfolio in times of low generation. Other options include government-backed contracts, and the market is generally buoyant about the reinstatement and return of the capacity market, which has proved critical in securing debt funding for new projects.

Diverse portfolio

A diverse portfolio is the key to boosting the chance of success when approaching funding providers, and to optimising the profitability of utility projects. Investors have been flooded with “shovel ready” projects in recent years and must weigh up the risks and rewards associated with them, ensuring their final decision is informed and workable in the long term.

Making use of innovative technologies and developing a robust supply chain that has low exposure to currency fluctuations – as well having a strong track record of past projects – are also effective ways to ensure that a project stands out among the rest.

Legal pitfalls

Understanding the key legal pitfalls to avoid is vital to ensure transactions run smoothly but a lack of commercial understanding from advisers during the process can lead to avoidable delays that can jeopardise viability. Some matters that are abundantly obvious to any investor on the surface – such as easements for cabling or environmental issues such as the decommissioning and displacement of batteries – can add unnecessary complexity and delays to projects if they are not dealt with correctly and in a timely manner.

Timing is everything when it comes to optimising the value of investments and a party that isn’t fully engaged in the process can have a negative impact on target completion dates. Contributions to third party costs are common, but performance-driven contributions have proved effective in ensuring that projects are delivered on time.

Investment in utility infrastructure has also created opportunities for independent distribution network operators (IDNOs) to take further market share and, despite their 15-year history, it is only recently that we are seeing the emergence of IDNOs on a scale that can challenge DNOs for many connections.

Smaller and more flexible entities are now entering the market to take advantage of these low-risk, high-return opportunities related to last-mile electricity connection.

Recent developments in the grid and the need to bolster the UK’s energy security mean there has never been a better time to invest in utility infrastructure. By developing a broad portfolio of projects and securing the right expert advice, businesses can gain access to funding and make the most of the energy sector’s infrastructure investment surge.