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Winds of change: How to invest in renewables today

The world is changing and so should our investment portfolios. Portfolio resilience has to go beyond government bonds and consider alternative return sources that can provide income and diversification. As the largest opportunity in private infrastructure, renewables are increasingly being asked to play that role in traditional portfolios. At the same time, rising investor allocations, increasing market participants and declining subsidies are changing the investment landscape. For investors today, navigating these ‘winds of change’ will be essential to get the most out of this resilient asset class.

[MUSIC PLAYING]

 

Hello, this is Rory O'Connor, the Global Chief Investment Officer for BlackRock Renewable Power and also the Head of Europe for our platform. As we all know, the world around us is changing. The COVID-19 pandemic is challenging the way we invest and accelerating structural trends in areas such as technology and sustainability.

Our latest white paper looks to address how to navigate these winds of change. As such, I'd like to recap on some themes of how to invest your renewables today to get the most out of the asset class.

We've broken this down into three key themes, the first being finding best relative value. Renewables markets our regionally moving through different cycle phases and at different paces, reflecting local trends in demand, supply, and policies. It is important to avoid pockets of overheating and to identify areas of relative value globally.

Our platform's expansion into Asia-Pacific is a great example of this. The region is projected to generate 50% of the world's electricity by 2030. Taiwan, Japan, and South Korea remain home to attractive 20-year fixed priced revenues for projects, and these are very important for overall portfolio balance.

The second theme is taking risk you can manage. Investing in renewables is not about avoiding risk altogether. It is about taking risks that are well understood and being equipped to manage those risks in order to generate best risk-adjusted performance.

Construction and late-stage development risks are idiosyncratic and more directly manageable than long-term power price assumptions. Guleslettene, a large-scale onshore wind project in Norway, is representative of our approach in this respect. We are currently progressing construction on this site, working very closely with all of our partners, and have successfully navigated supply chain and labor disruptions as a result of COVID-19. The project benefits from a 15-year power purchase agreement with Alcoa, supporting the trend towards corporates looking for team and indeed low-cost energy.

And finally, the third key theme is to position your portfolio for change. Decarbonization and electrification are reshaping the energy industry and beyond. Being dynamic in portfolio positioning and embracing change are critical to getting the best out of the investment opportunity.

One example of asset class evolution is in long-term wind and solar resource forecasting. Resource forecasting has come a long way over the last decade, and prediction methods continue to improve. Nevertheless, natural uncertainty remains in any single project's energy production. Global diversification of wind and solar investment can be a key contributor to reducing portfolio volatility.

In our view, following these key themes of investing allows investors to get the most out of the asset class and to build a portfolio resilience to the three key benefits of income, diversification, and sustainability. In terms of income, investors are currently faced by fixed-income yields that are at their lower bands and equity dividends being cut or indeed suspended. Income from renewables compares favorably to yields in other asset classes, and this has proven to be stable over time, including during this pandemic.

Second key benefit is diversification. Returns in renewable power projects are primarily driven by the availability of wind and solar resource, the capital cost to build new projects, and the price of electricity. These idiosyncratic risks make renewables a more natural portfolio diversifier and help reducing equity risk in an overall portfolio.

The third key benefit is sustainability. Portfolio resilience is more than income and diversification. It's making sure the portfolio is well positioned for structural themes. The shift toward sustainability is poised to give renewables potential return advantage for years to come.

In our view, we are at the energy crossroad several years ago, and the market has clearly chosen the direction it wants to go. Capturing the growth opportunity in renewables helps building portfolios that our future proofed, not only for the next five years but for the next century. Thank you for taking the time to listen to me today. And on behalf of team, I would like to wish everyone all their very best for a safe and hopefully an enjoyable summer. Thank you.

[MUSIC PLAYING]

 

Hello, this is Rory O'Connor, the Global Chief Investment Officer for BlackRock Renewable Power and also the Head of Europe for our platform. As we all know, the world around us is changing. The COVID-19 pandemic is challenging the way we invest and accelerating structural trends in areas such as technology and sustainability.

Our latest white paper looks to address how to navigate these winds of change. As such, I'd like to recap on some themes of how to invest your renewables today to get the most out of the asset class.

We've broken this down into three key themes, the first being finding best relative value. Renewables markets our regionally moving through different cycle phases and at different paces, reflecting local trends in demand, supply, and policies. It is important to avoid pockets of overheating and to identify areas of relative value globally.

Our platform's expansion into Asia-Pacific is a great example of this. The region is projected to generate 50% of the world's electricity by 2030. Taiwan, Japan, and South Korea remain home to attractive 20-year fixed priced revenues for projects, and these are very important for overall portfolio balance.

The second theme is taking risk you can manage. Investing in renewables is not about avoiding risk altogether. It is about taking risks that are well understood and being equipped to manage those risks in order to generate best risk-adjusted performance.

Construction and late-stage development risks are idiosyncratic and more directly manageable than long-term power price assumptions. Guleslettene, a large-scale onshore wind project in Norway, is representative of our approach in this respect. We are currently progressing construction on this site, working very closely with all of our partners, and have successfully navigated supply chain and labor disruptions as a result of COVID-19. The project benefits from a 15-year power purchase agreement with Alcoa, supporting the trend towards corporates looking for team and indeed low-cost energy.

And finally, the third key theme is to position your portfolio for change. Decarbonization and electrification are reshaping the energy industry and beyond. Being dynamic in portfolio positioning and embracing change are critical to getting the best out of the investment opportunity.

One example of asset class evolution is in long-term wind and solar resource forecasting. Resource forecasting has come a long way over the last decade, and prediction methods continue to improve. Nevertheless, natural uncertainty remains in any single project's energy production. Global diversification of wind and solar investment can be a key contributor to reducing portfolio volatility.

In our view, following these key themes of investing allows investors to get the most out of the asset class and to build a portfolio resilience to the three key benefits of income, diversification, and sustainability. In terms of income, investors are currently faced by fixed-income yields that are at their lower bands and equity dividends being cut or indeed suspended. Income from renewables compares favorably to yields in other asset classes, and this has proven to be stable over time, including during this pandemic.

Second key benefit is diversification. Returns in renewable power projects are primarily driven by the availability of wind and solar resource, the capital cost to build new projects, and the price of electricity. These idiosyncratic risks make renewables a more natural portfolio diversifier and help reducing equity risk in an overall portfolio.

The third key benefit is sustainability. Portfolio resilience is more than income and diversification. It's making sure the portfolio is well positioned for structural themes. The shift toward sustainability is poised to give renewables potential return advantage for years to come.

In our view, we are at the energy crossroad several years ago, and the market has clearly chosen the direction it wants to go. Capturing the growth opportunity in renewables helps building portfolios that our future proofed, not only for the next five years but for the next century. Thank you for taking the time to listen to me today. And on behalf of team, I would like to wish everyone all their very best for a safe and hopefully an enjoyable summer. Thank you.

Navigating the winds of change

We see three key investment themes:

Finding best relative value
Finding best relative value
Take risks you can manage
Take risks you can manage
Position your portfolio for change
Position your portfolio for change

On the first theme, renewables markets are regionally moving through different cyclical phases and at different paces, reflecting local trends in demand, supply and policy. It is important to identify areas of relative value globally and avoid pockets of overheating. For example, Asia renewables today is reminiscent of Europe 10 years ago. South Korea is building 42 GW in wind and solar this decade alone according to Bloomberg – that’s equivalent to the UK’s entire installed base today.

Balancing risk, reward and addressable opportunity

Risk and return view of renewables market

Risk and return view of renewables market

 

Source: BlackRock, proprietary analysis performed by the Global Renewable Power Team, June 2020. Capacity market data is taken from Bloomberg New Energy Finance. Return is based on market data points and does not reflect investment strategy.

We also believe that investing in renewables is not about avoiding risk altogether. It is about taking risks that are well understood and being equipped to manage those risks in order to generate best risk-adjusted performance. Construction and late-stage development risks are idiosyncratic and more directly manageable than long-term power price assumptions.  At today’s competitive market for operating assets, we see material risk in more mature assets, as the return profile for operating assets is skewed to the downside

Today, structural trends such as decarbonization and electrification are reshaping the energy industry and beyond. Investors should be equipped to position their investment approach and strategy in line with the market evolution. Being dynamic in portfolio positioning and embracing change are critical to getting the best out of the investment opportunity.

Building portfolio resilience

In our view, following these key investment themes, allows investors to get most of out the asset class and build up portfolio resilience through three key benefits of income, diversification and sustainability. 

  1. Income: Investors are faced by fixed income yields that are at their lower bounds and equity dividends being cut or suspended. Income from renewables compares favourably to yields in other asset classes and has proven to be stable over time including during this pandemic.
  2. Diversification: Returns in renewable power projects are primarily driven by the availability of wind and solar resource, the capital costs to build new projects and the price of electricity. These idiosyncratic risks make renewables a natural portfolio diversifier and help reducing equity risk in an overall portfolio.
  3. Sustainability: Portfolio resilience is more than income and diversification. It’s making sure the portfolio is well positioned for structural themes. The shift toward sustainability is poised to give renewables a potential return advantage for years to come.

Key Takeaways

The coronavirus shock is accelerating structural and portfolio trends, such as sustainability and resiliency, that are favouring renewables
At the same time, rising investor allocations, increasing market participants and declining subsidies are changing the investment landscape
Investors navigating these ‘winds of change’ successfully, by following our three key investment themes, will get the most out of the asset class
David Giordano
Global Head BlackRock Renewable Power
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Rory O’Connor
Global CIO & Head of Europe BlackRock Renewable Power
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Freek Spoorenberg
Head of Strategy and Investor Relations
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