Energy Transition
An investment thesis
Australia, like many countries around the globe, is undergoing a significant transition towards cleaner and more sustainable power.
Concurrently, the economy is being digitised and electrified, rapidly increasing the demand for electricity following decades of reducing demand from energy efficiency initiatives.
CSIRO analysis finds that new infrastructure must be added at over four times the rate previously achieved in Australia in both generation and transmission.
The shift to low-emission and sustainable energy, combined with increasing electrification of the economy will drive significant investment opportunities, with an estimated $300 billion of investment required.
To an investor like Fortitude Investment Partners, this presents significant investment opportunities (and hazards).
GENERATIONAL CHANGE
Australia is targeting a reduction in greenhouse gas emissions by 43% from 2005 levels by 2030, and to be net zero by 2050.
The chart below is taken from the 2024 Draft Integrated System Plan from the Australian Market Energy Operator. It shows:
1) the significant (>2x) expected increase in energy demand over the next ~26 years.
2) the considerable change in the energy mix from fossil fuels to a more dispersed and renewable source of generation (wind and solar); and
3) the scale of the investment into generation, transmission, and distribution required at all levels (residential, commercial, utility).
The size of this change is enormous and unprecedented. There will be errors made and supply disruptions. There is no one single solution or pre-determined pathway that will solve this complex system upgrade.
SUPPLY SHIFT: A CATALYST
Coal-fired generators, the ageing ‘workhorses’ of Australia’s historical electricity supply, are now retiring.
Thermal coal power stations, currently the single largest source of power generation in Australia, are in run off and scheduled to progressively close over the next 10 years approximately. This represents a significant catalyst for immediate change.
“ISP forecasts that the remaining coal fleet will close two to three times faster than those announcements. In the most likely ‘Step Change’ scenario, about 90% of the current 21 gigawatts (GW) of coal capacity would retire by 2034-35, and all before 2040. Even in the ‘Progressive Change’ scenario, only 4 GW of coal generation would remain in 2034-35" AEMO.
There is a possibility that coal-fire generator closures occur faster than forecasts with ownership becoming less attractive on the basis of higher operating costs, higher maintenance costs, reduced fuel security, and greater competition from renewable energy in the wholesale market.
With the primary source of Australia's electricity in rapid decline, investment into alternative generation isn't optional. It's needed to sustain and grow Australia’s $2 trillion annual economy.
ENERGY SECURITY IS THREATENED
There is likely to be some form of electricity supply disruption (blackouts) as we undergo this transformation.
The market operator is expecting there to be unserved energy demand above the regulated reliability standard over the next 5 years. This can be improved by significant investment in generation and transmission / distribution, but the current announced and planned projects do not cover what is called the “reliability gap”
By 2031-32, without additional investments beyond those currently committed, reliability is forecast to worsen in several National Energy Market (NEM) regions and go above the relevant reliability standards.
In addition, much of Australia’s existing electricity infrastructure is 50-70 years old with an increasing need to repair and extend the life of these assets and the increasing cadence of extreme weather has also increased the need to repair and fix damaged infrastructure.
TECHNOLOGY AND COST ADVANCEMENTS
Rapid advancements in technology are increasing the efficiency and reliability of renewable energy systems and grid integrations.
Innovations in areas such as battery storage, smart grid technologies, and virtual power plants enhance the reliability and efficiency of renewable energy systems, and help to facilitate the continued integration of intermittent renewable energy sources into the grid.
Continued reduction in the cost of renewable energy technologies, particularly solar, wind and Battery Energy Storage Systems (BESS), are making them competitive with, and even cheaper than, conventional energy sources and the number of new applications for these systems is expanding.
There are a range of different ways to invest in the energy transition thematic.
We believe the interesting niche areas, that others overlook, represent the most compelling investment opportunities.
Investment opportunities exist across the energy market value chain... with many niches.
Generation:
•Micro grid development for edge of grid and remote applications;
•Behind the meter generation and applications;
•Grid firming and stabilisation (frequency and voltage) technologies; and of course the
•Development of renewable energy and new base load power (at the consumer, commercial and utility scale).
Transmission / Distribution:
•Investment into additional transmission required to connect broader and more disperse generation assets;
•Maintenance of an ageing infrastructure that on average is 50-70 years old;
•Deployment of smart grid infrastructure and grid integration technologies;
•Preventative measures to pro-actively secure and protect energy infrastructure as weather patterns become more extreme;
•Back-up systems and firming technologies; and
•Services connecting numerate and disparate generation assets.
Storage
•Investment in energy storage systems, suppliers, and / or distributors;
•Grid scale battery energy storage systems (“BESS”);
•Commercial and Industrial bespoke BESS & uninterruptible power supply (“UPS”); and
•Transportation and motive power solutions (e.g. lithium-ion solutions for material handling equipment).
End use customers
•New technologies and the continued electrification of goods and services;
•Energy efficiency and demand-side management solutions; and
•Expansion of electric vehicle charging networks.
Across the value chain
•Investment is not just required for infrastructure and technology, but also across the value chain, including the:
•Supply and distribution of key componentry;
•Management, monitoring and reporting;
•Intelligence and know how to solve complex technical issues and integration; and the
•Sourcing and training a significant increase in energy sector workers forecast to grow by 30,000 people in the next 25 years.
Risks and challenges
While the energy transition presents significant opportunities, there are also inherent risks and challenges that need to be considered. These include regulatory uncertainties, policy changes, technological risks, and market volatility. Additionally, the transition away from fossil fuels may pose challenges for certain industries and regions reliant on traditional energy sources.
Underwriting risk and opportunities to create value within the energy transition involves all the usual due diligence considerations. But experience suggests that it also requires paying extra attention to several critical factors, such as:
Infrastructure and
grid Integration
Challenges related to integrating renewable energy into the existing grid have and are likely to continue to occur.
Regulatory risk
Regulation or policy changes, including changes to subsidies and government spend, have and are likely to continue to occur.
Market risk
New players and competitors will be drawn to lucrative opportunities, increasing competition.
Supply / demand volatility in rapidly changing markets can result in price volatility.
Technology risk
Impact and disruption from technology improvements, and how likely those impacts are.
Fortitude Investment Partners believe that the Energy Transition is an attractive thematic in which to invest.
We are well placed to look at opportunities that exist well beyond the scope of traditional large generation and infrastructure investments that have attracted the most attention.
WHY?
We have:
An established operating partner network with collectively 300+ years of experience across the energy industry;
An investment track record in the energy transition space, with in-house expertise and insight;
10+ years experience in investing in the lower mid-market (<$100m Enterprise Value), with gross realised returns of >27% IRR and >$500m returned to investors*;
* past performance is not an indication of future success
investigated >200 businesses across the energy transition thematic; and
currently have 6 high priority targets and a further ~15+ opportunities in the pipeline.
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