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Big Oil, asset managers can 'work symbiotically' in renewable energy – Octopus

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A wind farm in Sweden, one of the countries where Octopus has invested some of its funds.
Source: Arise AB

European oil majors are pushing more aggressively into the renewable energy market, but one of the continent's largest asset managers active in wind and solar says the relationship between Big Oil and institutional investors can be complementary, rather than confrontational, when it comes to green power.

"We're not seeing them as a threat or significant competitor at the moment, despite all the noises they've made," Matt Setchell, co-head of Octopus Renewables and the investment manager for London-listed Octopus Renewables Infrastructure Trust PLC, said in an interview.

The largest European oil companies have ambitious capacity targets for wind and solar that will require them to step up their activity significantly in the coming years, and likely require a large amount of M&A. France's Total SE, for example, only recently bought a 3,300-MW portfolio of solar projects in Spain from developer Ignis Energía SL, after acquiring a 2,000-MW portfolio of early-stage projects from two other partners in February.

But Setchell, whose latest fund started trading in December 2019 with £350 million in equity, said most of Octopus' capital in renewable energy will go to projects either ready for construction or already in operation, whereas oil companies will more likely look at different parts of the value chain, such as trading, and continue to focus on project portfolios in the development stage.

That means, rather than competing directly with the likes of BP PLC, Royal Dutch Shell PLC and Total, Setchell said more experienced asset managers who are comfortable with construction risk will have ample room in which to play — and could even see an opening when it comes to taking stakes from oil companies looking to recycle capital.

Setchell said Big Oil's entry into the sector could be complementary to Octopus' own strategies. The oil companies' activity "can work symbiotically with asset managers," he said.

"It's not totally clear where they will place their really big bets but, to date, we see their entrance as much as an opportunity as a threat," he added.

Pandemic challenges

Setchell said his team at Octopus, which also runs private funds for institutional investors, continues to talk to oil companies about their project pipelines to realize those opportunities. Its public fund has so far deployed around 85% of its raised equity and Setchell expects the remainder to be spent before year-end.

The fund most recently snapped up a suite of solar projects in Spain with a total planned capacity of 175 MW and, earlier this year, bought separate portfolios of operating solar parks in France and the U.K., as well as a construction-ready wind farm in Sweden.

For Octopus' origination team, the challenges of the coronavirus pandemic this year have had both upsides and downsides.

"In the early stages, some people wanted to desperately sell, and we managed to pick up some assets," said Alex Brierley, the other co-head of Octopus Renewables who manages the company's private funds.

On the other hand, deals were delayed because teams could not get to sites, while administrative procedures also slowed. And, as electricity demand plunged in March, lower power prices meant the value of wind and solar parks declined, at least on paper — causing some investors to hold onto their assets, Setchell said. Although the price declines most dramatically affected thermal generation and hydropower with full market exposure, even long-term contracted renewables were not unscathed.

'It won't be a BP that moves the market'

But even in the midst of the pandemic, market turbulence and national lockdowns failed to significantly dent the number of renewable energy deals in Europe, according to S&P Global Market Intelligence data. And wind and solar-focused funds still outperformed the wider market this year.

Despite the swing in merchant valuations, Octopus has closed deals for unsubsidized assets this year: Both the Swedish wind farm and its Spanish solar portfolio are not backed by state contracts, although the company expects to sign long-term power purchase agreements with utilities or corporate off-takers for the projects' output soon.

"Doing so means we can have merchant exposure in a Swedish wind farm and marry that out with a [subsidized] project in France," Setchell said, adding that investors are increasingly comfortable with this approach.

Brierley said Octopus' annual survey of institutional investors, which is not yet published, also shows that respondents — who manage between $6 trillion and $7 trillion — were reassured by how their green investments performed.

"Renewables are right up there with the least impacted sectors in infrastructure," he said.

As a result of their safe-haven status, and in an era of ultra-low interest rates, appetite and competition for renewables investments is likely even higher than before the pandemic, Brierley said. But the rapidly growing size of the market, bolstered by green recovery plans across Europe and elsewhere, means he is not worried about getting access to opportunities.

"Remember just how big this market is and how much space there is for everybody in it," he said. "There's trillions in it and it won't be a BP that moves the market."