Hydrogen
Renewable Energy
3 minutes
16/09/2024
Deep Decarbonisation of Energy Systems: Foresight’s Diversified Approach to Portfolio Construction
Our latest report explores the diversification benefits of investing across complementary technologies when building clean energy infrastructure portfolios. Through scenario-based analysis and new data from our European and Australian portfolios, the report highlights how a consciously diversified approach to portfolio construction could mitigate risks and enhance returns for investors.
Introduction
The global transition to cleaner, more sustainable energy systems is at a critical juncture. With rising investments and ambitious climate goals, the challenge lies in building energy portfolios that not only drive decarbonisation but also manage risks and deliver consistent returns.
In 2023, global investment in the energy transition surged to $1.8 trillion 1, a 17% increase from the previous year, with about $1 trillion directed toward power generation, storage, and grid infrastructure. However, meeting global climate and socio-economic goals will require a substantial increase in investments, with estimates suggesting $79 2 trillion in supply-side investments needed between 2024 and 2050, including $21.4 3 trillion for grid infrastructure.
To address these investment demands, active participation from institutional investors is crucial. By analysing the complexities of renewable energy infrastructure portfolios, the report highlights the advantages of a diversified approach. It uncovers the potential for reduced risk and enhanced long-term revenue through the strategic combination of complementary resource portfolios.
Key Takeaways
- Conducted with insights from Aurora Energy Research, the analysis explored various risk scenarios, revealing potential long-term negative correlations among different technology sectors, suggesting that portfolio-level diversification can yield more resilient, risk-adjusted returns.
- Integrating diverse asset types, including generation, storage, and grid components, is crucial for investors. This strategy allows them to leverage varying correlation profiles, achieving long-term returns while adapting to the complexities of evolving energy markets.
- Foresight Energy Infrastructure Partners (FEIP II) focuses on complementary investments with long-term negative correlations to reduce portfolio risk and enhance risk-adjusted returns. For example, while the expansion of renewable energy may sometimes negatively impact solar and wind generation revenues, it can positively affect energy storage and interconnectors due to increased volatility in wholesale power prices.
- Our analysis explored the comparative risk and return of three technology-specific portfolios to the optimal portfolio mix, which represents FEIP’s target portfolio. The analysis found that, although the target portfolio’s returns were in the mid-range compared to technology-specific portfolios, the overall risk, measured by the mean absolute deviation of returns, was significantly lower.
- The analysis highlighted the advantages of building a well-diversified energy infrastructure portfolio. By incorporating complementary risk and return profiles, such a portfolio offers the potential for increased diversification benefits, enhancing risk mitigation across both short-term and long-term investment horizons.
- Furthermore, deploying capital into storage and grid assets alongside renewable energy generation can be seen as essential for maintaining system flexibility and reliability, especially as the penetration of renewables increases.
- Looking ahead, investors should analyse their capital deployment programs holistically, ensuring exposure to different asset types and technologies, as well as geographies. This strategic approach allows for more effective risk mitigation and attractive returns, particularly in the face of evolving market dynamics and power market fluctuations.
With decades of experience managing energy assets across Europe, Australia, and the UK, funds such as FEIP II, showcase our commitment to building portfolios that help drive global decarbonisation.
Learn more: https://www.foresight.group/feip
Footnotes:
[1] BNEF Investment Trends 2024
[2] BNEF New Energy Outlook 2024
[3] BNEF New Energy Outlook 2024
