Photo: Diego Biasi Founder & CEO of Quercus Investment Partners
The development of the renewable energy sector globally: how does this compare with efforts from MENA countries?
The renewable energy sector has been evolving and expanding globally over the past decade, driven to a large extent by the growing interest and attention from governments and investors around the world. This momentum, which originally started in Europe, will no doubt continue globally with strong growth for the next 10 to 15 years, driven by the increasing attention to environmental issues from governmental bodies and their common aspiration to reform the sector towards greater levels of sustainability. When considering that the global installed capacity for renewable energy is set to increase 70 per cent by 2030, this represents significant development in the sector worldwide.
While MENA governments are interested in boosting the renewable energy sector, for both environmental and economic reasons, it is my opinion that they are currently at the beginning of a steep learning process. However, it is great to see many MENA countries, namely the UAE, making committed progress towards understanding how to manage the changing energy market, how to create the right environment for investors and how to develop the renewable energy market in the most efficient way.
In terms of the growth of the renewable energy sector in the MENA region, I believe we are currently watching the same movie that we were watching in Europe 10 years ago, especially given that the MENA market is currently following the same development trends of more mature markets. This means the Middle Eastern and North African region is set to undergo an exponential growth period of approximately seven to eight years, followed by steady growth, as it progresses towards the European market in its current state.
How lucrative could be investments in the renewable energy sector?
The UAE is a strategic choice for investors seeking to take advantage of the renewable energy sector, especially as the GCC plans to invest $100 billion in renewable energy in the next 20 years. This sector is therefore becoming more and more attractive for investors for a number of reasons. First of all, the low risk nature of investments in the industry and the boost driven by incentives makes it a far more profitable investment compared to those in the traditional energy sector. Additionally, the renewable energy sector is generally de-correlated from the rest of the financial market, so there is a huge investment opportunity for long-term investors, and a higher level of potential returns could be generated.
Secondly, the renewable energy sector is much easier to forecast compared to other infrastructure investments due to the simple nature of the technology applied and the way investments are structured. Renewable energy projects are also less dependent on market fluctuations, incentives and swings, driven by different macroeconomic factors, or any subjective relationships, due largely to their readily available sources of clean energy. Consequently, it is easier to build and manage investments to generate bigger returns, with lower risk for investors, especially when compared to other infrastructure or financial sectors.
In what ways can an investor tap into renewables? How do these structures work?
I always tend to compare this sector to the automotive sector—if you want a car, you can either build it yourself or you can buy one. The difference here is that if you build your own car, it will be of a far lower quality than if you buy from a car manufacturer. The scenario with renewable energy infrastructure is similar: you can build your own assets or you can have someone build them for you. In the renewable energy sector, I believe the best decision would be to let the specialists do their job.
Generally, there are two scenarios for tapping into renewables—individuals can invest directly as first-time investors—which we frankly all are because the market is so new, or they seek the services of a specialist, who will build the investment portfolio for them. The second route—seeking a specialist—for sure will increase your chances to build assets of a much higher quality and will be more profitable over the long-term.
Considering how young this sector is, and given that all investments in renewables can in some sense be seen as bespoke, these investments are far more sophisticated than they may at first seem. As far as the practical realities are concerned, sourcing high quality investments, and completing and managing them efficiently is of importance, because at the end of the day it will reflect an investor’s profit and loss statement. Ultimately, this is the main difference between a self-made investment and a well-managed process.
How do you view on green bonds and what is your expectation of the uptake in MENA?
Green bonds are relatively new to the MENA market, but I believe they have vast potential to become an efficient tool for more structured investors. Quercus has issued the largest green bond in Italy in December last year, worth EUR 125 million, which was oversubscribed three times over by international institutional investors.
As for our expectations relating to the MENA region, green bonds are still waiting in the wings. It is definitely something that will take place, but we are at a relatively early stage of an exciting industry, just as it did in Europe. While it may take three to five years for the market to flourish, now is the time to invest, and the green bond route is certainly an attractive source of financing compared to the more traditional methods. We are witnessing a big appetite for this type of asset within the renewables sector, especially for long-term investors with more sophisticated investment styles, like insurance companies.
What challenges do you anticipate in pushing this market segment forward?
The biggest challenge facing the MENA region is that local players have to import know-how and experience from more advanced markets, where equipment and access to financial services are easier to source. It is important to highlight that the MENA region still has much to learn from the growing bank of knowledge more advanced markets have developed in the renewable energy sector.
While this experience is certainly something that Europe is ready to share, it adds weight to the argument that investors in the MENA region should seek the services of a specialist, who will build and manage investments on their behalf. Ultimately the MENA investor is in a very good position, as following the advice and guidance of an experienced specialist will prevent them making some of the same mistakes that were made in Europe.
What are the untapped opportunities in this area?
It helps that the MENA market is in its infancy, as there is great potential for strong and sustainable developments. This potential is underpinned by regional government driven initiatives, such as Dubai Electricity and Water Authority (DEWA) making a commitment to solar power with its Mohammed Bin Rashid Al Maktoum Solar Park development, currently the largest single-site solar project in the world. Regarding untapped opportunities, there is rising interest in this region, especially on the part of the Global Climate Committee, to reallocate capital which is less invested in the traditional forms of energy, like oil and gas, and more into renewable sources. This will lead to a strong renewable energy infrastructure and ultimately a strong investment environment.
What distinguishes Quercus, as a leading international investment advisor, is our solid experience in structuring and constructing renewable energy assets based on comprehensive know-how and an operational track record. We see growing opportunities to provide clients with our services based on our solid experience in the renewables sector. We see opportunities in due-diligence, in consulting on building or acquiring assets and helping clients manage assets after construction projects or acquisition transactions. This is why we have decided to open our Dubai-based office, to serve the MENA region.
What is your outlook on this for the short term?
An energy revolution has started in the last few years, which represents a transition away from oil and gas towards renewable sources. This is happening now, and evidence can been seen in recent governmental milestones, such as the recent announcement that 200 electric car charging stations will be installed across Dubai, double the present number, under the second phase of the Green Charger initiative. The same initiative has targeted at least two per cent of government vehicles must be hybrid or electric by 2020, increasing to 10 per cent by 2030.
This indicates the beginnings of a vast investment opportunity that is set to grow for decades as more counties adopt renewable energy advancements. The MENA renewable energy environment is becoming more attractive to foreign investors, and we are witnessing a growing flow of investments into the region. We are confident that these investments will generate positive returns as long as they are managed correctly and with assistance of experienced specialists in the field.