Investing in Energy Assets Amid Volatility and Geopolitical Risk | Stéphanie Dobbelaere, TINC Development Partners

Good afternoon, good afternoon, good afternoon to all of you and thank you Montel for having me here. I'm Stephanie Dobelaar working for Think Development Partner as Executive Director and I'm here today to speak about how to invest when volatility and instability is no longer an exception but is really now part of the investment. investment landscape where we are in. I will look at it through an investor perspective and because we invest in more than 20 years in assets like you saw on the slide of Andre's slide where you saw the highway with all the assets next to the road. Well, we are investing in such assets and I must admit that 20 years ago investing in renewable energy assets it was quite straightforward, quite easy. But now the same assets are facing really a lot of much more exposure actually. They are exposed to grid constraints, regulation, financial, new financial condition, geopolitics and energy prices risks. So, what I want to, I will go through my presentation but actually I want just to show you and I hope you will understand that there is a lot of volatility, a lot of instability. But the opportunities are still there and what we have to do is to change our mind shift. Yes, I also have to do two slides of a little bit presentation of my company of course. So, I'm working for infrastructure asset manager that is called TDP, Think Development Partners and we have been created almost 20 years ago. We are managing a portfolio of 1 billion euros of investments in infrastructure and the 1 billion is calculated as the equity value of the portfolio. We are active in mainly four countries. We are active in mainly four countries, the Benelux, so Belgium, Netherlands mainly, in France and in Ireland. And we do that with two teams that are located, one located in Belgium, one located in the Netherlands and we are about 20 professionals. We are investing in four segments in the infrastructure, so it's much more broader than only the energy and maybe that's a good point to have a big diversification in our portfolio. So, we are investing in energy infrastructure, in digital infrastructure, so we also invest in data centers. We have spoken a lot about data centers today, in social infrastructure and in public infrastructure. And throughout our portfolio what we do is that we have participation in project infrastructure, but also we are moving to corporate infrastructure. And the difference between both of them is that the first one is really combining the predictability of cash flows. It's also capital intensive and with an exposure with a limited length of time. With a corporate infrastructure there we also have a focus on infra, of course, but we also add the component of growth and the growth potential in our portfolio. So, by mixing both of two we try really to adopt the project and the platform approach. We do this, we invest through several vehicles actually, but if you want to have information about our portfolio, mainly you will find information on the Tink. Tink is an investment vehicle that has been listed in 2015, so a lot of public information is available. And that is a vehicle of about 840 million euro fair value. The other one is, for example, a fund that we are also managing, and it is a fund that has a closed-end fund with a limited period of time of 30 years. As I said, we invest since more than 20 years in the renewable energy sector. And to be honest, we have seen a lot of things. We have been moving through various cycles. We have even invested, for example, in the offshore 15 years ago. And throughout all that time, we have seen and we have managed a lot of turbulences. As I say, when you have to manage a portfolio of even renewable energy assets, it's never... You can think that it's boring, but actually, you never have a dull moment. I have a lot of anecdotes, if you want, but I will leave them for the break. When you look at the asset class of renewable energy assets, I think that there have been through three cycles. The first one is when the assets were, like 20 years ago, not seen as a commodity, but they were quite unproven technology. The structure and the investment structure were quite bespoke. And at that moment, actually, there was not a lot of capital available for those assets. That means that the investors and the lenders, because although those assets need to be financed, were still growing in the learning curve and that the returns that could be made through those assets were still, at that time, quite high. Then we moved to a new cycle where, actually, the public opinion and everybody wanted to invest in renewable energy. The countries, the regulation, the governments, they saw that, well, we need to invest in renewables. So they started to subsidize a lot those assets and that market, meaning that you could invest in these assets and having a lot of very good predictability on the cash flows that you are investing in. That means that a lot of capital went to those assets, that the returns went down, were compressed, and actually, there has been really a move through the investment through those renewable energy assets. Now we are coming, actually, to the latest phase of those assets, of the newer phase of these assets, is that all those assets, like just wind farms, solar parks, are merchant risk assets at that moment. And that means that there is less subsidies. Less subsidies are available. All the countries, and I'm coming from Belgium, but in Belgium, it's really actual at the moment. I'm looking for new money to fill the budgets of the country. So the subsidies are reducing on those assets. And that means that the exposure is more on the energy prices, on capture prices. And that means that actually the investors are facing much more risk. But also the lenders, that means that the returns are, again, under pressure, but the risk is even higher. So I think that we are now in a phase where renewable assets are not looked individually anymore, and we are really trying to look at platforms at portfolio basis. You cannot see any more investments through one only single asset only investment. That's why also we have, because you have a lot of merchant risk on those renewable energy assets, and the technology is there as well, there is now a really new market that has changed a lot since three years. It's the best market, the batteries. Everybody is speaking about batteries at the time, at the moment. We have invested in our first battery storage in the Benelux two years ago. We were quite happy about that. It was one of the biggest batteries under development and now under construction in the Netherlands called Mufasa. I think that someone from Return is also in the room. And we were so, so I can say that we were a quite early adopter of battery. And even within the two last years, we have seen a lot of things that have changed. Because batteries, there are a lot of batteries in the market. Everybody is speaking about the batteries about the best, but there is not such a thing as a battery. You can speak about batteries, but all the batteries are quite different. You can have two batteries of the same size, but they will be different. The business cases are quite different. And they depend on actually so many factors, like the capex. When are they developed? When are they built? About the C rates. About the business model that is behind this. Is it tolling? Is it merchants? About grid fees. What will be the grid fees, depending on where they will be located or not. What will be the type of connection? The type of strategy that will be used by those batteries. And who is going to operate the batteries. So you really need to dig in those assets in order to well understand what is actually a battery. Of why is that battery different of another one. And we are all speaking about that. We have figures. We have already seen figures today. But we see that in the Benelux, the forecast about the battery market, the best market, is quite high. That means that also there will be a kind of potential cannibalization. And that means that the market is still in evolution. There will be new revenue, new strategies that will need to come into the market in the future. And that we cannot forecast today. Okay. So now I can come to what is happening today. It is the volatility and the geopolitical risk. Because it has been mentioned previously. But I think that in 2022 and Russia invaded Ukraine was really a turning point in the energy market. And in the way how we have to invest in those assets. The invasion from Russia was actually not only a temporary disruption in the European market. But it was really a turning point. And it showed how we were, as Europeans and as in the Benelux, exposed to the dependency of the fossil fuels. And it happened overnight. But I think that everybody today realized the importance that we have policies and a strategy of independence of that. And what was previously driven as a cost of the energy is now today really a security question. A question of sovereignty and the priority that has been set in all the countries about protecting our energy. That means that geopolitical risk since a couple of years and now we see it really is really a repricing. And it's entering into the different layers of the value chain when we speak about renewable energy assets. We have, for example, we can mention, for example, in the supply chain, you cannot order assets or parts of assets without taking into account all the geopolitical risk that you can encounter. For example, we ordered massive batteries. They come from China. Yeah, that's the way it is. But after the invasion in Iran from the U.S., actually all the batteries were on the ships. They couldn't enter Europe through the Suez Canal and they had to go all around Africa, for example. So that means that a lot of delays when you order battery materials. So these are all the things that you need to take into account. Another important is the grid access. And we have spoken about that as well. But there are a lot of people of company in the Netherlands that are waiting for, companies for sure, that are waiting for a connection to the grid. And all those things that are slowing down the development, putting pressure on investments, also on investment. Even if you have a grid connection, you don't know when you will be able to use it. And you have to price all of this in. Regulation also is a very important topic. And I'm happy that there was also the Ministerie in Nederland that is here. But regulation and all the impacts that regulations can have on a business scale, I think that this is underestimated as of today. Maybe I can take the Belgium example, but there are regulation subsidies that are too often change over time. When you are an investor, you try to look at stability. What you want to have is predictability and stability. And having regulation that might change or might not change or that is unclear is really a difficult topic. I still try to see when we will have a clear view on the grid tariff, for example, in Netherlands and in Belgium. And it's a quite difficult question where we don't have an answer. And even Montel cannot forecast that, I heard. So, volatility and geopolitics is becoming a new normal in the world. It's becoming a new normal in the investment world. And for me, if I want to summarize what is volatility, well, actually, for me, it's a thing that is layered. It's not a single factor anymore. 20 years ago, we said, what is the volatility on renewable energy assets? You said, well, there is a little bit of volatility of the prices. But because you had a big portion of the revenues that were subsidized by subsidies or that were actually fixed. Because governments were helping, incentive schemes, whatever it is. But it was fixed. And you had only a little bit of volatility on the market prices. Now, today, you have volatility on different layers. And they are all interconnected, actually. You have volatility on market prices, on the demand, on supply, so on the volumes that will be used or will be used in the future. On financial elements, a lot of volatility as well. And all of these, I said, are interconnected but are also influenced by the geopolitics. Volatility on interest rate, inflation rate, foreign exchange, tax, and all those have an impact on the cost of capital. So, the capex, as I mentioned, and when you, yeah, the capex and the supply chains, volatility on the regulation, volatility on grid fees. That means that you have, actually, volatility on a volatility and that the business cases for investments are becoming much more complex. I see that I have to speed up a little bit. So, business cases are becoming much more complex for an investor. And that not everything can be hedged. We were used to like predictability of cash flows and to like certainty. But it is not how the situation is today and will not be the future anymore. So, what do we do? Well, we take care of merchant exposure, of course, and we try not to look at single assets anymore, but to see how platforms or several assets can be combined to try to offer a little bit more of stability. All those elements impact also the financing because next to investors, you also need banks. And the banks are quite, are even, need even more stability and certainty than investors. Meaning that the senior banks also are adding much more covenants and difficult, covenants and cash sweep, for example, on the, on, as required for the financing. So, for me, the question is, is no longer how is contracted your renewable energy asset, but who is really managing the exposure. It's quite important to see when you have the assets, who, what are the risks, how are they managed, by who. The correct parties need to, to, to, to manage the correct risk. And that's why we are entering the importance of, when we look at best, for example, the optimizers, who is dictating the strategy, who are the traders that will play or will use the assets, actually, and trying to have the good data and the forecasts. That's why also a good mental forecast is important. And so, for me, maybe I will conclude. You might think that I'm a little bit pessimist, but I think that volatility actually offers a very good opportunity to invest, for new, to, for new investments. Because you need to, to know which, what are the kind of volatilities that you, that you want to do? What can you hedge? How can, and, and, and, what, where, where are you going to locate, actually? Who is going to take that risk? Who is going to manage it? And if you can understand and structure it well, then you can actively manage those assets and try to turn the volatility and the expectations into, actually, a monetization of your investment. Perfect, Stephanie. Thank you very much, indeed. Yeah. Thank you very much. Thank you very much. Thank you very much. Thank you very much. Very interesting indeed. And it's maybe something for JP and the team to look at, forecasting grid tariffs. But I'm sure that's no easy task anyway. But Stephanie, once again, a warm round of applause for her. Thank you.