The power of collaboration in investment

MATHIAS STECK     Hello and welcome to the 10th series of the DNV Talks Energy Podcast. I’m your host, Mathias Steck. In this series we take a fresh look at the role businesses play in lowering the world’s carbon emissions and how they can work with governments, policymakers and other key decision makers to transition faster to a clean energy future.

With the price of technology such as wind and solar PV continuing to fall, investments in renewable energy are delivering better returns than fossil fuels in many parts of the world. But is it enough to keep us on track with the Paris Agreement? I speak to Christina Sørensen from Copenhagen Infrastructure Partners, who tells me about her own role in pioneering some of the world’s first offshore wind projects.

She also discusses the need to completely rethink the network that renewables feed into, if clean energy technologies are to have an equal share of the energy mix within a generation. We hope you enjoy the episode.

Christina, to jump right into the topic, it would be great if you could give us some background about Copenhagen Infrastructure Partners and what you do.

CHRISTINA SØRENSEN     Thank you. Copenhagen Infrastructure Partners is a fund management company. We are managing seven funds totalling EUR 12 billion and our funds invest exclusively into renewable infrastructure. We were established back in 2012 as a joint initiative with our founding investor, PensionDanmark, who is a large pension fund and one of the first direct institutional investors in offshore wind. So, the purpose was to create an alternative to fixed income in the low interest rate environment, meaning creating a unique long-term investment product with an attractive risk return profile.

As many financial investors do not have the industrial experience to take part in large greenfield infrastructure projects, our fund has been designed and set up to do exactly that and today we are more than 130 colleagues, primarily with an industrial and energy background, and we have a mix of competencies between finance, engineering and law, and this is important to cope with the investments across a variety of energy markets, technologies, partners and capital structures.

MATHIAS STECK     That’s a very impressive portfolio, Christina. I would like to ask you a personal question. What is driving you personally to bring the energy transition forward?

CHRISTINA SØRENSEN     So, in CIP we are set up to manage greenfield projects and therefore the energy transition becomes really important. So, we need to understand what renewable infrastructure is relevant tomorrow, so we don’t invest in electricity that is not part of the clean energy future.

So, prior to establishing CIP, I was part of initiating one of the first energy transitions and this was a large utility, namely Ørsted, and we were pioneering the offshore wind by building some of the first projects in the world. But the cost was too high, and we were focusing on getting the cost down through initiatives in the supply chain and creating new financing models where we attracted financial investors and also enabled project financing. Thus, taking that mindset and establishing through a broader investor base, ensuring that we can have capital deployed in the energy transition, I think that is very important and it’s an exciting part of what I do.

MATHIAS STECK     As you said, CIP is funding and managing pioneering energy projects. Could you give us some examples of some of the exciting things you have done?

CHRISTINA SØRENSEN     So, we invest in offshore wind, in onshore wind, solar, in transmission assets, in thermal assets, biomass. We invest in geothermal, in pump storage, so you can say the breadth of our technology base is quite large and I think that in itself is quite innovative. But we do use a similar approach to mitigate the risks on behalf of our investors and that has to do with understanding, of course, that there are relevant infrastructure investments, but also, making sure that we can de-risk from a contracting perspective of the investment. One example could be the offshore wind project of Beatrice in Scotland that we are part-owners of.

So, this project is a challenge in the way that we had to utilize the jacket foundations as opposed to the more classic monopile foundations due to the depth of the waters and the challenging seabed. But getting 84 jacket structures ready in just one year is actually quite a construction effort in itself. So, apart from partnering with an experienced operator, namely SSE, and apart from choosing the many experienced suppliers, which we did, we also made sure that the production of the jackets took place in five different yards with five different suppliers.

So, when something went wrong, these suppliers could collaborate, swap volumes and make sure together, with the project, that there was a certain robustness in the delivery of the foundations and I can say that the foundations were delivered on time, and also the wind farm, and that was a great achievement and, I guess, actually one of our first achievements in the CIP.

MATHIAS STECK      Christina, you just mentioned the importance of cooperation and if we look into the DNV Energy Transition Outlook, cooperation may be even more important in the future because what the Energy Transition Outlook says is that we expect that in the future about the same amount of energy and the energy mix comes from renewables and it comes from fossil fuels and that means that we need a major upbuild of renewables. Where would this growth come from?

CHRISTINA SØRENSEN      It’s a really good question. I think the easy answer would be that everything will grow a lot, which I actually believe is also the truth. But I completely subscribe to the expectations of DNV’s latest forecast. The developer of renewable technologies have done that for itself, so to speak. They have come down in cost and it just makes a lot of sense to deploy these technologies where it makes sense.

So, where the wind blows we’ll have a lot of wind, where there’s a lot of sun we’ll have a lot of solar and so forth. But I think there are more challenges to it than that. So, we also need to address the challenge that some of the provinces and probably, most important here, is the intermittent production, need us to rethink the network and the society that these technologies feed into.

So, investments in new infrastructure, central transmission, distribution networks, storage, could also be pump storage, power to X, a lot of these technologies are really key enablers and also need an equal portion of investments, as does the supply side investments.

MATHIAS STECK      So, I’m living in a country, Germany, and I think I can say that, and that’s not a secret, who had very high ambitions to have a transformation, to do a lot about climate change, but we are getting stuck here in all kinds of things, mostly political things and regulatory things. Regional planning is not getting ready, maybe that’s gone now but there were issues with grid infrastructure and so on and so forth and we had a record low installation number for renewables, although we thought it’s a good idea to do that. I’m telling this because I would like to ask you what do we need from the stakeholders in the industry to actually make this growth happen as we require?

CHRISTINA SØRENSEN     That’s another good question and I think we need to probably all agree that it takes a lot of trust of the different stakeholders to make it happen. I think that the policy frameworks used to last for a lot longer than they will do in the future. So, I think it’s good that we have high ambitions and gotten costs down on the wind technology and the solar technology but if we don’t adapt the networks and how the society consumes electricity in the same rate, then we will not be able to deploy the cheap energy at the same rate.

So, I think faster policy development is key to actually enable more renewables in the system and also that needs to be developed more holistically, I think, and with trust in the dialogue between the developers, the energy companies, the regulators and so forth. I also think that a lot of good initiatives is going on right now from the recovery initiatives post pandemic and I think it’s key that those huge sums made available for new investments actually are put in the future transition and where it’s needed and not necessarily in the challenges that we have already overcome, so to speak. So, I would definitely call for making sure that the policy is also directed to the demand side investments and not only on the supply side investments.

MATHIAS STECK     And are you engaging on the demand side as well as CIP?

CHRISTINA SØRENSEN     Yes, we are. We are investing into transmission assets. They are a rare gem, I would call it. So, there are not many projects like that. We are fortunate to be part of a project in North America. So, that you could say is more on the… It’s actually more midway.

Then in Denmark a very ambitious climate plan has been launched post-pandemic and that includes actually some energy islands where we are also participating and collaborating in the discussions of how to make that happen in practice. And I think the energy island is exactly the type of lighthouse projects that we need. So, it’s basically a hub. You put 100 kilometres offshore.

You can connect massive amounts of offshore wind but then you also need to be able to store or produce power to X or transmit from one country to another country to better utilize offshore wind compared to when you just have a one-sided transmission line.

MATHIAS STECK     That is a very interesting aspect because that also leads to the question what needs to happen on a more global basis to get the energy transition moving forward? Because a lot of initiatives we see today are kind of defined by countries and are maybe also limited to then the resources of the country and the infrastructure of the country. How do you see that developing going forward? Will we see that that becomes a bit more of a joint planning?

CHRISTINA SØRENSEN     I hope. I think that’s not only a good question but also a difficult question. I think there are forces pulling in each direction and I think everybody can subscribe to that. So, energy is by nature, at least electricity is by nature, quite local and regional and then there are global energy streams, particularly in the more fossil areas.

Then you have the geopolitical tensions and that creates sometimes more collaboration, sometimes more focus on security of supply and the more national planning. I think and hope it’s a two step forward, one step backward, two step forward approach and I do see a lot of openness of the different countries when it comes to learning from technologies that we have already deployed in other countries. So, one good example, again, is offshore wind where countries in Asia - So, we are currently doing a big project in Taiwan. They are certainly welcoming the capabilities and experience we have from the European base in offshore wind and they are, of course, putting up requirements of us, learning skills and making sure that we are establishing a supply chain in the local markets which also makes sense since it's very far from Europe. But they’re definitely very open to discuss our learnings and the energy-related topics and learnings that we can contribute.

MATHIAS STECK     You mentioned two things where I want to go deeper. You briefly mentioned the impact of COVID-19 a bit earlier. There are some saying that renewables were relatively resilient to that pandemic but maybe from the perspective of CIP, how has that affected you and what view do you have on the impact of this virus?

CHRISTINA SØRENSEN     So, it’s a difficult question. I think it’s true that the fossil production was hit harder than the renewable production, following the lockdowns but I do think also renewable was hit by the lower power prices, just as an example, but also with the limited movement of supply chains for a period of time where construction sites were shut down and so forth.

So, I think it’s true that they were quite resilient but still there were some eye-opening events, you could say, where it became clear that the energy demand, electricity demand was not a constant and thus also the power prices is not a given. So, for financial investors, we definitely get more questions on how do we expect the future market to look like and how we can incorporate more certainty around the offtake arrangements and so forth now that we are, you could say, one experience wiser post the lockdown of the pandemic.

I do, however, think that we see a lot of big oil and gas majors entering the renewable scene now and that definitely gives confidence to the financial investors. So, I think there is a lot of backing for renewables but it’s also just to say I don’t think it’s a one-sided advantage, so to speak.

MATHIAS STECK     So, that leads me to another question I want to ask you. We see a lot of players, as you just said, getting into the offshore wind space, as, for example, the oil majors. We hear from some of our clients that it sometimes has become difficult to get good projects because there is quite some competition around the available projects at the moment. Do you see a problem there for the further development or is a certain over-subscription quite healthy?

CHRISTINA SØRENSEN     So, I’m in the healthy camp, I think competition is good and we need much more developers and energy companies and companies in general to take responsibility for the energy transition. So, getting the really strong companies in here also and to participate in the new energy field is excellent and I think that we are still too few companies and developers to fulfil the entire target of the energy transition and of course we need, at the same time, as I also alluded to earlier on, make sure that all aspects of the transition, both supply and the demand side, are equally targeted, not only the supply base. That is, of course, a risk. If there is a lot of focus on getting assets on the supply side and less focus on the enablers and creating the flexibility in our network.

MATHIAS STECK     Right. So, we talked a bit about new players, maybe new markets. You mentioned one which becomes quite a hot market at the moment for offshore wind, or already is. It’s Taiwan, where you are also active, and that leads me also to one new-ish technology, floating wind, which would potentially also be interesting for Taiwan. What do you think about this and how do you see this developing over the next ten years?

CHRISTINA SØRENSEN     So, we obviously see the offshore wind market is growing a lot, but it so happens that 80% of the relevant ocean for offshore wind is not suitable for bottom fixed. So, if you want to allow the full potential of offshore wind, now the cost has come down and it has proven an excellent technology as it can be put close to demand centres, I think that floating will have a lot of focus and many people and companies will look into developing this technology to become viable at lower cost.

So, in CIP we share that belief, and we are also looking to invest into floating projects in the future and following the market extremely closely. I think the concept has already been proven in, for example, Norway and Portugal. So, now it’s a game to get the costs down for it to be a relevant renewable investment sooner rather than later. But there are so many densely populated areas around Japan, around Korea, around the west coast of the US that would benefit from the floating technology. So, we really believe that this would be a strong card going forward.

MATHIAS STECK     Talking about attractive energy markets and staying with offshore winds, obviously at the moment it’s Europe and Asia which are leading there, what other markets in the rest of the world would you see have great potential?

CHRISTINA SØRENSEN     I think we are so far away from fulfilling the full potential of Europe and all of Asia, Australia and the US. There are definitely also other markets around that but I just think that ten years ago it was only in Europe, now we are in three, or maybe even four, continents with offshore wind and we will see many countries looking for this as a powerhouse in the electricity supply as it can be put right next to the big load centres.

So, I think in my mind there are a lot of markets and countries putting out specific plans for offshore wind, both, of course, in Europe but particularly in Asia and also in the US. So, in my mind that’s really where the growth will be for many years coming forward. I think we have a very long way to go to fulfil the potential.

MATHIAS STECK     Christina, we talked about stakeholders in the industry to enable the growth we need. What about technology, like digitalization, machine learning, better insight into data?

CHRISTINA SØRENSEN     Yes, as I previously said, I think the deployment of renewable energy at the large scale that we need will need the network and the society to consume electricity and energy differently and there is no doubt that the balancing act, you could say, of the transmission system operators, I would never claim that it has been easy but it was probably more simple with fewer central units of the same type of technologies.

Now you need to be able to fit in generation at a very central level but also at a very local level, even in people’s own houses. I think we will need to adapt or include all of the machine learning and digitalization that we can, in order for that to happen. That’s also where we need to increase the collaboration with other industries and skill groups in order to make the energy transition happen. So, thinking that we can reapply exactly what we did yesterday for the new energy system is probably where we would fail if we don’t include some of the other skill sets from other sectors which could be enabling this development.

MATHIAS STECK     Finally, my last question to you would be what do you think is the most important enabler for us to transition faster together to a clean energy future?

CHRISTINA SØRENSEN     You could answer here whether we should have a global CO2 quota agreement and whether that would speed up things but probably staying more realistically and following up on today’s conversation, it’s probably wiser to say that I think we should focus on the policy support for this transition.

So, also to remember to invest in the enablers, so make the demand side flexible to be able to adapt to all the renewable energy that will come in, basically making sure that the policies are not the thing that is delaying the investments. I think it would be a pity if we tell our grandchildren that we had a great plan but we couldn’t agree how to implement it and I think also, on the positive side, we should remember that there is enough capital in the world to invest, we just need to make sure that it becomes relevant for the capital to invest in the energy transition.

MATHIAS STECK     Christina, thank you, it was a pleasure talking to you and thank you for all these fascinating insights.

MATHIAS STECK     Thanks for joining us for this week's episode. It was a fascinating conversation about the importance of infrastructure and accelerating the energy transition. In next week's episode of DNV Talks Energy, we speak with Christina Sorenson from Copenhagen Infrastructure Partners. She'll tell us about the company's pioneering role in offshore wind development and share her thoughts on why greater trust and collaboration is required between stakeholders in order to facilitate change.  To hear more podcasts in the series, please visit dnv.com/talksenergy .