AMP Capital is a large investor in energy infrastructure, with over $2.8 billionAUD of assets under management globally . The companies we invest in on behalf of our clients include those in the electricity and gas industry, as well as sustainable energy production.
As we take a look at 2020 and prepare for the year ahead, there are two macro themes on our radar when it comes to the energy sector.
Transition in the sector will continue
First, we believe Australia will continue its gradual transition from the fossil-fuel dominated energy system to one powered by renewables (including distributed generation at the consumer level). Recent evidence from Endeavour Energy supports this contention, suggesting that transformation is already in full swing, with some parts of its network already experiencing 100% rooftop solar penetration.
The imminent transition creates numerous challenges for the sector. These include physical stability of the grid, reliability of supply, regulatory changes and most importantly for investors, capital considerations as the traditional business models of the utilities adapt to a new reality. However, with change comes opportunity, one of which is investment in new technologies.
Incumbents are applying these new technologies to protect the value of existing energy investments. For example, Evergen and Powerco are working together on developing a reliable off-grid power solution for remote communities in NZ, not only benefiting consumers but also helping to mitigate any risk of regulatory scrutiny of future capex for the underutilised parts of Powerco’s network.
Policy and regulatory uncertainty.
Despite this transition, Australia lacks a comprehensive national energy policy that will tackle each elements of the energy trilemma simultaneously: affordability, reliability and decarbonisation. Unfortunately, policy uncertainty, frequent changes to regulatory settings and the ever-present prospect of government intervention are all part of the reality for investors.
For AMP Capital, the ability to forge cooperative and constructive dialogue with the national energy regulators and all levels of governments, as well as having a seat at the table at this important junction in sector transformation, will continue to be an important element of our active asset management strategy.
Given these dynamics, it’s unsurprising that investment risk in the electricity sector is rising, while equity returns are under downward pressure due to regulatory risk and competition for assets amid low interest rates.
In an environment experiencing such change and uncertainty, our strategy is to drive the assets harder, facilitating knowledge-sharing across our portfolio companies to incorporate best industry practices and extract further efficiencies. In addition, we are working closely with management teams to encourage technological innovation and de-risk by diversifying into adjacent business streams.
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