Via Wood Mackenzie:
We recommend the following action items for capital allocators:
• With roughly US$800 billion in annual spend, it’s a growth story. Apply strict discipline when it comes to risk-return expectations. Be conservative on the terminal value assumptions.
• Don’t ignore opportunities in the T&D sector. Returns could be better in T&D versus contracted wind and solar in some cases. Furthermore, ticket sizes could be billion-dollar-plus when it comes to T&D plays.
• Invest in the Power-2-X value chain in some form or other. Hydrogen-related investments are key to building optionality for the next decade.
• Develop or buy platforms and growth companies rather than assets. Value crystallisation is a function of building out platforms and sell-downs to passive investors.
• Before discussing project or opportunity returns, clarify key assumptions to ensure parties are on the same page. Go beyond the IRR and focus on platform growth.
• Shareholders put a premium on independent green growth engines. Use spinoffs and Yieldcos to mobilise capital into renewables. Alternatively, offer clear disclosure when it comes to growth targets. Don’t set GW targets but value-metric or population-metric targets.
• Build resilience into portfolios, but also an investment into optionality. Watch out for potential value traps. Use a framework to build opportunity pipelines and don’t assess every opportunity that comes to your desk.
• Balance defensible investment plays versus non-defensible plays.
A new set of energy majors will inevitably emerge over the next two decades. This subset is likely to combine some risk-on funds, oil and gas firms, utilities and some regional players. How and when exactly would this happen is yet to be seen.