Savills : Investing in renewables infrastructure to decarbonise and be defensive

The UN Secretary General opened the recent COP27 summit with the words: 'We are on a highway to climate hell with our foot still on the accelerator', reiterating his appeal to phase out coal by 2040, and declaring that it will soon be too late to reverse the harm being done to the earth.

In 2021, one-third of Europe's energy - used for generating electricity, transport and heating - came from gas. The bloc's energy policy has significantly changed due to recent events. Although the objective is still to reach net zero by 2050, currently the top priority is securing energy supply for winter and reducing the negative economic and social effects of sharp oil and gas price increases.

Governments recognise the risks of depending on non-renewable, imported energy. Consequently, investment in alternative sources of generation is growing. But currently no EU country is reaching its full potential in terms of renewable energy production. EU Commission data says that using 3 per cent of land for solar and up to 15 per cent of land for wind energy would cover the total EU's energy demand exclusively from renewables. Converting just 1 per cent to solar would be enough to provide the EU's electricity needs.

Globally, according to Land Art Generator, 1.4 million sq km (around half the size of India) of renewable energy landscapes and about 490,000 sq km of renewable energy oceanscapes need to be deployed to support a 100 per cent renewable, zero emissions, regenerative global economy.

Institutional investors, corporations, and governments must expand funding for renewable infrastructure globally for clean energy transitions to be effective. The World Economic Forum says annual clean energy investments in emerging markets and developing economies must rise from under $150 billion in 2021 to over $1 trillion by 2030 for the world to reach net-zero by 2050.

The role of investors

Real estate investor interest in renewable energy infrastructure is growing rapidly. According to the ULI and PwC Emerging Trends in Real Estate 2023 survey, 'Infrastructure' is a top investor pick. In Europe 'New Energy Infrastructure' has topped the sector rankings for two years. In the US, infrastructure spending is expected to be supported by new programs under the Bipartisan Infrastructure Law, which can be leveraged to support subnational climate and clean energy goals.

Infrastructure can diversify investor portfolios, being less cyclical and having fundamentals supported by long-term structural factors; it's often less volatile than other sectors and provides stable income during uncertainty, potentially protects against inflation, and contributes to net zero and ESG strategies.

A recent report by Imperial College Business School confirms that investing in renewables makes sense from both climate and financial standpoints. Returns from unlisted renewables are 22 per cent higher globally, compared to the whole unlisted infrastructure market.

The prospects of the sector's growth

Since 2010, green private investment in infrastructure has doubled, reaching 60 per cent of all private investment in infrastructure projects last year. Investors are demonstrating most interest in renewable energy, which accounted for 91 per cent of all green private investments.

We expect this positive trend to continue. The challenge is identifying land that is appropriate and ensures the financial viability of the investment. Large urban centres are the largest consumers of energy, but nearby land is highly valuable. In areas with lighter densities, it's possible to fuse energy with urban planning by incorporating, for example, solar into suitable projects. But most energy will have to be generated in remote landscapes, although there may still be opposition around issues including habitat protection, competition with other uses, and heritage.

The current crisis proves the need to accelerate energy transition. Renewables offer an effective long-term solution, but require trillions of additional investment globally. Real estate investors are considering expanding their portfolio allocations to renewable investments, which will help meet national and corporate decarbonisation objectives. At the same time infrastructure as an asset type offers risk diversification and stable (even inflation hedged) returns, at a time of volatility.

Further information

Contact Eri Mitsostergiou or Henry Grant

Investing in renewables: the benefits and risks for landowners