Energy transition and investors: How are the two worlds meeting?

We explore how the worlds of the energy transition and investors are meeting, joined by two guests – Mark Watts who has a long career in the investment world, and Sam Hollister, who has a background in energy but recently been working closely with investors.  

Episode transcript

[00:00:04.490] – Jon Slowe

Welcome to Talking New Energy, a podcast from LCP Delta. I'm Jon Slowe.

 

[00:00:09.290] – Sandra Trittin

And I'm Sandra Trittin, and together we are exploring how the energy transition is unfolding across Europe through conversations with guests from the leading edge of the transition.

 

[00:00:20.690] – Jon Slowe

Hello and welcome to the episode. Hi, Sandra.

 

[00:00:24.510] – Sandra Trittin

Hi, Jon.

 

[00:00:26.890] – Jon Slowe

Sandra, you're joining us from another event. You're very busy with events at the moment. It's that time of year, I guess.

 

[00:00:32.720] – Sandra Trittin

Yeah, I think it's the energy autumn season, right? It's like September, October, where everyone is getting really busy.

 

[00:00:39.530] – Jon Slowe

You're certainly throwing yourself into it.

 

[00:00:41.600] – Sandra Trittin

Exactly.

 

[00:00:43.550] – Jon Slowe

So today we're going to well, there's a saying that money makes the world go round and that can certainly be applied to the energy transition.

 

[00:00:55.090] – Sandra Trittin

Yes. And what we see right there is a full remake of the energy system. We have to go from the old energy system into the new energy world. And this will require a lot of money in terms of new business models, new assets, new processes, new teams. So, a lot to do.

 

[00:01:16.150] – Jon Slowe

Yeah. And I guess it's not all brand new in that energy has been flowing, or investments been flowing into the energy sector for decades, but that's been supporting large fossil power plants, energy networks and so on. What we're seeing now is that investment required is changing in nature as the energy transition gathers pace and the nature of those investments’ changes.

 

[00:01:39.390] – Sandra Trittin

Exactly. And this will also need some training and let's say some communication between the investment side and also the new energy world because both sides will have to learn from each other to better understand what the real need is.

 

[00:01:54.230] – Jon Slowe

And that makes it even harder as we're finding our way forward with the energy transition, because it's not clear, it's not predictable, it's not certain. So, in today's podcast, we brought together a couple of colleagues from LCP and LCP Delta to explore how these worlds are meeting the energy transition world and the investment world. So, let's say hello first. Mark Watts, who sits in LCP's investment team. Hello, Mark.

 

[00:02:25.070] – Mark Watts

Hi, Jon.

 

[00:02:27.070] – Jon Slowe

Mark, can you give us a quick intro to your own background and in a nutshell, your role at LCP?

 

[00:02:35.490] – Mark Watts

Sure. Well, I'm a partner at LCP on the investment side, and I've spent most of my career on what we term as the buy side. So that's basically in the asset management industry. And I've been pretty fortunate enough to work most of my career in London, but also spent a couple of years in the US. And also, four years living and working in the Middle East, mostly in a variety of investment roles. I have a macro background, so looking at big picture stuff. And I've had roles like investment manager, head of desk, chief investment officer, and also CEO of a Middle Eastern owned bank. So, at LCP, I think it's really interesting. It's interesting you sort of mentioned energy transition and the intersection of energy and investment because I found the energy language, the lexicon, is different from that in investment. And I do believe what we're missing sometimes is just somebody to translate that.

 

[00:03:34.870] – Jon Slowe

Can I start with one translation, Mark, for some of our listeners who may even be unfamiliar with Buyside. So just unpack that a little.

 

[00:03:44.710] – Mark Watts

Absolutely. So, there's lots of different names. Buyside is sort of a colloquial name for typically it's the side of the market that ends up buying stuff. So, buying equities, buying shares, buying bonds, buying private equity sort of assets. So, buying wind farms, they often buy them on behalf of end investors who we act as agents for. So, the vast majority of asset management is really a mixture of institutional mandates, so big pension funds and sovereign wealth, for example, and also some retail that we invest on the behalf of. So, it's a classic agency role. So, we buy it and we buy it from the sell side, which is typically investment banks, for example.

 

[00:04:31.610] – Jon Slowe

Okay, so you're representing the people with the money, the pension funds, the sovereign wealth funds, the retail investors, and on their behalf, buying quality assets for them to own.

 

[00:04:45.240] – Mark Watts

Correct.

 

[00:04:47.710] – Jon Slowe

I interrupted you about the lexicon and the different terminology that you're coming across as you dig into the energy transition. So, are you seeing mismatches or not mismatches? That's maybe the wrong way of putting it. But different languages?

 

[00:05:04.130] – Mark Watts

Oh, 100%. You've just picked me up on my Buyside example. In any industry, people who act inside that industry normally get familiar with the language in their industry. When you're outside the industry, it's often quite difficult to penetrate. And what I found is that the investment industry is rife with acronyms, et cetera. You go into the energy world and of course you've got the same thing happening, but also there's an underlying technical nature to what's going on in the energy transition space. So, I think what we see our role at LCP is acting as almost that translator that arbiter that go between. And I think that's on the investment side, and obviously what is particularly unique about what we do at LCP is that we do have, as you know, the LCP Delta team, which is really that deep technical knowledge alongside the investment team. So, it's really synthesising those two together to actually produce something that is palatable, understandable and executable by our investors.

 

[00:06:08.530] – Jon Slowe

Okay. Thanks, Mark. Come back to you shortly. Let's say hello to our second guest, Sam Hollister, who sits in LCP Delta's, or the LCP Delta team, which is LCP's energy team. Hello, Sam.

 

[00:06:20.970] – Sam Hollister

Hi, Jon. Yeah, I'm Sam Hollister, head of economics and finance at LCP Delta. So, yeah, I've spent my life in the energy space. Prior to joining LCP, I was Head of Policy and Public Affairs at OVO. The energy supplier. And then prior to that, I was Director of Economics at Energy UK, the trade body. So spent a lot of my time engaging with kind of the utility industry and then with the UK government and regulator helping support policy development and in particular kind of looking at that energy transition, things like CFDs, capacity markets. But also, I sat on advisory panels on things like EV. I sat on the Electric Vehicle Energy task force and also decarbonising heat. So really been focused over the last 10-15 years on UK energy policy and the energy transition. So, I guess very much in marked lexicon sitting in the energy policy world.

 

[00:07:20.730] – Jon Slowe

Okay, so between the four of us, we've got three who are very much from the energy world and Mark, you're all alone and coming from the investment or finance world. Sandra, you're an advisor to an investment company, if I remember right.

 

[00:07:37.970] – Sandra Trittin

Exactly, to Junction Growth Investors investing in scale ups in the new energy world. Yeah, they are now active since one year. And it's quite interesting to see also with regards to that translation issue, right, translating from the finance world into the energy world and then also to the physical connection world, because energy is all about physical connection at one point in time, as Mark was saying. Right, it's like to certain extent, deep tech necessary. Right. But I was thinking probably, Sam, you were working recently on some topics around big storage, probably that would make it a bit more lively for our listeners to better understand what you are actually doing there and what happened.

 

[00:08:27.570] – Sam Hollister

Sure, happy to kind of jump into that. Sandra, interesting, you kind of used the phrase right at the beginning of this podcast, you spoke about the transition to a new energy world, and I think nothing quite kind of sums up new energy in my mind than the massive transformation in battery storage and how much activity is being driven towards battery storage. We at LCP Delta have done a lot of work both with owners and developers and also with those looking to invest in batteries in the UK. Published a report relatively recently looking at that market and I think that's actually quite an interesting kind of jumping off point, if you like looking at some of the kind of the financing and the structure of that market.

 

[00:09:16.230] – Jon Slowe

Sam, if I remember right, there's something getting in the order of three gigawatts of batteries in the now.

 

[00:09:23.170] – Sam Hollister

Yes. Yeah, I think there's about around about gigawatt already installed and we're expecting sort of another two or three gigawatts installed just this year. So, yeah, you really have kind of seen a massive uptake in battery development and something that is keeping us at LCP Delta very busy with people kind of asking questions around the role of batteries and its potential revenue streams, where's.

 

[00:09:48.420] – Jon Slowe

The money for that come from? Because that's a lot of money for a gigawatt and then another two or three gigawatts of batteries.

 

[00:09:56.990] – Sam Hollister

Yeah, I think that's kind of a really interesting question. We've dealt a lot with people looking at kind of the revenues that have been achieved by UK batteries, particularly over 2021 and 2022, which obviously, listeners to this podcast will realise is kind of a very volatile period of global energy markets, but particularly in the UK, where we saw huge volatility and huge kind of price increases, which, unsurprisingly, is very good for a battery, really, who can kind of take advantage of that price. Arbitrage. So, in 21 and 22, we saw particularly high revenues for batteries, which, as you'd expect from the market, attracted developers, attracted investors, I think probably less kind of people were more comfortable with batteries by this point in time, so it wasn't particularly speculative. People were being drawn into seeing the huge opportunity. And actually, what our report has found was that 2023 has been a much tougher year for battery storage in the UK, as that kind of market gets a bit more saturated and has almost attracted those that were looking for those high revenues from the last couple of years.

 

[00:11:18.570] – Jon Slowe

Okay, so an area where money has certainly been flowing into that space, but it's still quite specialised and probably not that many investors fully understanding it, fully comfortable with it.

 

[00:11:31.180] – Sam Hollister

Yeah, I think there's kind of a little bit of a change in dynamic, I think, from those that have been those that have kind of been attracted to those high prices that we've seen. And now our report actually is talking about, well, we still need a huge amount of batteries and storage on the UK system. We are moving to a renewable based system that's going to be highly intermittent. So therefore, we actually see that there's another 18 gigawatts of batteries due to be built just this decade, actually, in the UK. But people are going to have to be a little bit smarter about where they think those revenues are going to come from, because we're not going to be able to kind of extricate the value that we've achieved just from the wholesale market, for example. But, Jon, in answer to your question, who's looking? Most conversations we're having at the moment, people are talking about either investing in UK batteries or what those other markets might be, because they're seeing that maybe they're already a bit too late to the UK and maybe, perhaps the market is becoming saturated, and the revenues are slightly tailing off.

 

[00:12:38.130] – Sam Hollister

So, people are asking us kind of what's the potential other areas that we're going to see a similar market growth potential to what we've seen in the UK.

 

[00:12:46.310] – Jon Slowe

Mark, you had a question or point?

 

[00:12:49.750] – Mark Watts

Yes, it's kind of interesting. We recently did an Energy Transition Investment management survey, which we conducted over the summer, which I'd like to talk about a little bit more in detail. But since we're on the subject of batteries or storage, we actually asked over 100 managers where they were invested, and we got some really interesting data back. And in the storage sector, just looking at it more broadly. So colocated battery storage, pumped hydro hydrogen storage, battery is definitely getting an awful lot of attention from the professional investment community. Probably interesting actually for us is just to note that hydrogen was making a really good attempt at getting sort of shelf space. So around 25 to 30 managers that we surveyed out of that hundred reporting that they'd actually put money into hydrogen storage. So that's certainly behind battery where those numbers were double. So, battery storage definitely double. But yeah, certainly echoing Sam's points there, that the professional investment community definitely jumping in behind the battery story.

 

[00:14:02.270] – Jon Slowe

Mark, maybe digging in now to the different types of money. You mentioned a few earlier on sovereign wealth funds, pension funds. But how should our listeners who are mainly working in the energy sector think about these different pots of money? We hear these big, big numbers of trillions of pounds, euros, dollars looking for a home in the energy sector, needing to be invested in the energy sector. But in terms of where that money is coming from, can you help our listeners understand a bit about the different money pots, to speak of it in a different way?

 

[00:14:43.130] – Mark Watts

Absolutely 100%. Well look, let's start with some big scary figures. If you take some of the numbers that are out there and these aren't outlandish by any stretch of the imagination, by 2050, for energy transition to be a success, we're talking numbers around $200 trillion in cumulative investment. Now that's staggering. That's two times current global output, so global GDP. So that has to be found from somewhere. And what we know from our investment work is that governments are pretty much stretched in most developed economies. So it's not going to be the governments that are going to be riding to the rescue and providing all of that investment money. It's got to be the private sector. Now, it's not going to be zero from the government. We think government definitely has a role in providing some of that either subsidies or cornerstone investments in some areas that need a little bit of derisking. But it is the private sector that's got to do that. So some of that will be coming from banks but basically I think the main money will be coming from what we collectively call asset owners. So, these are the large funds or the large plans around the world that have billions, if not trillions of US dollars of capital at their fingertips.

 

[00:16:06.150] – Mark Watts

So, we've mentioned sovereign wealth funds. Sovereign wealth funds are obviously the nation state pots of money that have either accumulated naturally or through hydrocarbon revenues or various other routes, but they are there to be invested. We are also talking about long term pension plans around the world and also some insurance companies. Now the unifying thing for all of these is a phrase that we like to call patient capital. And I think listeners may have heard that banded around after the mansion house speech in the summer. Patient capital is basically money that you can invest and lock away for ten years. And it's that ability to take those long-term investment decisions like a sovereign wealth fund can or endowment or some charities. These are multigenerational pots of money that can afford to place their funds in something that they might not see a return accruing until ten years’ time. So, they are the perfect targets for infrastructure investment.

 

[00:17:17.450] – Jon Slowe

And that's very different mark, isn't it, from something listed on the stock market where it's all about next quarter's earnings figures and its very short term.

 

[00:17:28.510] – Mark Watts

Absolutely. And what you tend to find almost definitionally that a company that's listed on the stock market is daily dealing. And so, can you imagine investing in a wind farm where you're just trying to literally get permissions for the wind farm to be built and constructed and then all of a sudden one month later you say, oh well actually, can I have my money back? I mean that's not possible. The whole idea, the whole structure in the market is to really offer these opportunities but do so in a way where investors know that they are not liquid. In other words, you cannot sell them tomorrow or next week.

 

[00:18:06.320] – Sandra Trittin

Okay, so it seems there is quite a lot of money around and different opportunities how it is structured. But what is actually now the best way to get to it? Right, if I'm now seeking for big projects, for example for wind farm, or if I'm looking for battery storage in residential space and I'm looking for money, what is the best approach I should take?

 

[00:18:31.810] – Mark Watts

Sure, well, why don't we start with well, let's start with returns and then we'll look at maybe some of the structures. So often what people sort of say when they're looking at investments is how much money can I effectively make? That's almost one of the good jumping off points. And what we've actually found from our analysis is that the types of returns which are really expressed in the form of IRR so internal rate of returns investors can be expecting after fees returns around 12% per annum. So what we're seeing is that's quite a large number and that's quite an attractive number and it's larger slightly than what the professional investors would be expecting from the infrastructure space. So there seems to be a nice increase for energy transition over standard infrastructure like roads and airports.

 

[00:19:29.030] – Jon Slowe

Okay, so energy transition is used as more attractive returns potentially then, is what you're saying by the investment manager community?

 

[00:19:37.820] – Mark Watts

Yeah, they seem to be. I mean, our recent survey suggested that targeted returns from managers were in that eleven to 12% region and that's net of fees, so gross sort of getting up to 15. And then anecdotally from talking to managers, there are a number of projects out there where they are achieving those numbers. As you say, this is not a new space, particularly because people have been investing in these areas for a number of years. But I think the big change for us is you're seeing dedicated energy transition solutions, whereas maybe five or six years ago, you were seeing them as part of a broader play for infrastructure assets. So just to answer your question, Sandra, on how people access well, again, we surveyed the market and according to our data, the vast majority of ways of accessing are through closed ended funds. So, what that means is that is a fund that is open for subscriptions for a limited period. Then once they have enough subscriptions committed, they close. Then they spend a couple of years deploying that committed capital, and then the next interim period, effectively building the assets, constructing, growing the assets, getting the revenue flowing.

 

[00:20:55.720] – Mark Watts

And then finally, after ten years or so, seven to ten years, they then look to exit those positions and return money to investors. And those returns are where you're getting those IRRs (Internal Rate of Return) of around 12% mark when you say assets.

 

[00:21:13.210] – Jon Slowe

So, infrastructure. Some of our listeners will be thinking, okay, things with lots of metal or concrete stuff in them, like wind farm or a big battery, but is also included in that less tangible things like a virtual power plant, a software platform that can deploy flexibility from thousands of electric vehicles or batteries in people's homes. Or could it be financing heat pumps installed in customers' homes? So how widely is the sector thinking of assets today and how widely should it be thinking of what it's actually investing in?

 

[00:21:56.070] – Mark Watts

Absolutely. Yeah. And I think all of the above is the short answer and more. And I think at LCP, I mean, collectively, the Delta team and the investment team, we've mapped some 45 or so subsectors in this particular space that span what we class as sort of the four main areas. So, generation, storage, network, and demand. So, across those four main areas, there are a number of different areas that people can invest in or investors can get exposure to. Now, I think historically, generation has been the now that's been the first part, first sort of group to the party. So those big assets, and we tend to talk about those, I think, quite a lot. And quite rightly, because they do require lots of capital expenditure and they've been around for a while and they're easy.

 

[00:22:44.690] – Jon Slowe

To understand, aren't they?

 

[00:22:45.880] – Mark Watts

Yeah, absolutely. And it's easy to sort of people can visualise that, whereas a virtual power plant, a VPP, that kind of thing, is a lot harder. You probably need a chart. It's not very good for podcasts, for instance, because there's no graphic, but I think one of our paint a very.

 

[00:23:04.430] – Jon Slowe

Good picture of a virtual pavlovan on a podcast.

 

[00:23:06.640] – Mark Watts

Yeah, absolutely. I'm not even going to try maybe that's version two of volume two. But from our sort of assessment today in the market, around 66% of the assets that we surveyed were in what we would class as generation. 7% in storage, 14 in the network and 13 in demand. In other words, how you produce it, store it, move it and use it. And so, effectively, what we are thinking going forward is that that generation, whilst all of these numbers, the pie, is going to grow without a shadow of a doubt, there's going to be much more money moving into this area, but what we expect to see is more opportunities on the segments that aren't generation. So, the storage network and demand, and as you say, that demand side is a very vibrant area. I was lucky enough to go to the LCP Delta Conference in Frankfurt last week, where we were seeing lots of players on the demand side, tonnes of solutions coming out, different levels and rates of penetration in different markets. There's clearly some incredibly smart and highly investable things going on in that space.

 

[00:24:21.170] – Jon Slowe

So, I'd like to come back, Sam, in a minute to you and batteries again, but Mark just on that, on our summit, Sandra and I did a podcast last week on the highlights from that. I'm quite interested in what you made of that from an investment lens, because there were companies there like Tibber, an energy retailer that's now got a million customers. There were energy data platforms like Elite Connector, Grid, so quite a lot of what you might think of as niche companies, but from an investor perspective, not those companies specifically, but in general, what did you make of the opportunities for investors from what you saw?

 

[00:25:03.330] – Mark Watts

I came away hugely energised. I mean, the amount of innovation that's going on, even within sectors, so even within areas, there are often a number of different competing solutions. So, there's part of me that says, actually, there will be some winners and losers out of that, without a shadow of a doubt. But what I actually saw was the ability of some of these maybe country dominated players to acquire one another. So effectively you've got that cross-border acquisition. So as an investor, that's actually an attractive thing. Then there were people who had a single technical solution that satisfied one part of the market and then you've got other people who are trying to aggregate those together. And so, I can actually see if I crystal ball this and maybe we'll talk about crystal ball stuff later. But once thematically, I expect to see over the course of the next ten years that there will be dominant technologies, emerging, dominant standards of interconnectivity and also some dominant players providing those services, possibly with a one single umbrella. So, in other words, one point of contact for the consumer, and then below that, lots of multitude of different sort of plug in, not plug in solutions.

 

[00:26:18.650] – Mark Watts

But I don't think the future is a consumer having to source their storage source, their solar source, their heat pump and then worry about whether they all talk to each other. I think that's a big headache. I don't think we're ready for that yet.

 

[00:26:32.510] – Jon Slowe

That's just a personal view.

 

[00:26:35.870] – Sandra Trittin

So, it would be then solutions like of NPAL or Finn for know where you have everything in one, like even including then the energy tariff, potentially, yes, some of those.

 

[00:26:50.450] – Mark Watts

I mean, the energy side I thought was particularly interesting with the ability to have those 30 minutes window pricing and have that have energy aligned with the consumer. In other words, not profiting from the provision of energy itself, but the services that go around that. I thought that was a very innovative way of looking at things. And I think one that I think a lot of the big incumbents need to wake up to before they're outcompeted.

 

[00:27:15.610] – Jon Slowe

So, zooming out, you can see ways to connect the money that you described from pension funds, sovereign wealth finance, et cetera, to the sorts of scale ups that are happening in the downstream energy transition.

 

[00:27:29.970] – Mark Watts

Mark absolutely. And if I just look at, again, the results of our survey, in that demand segment, there were some two, four, so we've got some 16 segments that were being allocated to. And the interesting thing is, everything's sort of a flat structure, so there are about the same, give or take, same amount of investors in each of those areas. So, what that says to me is people are just saying they're all investable, there's lots of opportunity here and let's see the creativity in the market exert itself and see who the winners are. And the rest, I suspect, will end up being merged. So, again, people can make money from that. But, yeah, it's a very interesting I'm looking at it so, sorry, again, it's a visual, but it's a very interesting because it's a far more flat structure than you see in other areas that's just broad application of each of those technologies.

 

[00:28:26.370] – Jon Slowe

So, Sam, I'd like to come back to big batteries. You talked about the growth in the UK, the revenues, the challenges with those revenues, but the fact that financiers have got used to putting money into big batteries. Spain is an area where there's equal, well, maybe emerging opportunities for storage. And I know you've done some work with Santander, I think it is, looking at how they might be financed. So, if I'm an investor, I might understand UK and UK batteries, but is a challenge, then how do I understand Spain and Spanish batteries? Is that the purpose of that paper? What that's for?

 

[00:29:15.010] – Sam Hollister

Yeah. Thanks, Jon. Yeah, really interesting, actually, that almost just going back to the UK and then I'll take us to Spain. We're already seeing the UK kind of looking for longer duration batteries already, people kind of moving from 1 hour to two-hour batteries and then perhaps longer than that. And that's going to be kind of the way that the market we can see evolving in the UK, and particularly when you have a kind of very wind dominated system, actually, the need for longer duration batteries is probably the next step in that. And ultimately, we can then start to talk about kind of day long battery storage or weeklong, et cetera, et cetera, the need for that when you've got 50 gigawatts of wind on the system. Well, conversely, you then change that to a Spanish type of energy system, which is going to be more dominated by solar and solar PV. Well, actually, you can kind of rely in Spain if you're lucky enough to be living there on the sun shining every day. So actually, you can be using that sun during the day and then kind of store that excess to use that overnight with the kind of the near guarantee that the sun is going to shine again the next day and recharge your batteries and bits and pieces, actually, a need for much shorter duration battery storage.

So clearly, just on the way that the energy transition is going to happen in countries like Spain, you can see that actually the need for batteries is going to be huge. Now, where Spain is compared to the UK, and perhaps this is where kind of lessons from the UK will take shape, is the UK has opened up the markets for batteries and provided the revenue streams that have made this investable and provided value to the services that it can provide. For example, frequency response has been a huge driver for investment because of the revenue streams that have been available from some of the programmes that National Grid have put in place. Now, countries like Spain aren't there yet. They haven't quite opened up their markets for things like frequency response issues around kind of the launching of a capacity market auction. That's another kind of revenue stream for batteries. So, countries like this, we're seeing perhaps there's a need, but at the moment, there isn't quite those revenue streams open to it like we've seen in the UK. So, I think the UK has been at the forefront of this. We are looking for other markets where you can see that the dynamics are going to be there.

Perhaps if you're looking, you might be thinking, well, not yet. I want to see more visibility on some of those revenue streams before investment really starts to pile in. But the Spanish government have set itself some targets around battery storage. They are starting to issue grants, for example, around batteries. So almost the UK has been the front runner in this. And as I said, we're still expecting kind of ten gigawatts of investment and deployment just this decade. So the UK will still very much be kind of a market to look at. We think that people will need to be a little bit smarter because some of those revenue streams are going to be kind of competed away. So how else do you kind. Of make yourself stand out from the crowd. And our report highlights seven key lessons for people to take forward. But as the UK kind of people are now having had that experience, looking for where else and where next? And we've done, as you say, a report with Santander around the need for batteries in Spain and as and when that market opens up.

 

[00:32:45.010] – Jon Slowe

So, question for you and Mark as well, Sandra. The work you're doing with junction growth in terms of investments. Mark, the meeting of the two worlds of energy transition and investors, it gets pretty detailed pretty quickly when you start looking at this space, how hard does that make the decision making? And is that a potential barrier to money flowing into the sector, that there's so many details and every country is different, and the regulations move, and the market structures move? Maybe. Sandra, sort of your experience and Mark then you.

 

[00:33:27.090] – Sandra Trittin

Yeah, I mean, you're pinpointing exactly to the right, let's say challenge, right. And to the right barrier. Because if you're an investment manager, either you have the advantage of being in a big company and then you can focus on a specific vertical, or you get, like, every day, three different kinds of profiles of companies on your table, which can range from hydrogen to some kind of software solution in flexibility down to new storage systems. Right. And all of a sudden you should be knowledgeable around all of these industries, about all the competition, about the further development, about the investment structure, et cetera. Right. So, this can be quite challenging. So, what I have seen, and not only with junction growth, but also with others, they are trying to focus on certain kind of verticals or of certain kind of growth stages or types of companies, let's say. To also be a bit more consistent in what they are doing, sometimes even defining focus topics, for example, at least for a certain kind of time to manage these kinds of barriers. And sorry for the background noise.

 

[00:34:46.890] – Jon Slowe

That's okay. You're getting the benefits from all these events and the different details that you're picking up. No problem. Mark, how about you?

 

[00:34:56.510] – Mark Watts

Yeah, well, I'm a big fan of education. I think a lot of things start with education. And certainly, when you're stewards or looking after a fiduciary for other people's money, I think it's even more important that we know what we're talking about. So, our approach at LCP is we have a service that we branded LCP Transform, and that effectively takes our investors on a journey. And that journey effectively starts with education. So, do you understand the fundamentals of energy transition? And so, we go in and we spend time with decision makers making sure they understand the need for energy transition. What is energy transition defined as then? What is investable in that energy transition? And we draw on the expertise of LCP Delta to have a look at some of the sectors that we like and what we don't like, and we have a very consistent lens and investment process there to look at that. And then at the end of that, we then say, well, okay, what does that mean to you as an investor? So, based on that education, you can then make a decision about which sectors are more applicable for your particular risk profile and then we cap that off with knowledge of the market.

 

[00:36:08.300] – Mark Watts

So, I refer to that energy transition investment manager survey if this isn't an academic exercise, this is about putting money to work in real projects, in real companies. So, what we do is we then spend time having a look at the investment managers to see which of those that we like, the way they're doing things, we like what they're exposed to, and what they're exposed to is aligned with what we've agreed with the client. So that is how we're really seeing the bridging of the gap between people hearing about energy transition and not quite putting the dollars in the ground. And so that's a great way of bridging that gap.

 

[00:36:44.840] – Jon Slowe

Yeah. So there's a lot of detailed work to do then, to get these two worlds to really know each other well and ultimately for investors to be comfortable with investing in the energy transition.

 

[00:36:59.590] – Sandra Trittin

But I think this makes it also exciting.

 

[00:37:02.310] – Jon Slowe

Yeah, it does. It's exciting and I think we can't just sit back and hope the money will flow. I think there's lots of active work that needs to be done on both sides. And I guess, Mark, that's the job you're doing. Sam, the job you're doing is that active work to help the two sides understand each other and ultimately that money to flow. Okay, let's bring out the talking new energy crystal ball. And I'm going to set the dial this week to just three years ahead, 2026. And Mark and Sam, from being in 2026, looking back in the last three years, I'd like you to pick out one development or trend or one thing that's happened in that three-year period about the flow of capital from investors into the energy transition.

 

[00:37:58.070] – Mark Watts

Okay? Three years is not a huge amount of time. I was kind of hoping you were going to give me ten because then.

 

[00:38:04.620] – Jon Slowe

No, ten is the easy. Tens are easy, three is harder.

 

[00:38:07.300] – Mark Watts

No one will remember the answer. Well, in the UK, from a UK perspective, obviously, we've got an election looming and really not sure what that's going to yield yet. But I think if you go back to the Mansion house speech, what I think has become abundantly clear is that we do have large pots of capital available. And the Mansion House speech, you look at the US version, IRA, and there's also the European version. There are a lot of government that are now looking to the private sector to say you need to mobilise capital. So, a fairly confident prediction I think I'm going to make is that we will see a lot more capital flowing into this area with a very strong hand or strong guidance from government behind it. Not telling you where to put your money, just suggesting to you that you should really be doing it for the good of not only the economy, actually, but broader society and the planet. So, I think that's one and maybe slightly more micro I think as this money starts to flow and people become more familiar then you're going to see a little bit of differentiation between people.

 

[00:39:20.200] – Mark Watts

Instead of people just choosing global managers that put their money everywhere, you might see lots more managers who are out there saying look, we are experts in hydrogen so we will just invest in the hydrogen vertical, or we are experts in electric vehicles. Electric vehicles or demand side. Yeah, so you'll have that specialism and that is natural. I think in any market you start global and then you become more specialised as knowledge increases. So, I do expect I mean that's starting to happen already but it's very nascent levels.

 

[00:39:53.130] – Jon Slowe

Yeah. Okay. Thanks, Mark.

 

[00:39:55.260] – Sam Hollister

Sam, I will take the liberty of doing what Mark did and have two answers. I will reflect on the fact that I would think that the trend towards energy transition is deeply enough set both with investors and with the public that the transition continues apace despite kind of things like the recent government announcements around the pushing back of the EV deadline and low carbon heat. I think that enough people particularly actually interesting what I found really interesting was Mark's discussion just around the internal rate of return and kind of what that looks like compared with normal kind of infrastructure type investments. Quite pleasing to see. Well actually you're not giving away money in order to invest in the energy transition. You actually get kind of the similar returns plus the benefits from the sort of ESG type activity. So hopefully the three years trend will kind of continue and that's certainly what I expect. And I think then looking back I kind of think well actually where we will be on kind of the next iteration of kind of technologies and that probably is things around low carbon power such as carbon capture and storage and hydrogen.

 

[00:41:15.020] – Sam Hollister

I think we can probably say if we put ourselves in our shoes three years ago, the thing that we were really pushing for was battery storage. And we could see the kind of the need for that. I would say as we kind of head towards the latter part of this decade, actually, where we're getting that kind of low carbon firm power from will be the kind of the area of that kind of what needs. To be pushed throughout the would hope that we are starting to kind of get whether that's policy clarity or technology clarity not too sure. But I think at this precise moment in time. I don't think anyone could quite call where we're going to land on that. So hopefully in three years’ time we'll have a little bit more development in that space.

 

[00:41:53.410] – Jon Slowe

Okay. Thanks, Sam. Thanks, Mark. Thanks very much for your time and sharing your thoughts. Sandra, any sort of final observations, thoughts on what we've heard today?

 

[00:42:05.190] – Sandra Trittin

Yeah, so what becomes, again clear, I think, is that the money is there. I think the money is there. The money wants to get into the energy market. So, there is enough motivation, I think, also from the financial sector. But there's really still a lot of work to be done with regards on how to make that happen. And as Mark was saying, a lot around education, a lot around communication support, also on both sides, right. On the energy side as well as on the financial side, to bring both worlds together and to make them even speaking the same language, or at least in a way that they can understand each other much better. Right. But I think it will be the right way. What's your key takeaway?

 

[00:42:50.970] – Jon Slowe

Similar. There's a lot to do. And normally, Sandra, I feel very excited when there's a lot to do with this. I feel slightly daunted, I think, as to how much work there is to do, how quickly to bring these two industries together. But we absolutely have to do that. And I think through what we heard about big batteries, for example, it's actually very encouraging how quickly new investable sectors or subsectors of the energy transition can develop. So, while there's a lot to do, I think we can look at examples of where money is flowing really well into certain subsectors of the energy transition. So maybe I'm feeling part daunted, part excited, but yeah, a huge amount to do in the next years. But what an opportunity and what a privilege to work in this area.

 

[00:43:45.830] – Sandra Trittin

Exactly. And we can make it happen altogether. Thank you very much.

 

[00:43:51.640] – Jon Slowe

Okay, well, thanks everyone. Thanks for listening, as always, and look forward to welcoming you back of the next episode of Talking New Energy soon. Thanks, and goodbye.

 

[00:44:01.770] – Sandra Trittin

Thanks for tuning in. We are excited to bring you captivating conversations from the leading edge of Europe's energy transition. If you've got suggestions for topics or guests for future episodes, please let us know.

 

[00:44:13.730] – Jon Slowe

And if you're enjoying the podcast, then please do rate it and share it with colleagues. For show notes, transcripts and more, please visit www.lcpdelta.com.