Power and renewables

Energy Finance: the future is digital

Welcome to Face the Facts – the new current affairs podcast from DNV GL Talks Energy, where the world’s leading energy experts share their insights on the most important global news stories about the energy transition.

Renewable energy is going mainstream
In 2018, global investment in energy totalled USD 1.8 trillion, with investment in renewable energy exceeding USD 332 billion. But what is making green investment so successful? And, how can businesses ensure that they generate a financial return and stay ahead of their competition?

Carlos Albero, Global Finance Segment Leader at DNV GL – Energy, explores how embracing digitalization and embedding it in decision-making can enable businesses to become more profitable.

In recent news, countries around the world have been setting ambitious new targets to help combat climate change, while renewable energy investors and developers are increasingly turning to new forms of financing and digital technology to build effective investment strategies.

However, with 40% of finance professionals choosing not to invest in digital technologies because of uncertainty around future revenue streams, it’s time to face the facts.

Read the transcription of this episode here

Transcript:
Transcript:
NARRATOR 1 Welcome to the DNV GL Talks Energy podcast series. Electrification, rise of renewables and new technologies - supported by more data and IT systems, are transforming the power system. Join us each week as we discuss these changes with guests from around the industry.
Transcript:
NARRATOR 2 Hello, you’re listening to ‘Face the Facts’, the new current affairs podcast from DNV GL Talks Energy, where the world’s leading energy experts share their insights on the most important global news stories about the energy transition.

Global investment in energy totaled USD 1.8 trillion in 2018, with investment in renewable energy exceeding USD 332 billion. While recent news has shown countries around the world setting ambitious new targets to help combat climate change, renewable energy investors and developers are increasingly turning to new forms of financing and digital technology to build effective investment strategies.

In this episode Carlos Albero, Global Finance Segment Leader at DNV GL – Energy, explores how embracing digitalization and embedding it in decision-making can enable businesses to become more profitable.
Transcript:
CARLOS ALBERO Renewable energy is going mainstream. Global investment in energy went up to 1.8 trillion US Dollars in 2018 and 332 billion US Dollars went to the power sector. This is the third year in a row in which the power sector outpaces the oil and gas sector in terms of investment.

This is no longer an isolated trend in isolated markets, it’s becoming global. It’s the US’ ambitious plans on, onshore and offshore development, the UK, Belgium and Netherlands on the off shore development in Europe, Spain on the on shore in Europe as well, Saudi Arabia in the Middle East, India, China, Japan, Australia in the Pacific area. So, this is becoming a global trend, not isolated anymore.

This is happening because of the increasing awareness on the climate change issue and ways to mitigate via the power sector. But, also, it’s because the capex cost on the renewable energy projects has been reduced by a lot. PV, wind, onshore and offshore have become very, very competitive against traditional sources of generation and they are putting the markets into a new paradigm.

This has been felt by the finance community, which is quite eager to put their effort into the energy market. In this area, we are seeing there is not a lender and sponsor relationship anymore, like with what we’ve seen in the last 10 years with the feed-in tariff schemes.

The new market mechanisms have made new players to get into the market. Players like the airport investors, which are more eager to get risk on their portfolios than the traditional lenders do, and the new ways of financing, like the ‘green bonds’, which have been very, very profitable for some of the companies in the schemes that have been using them. In this scheme, up to 200 billion US Dollars in 2019 are expected to go to the markets through green bonds.

So, the finance community is eager, as I’ve said, to put their effort into the energy business and the basic requirement for them is having long term signals on the regulatory frameworks that allow them to have a visibility of the revenues in the long term. These signals could be very different in terms of tax incentives or other kinds of mechanisms that will allow them to invest in the market, but it’s mostly merchant schemes are the ones that are working the most.

On this new environment of investments, what we are seeing is that the more advanced your analysis of the market is, the better your investment decision will be and, in that area, digitalization has a very relevant role to play. This role becomes increasingly important when coming to investment decisions. Mechanisms like market power price forecasting or advanced analytics in lifetime extension could allow your business model to grow extensively more profitable than your competitors.

So, the companies that are willing to invest into the energy market using this kind of advanced analytics and the new tools that digitalization brings to them will be much more successful than the ones who don’t. So, we at DNV GL surveyed 2,000 professionals across the value chain of the energy market and specifically focusing on the finance segment the renewable energy investors and developers are increasingly turning to digital technology to build effective investment strategies, and almost half of them are saying that they have digitalization as co-part of the publicly stated strategy.

We have seen this kind of approach to digitalization and to advanced analytics to check for investment decisions. Merchant schemes push developers to this sector because they need to know what’s going to happen with the markets in which they are investing. Topics like the optimization of the investments via advanced analytics based on the site conditions, making the developer able to tailor their investments to their specific sites or assessing the lifetime extension of the assets and improving the tail of the projects, are studies that are being used by the investors to improve the profit on their investments.

Also, what we are seeing is that market analysis, based not just on the renewable energy resource, but also the electrical market conditions, is an area that allows the owners and operators of products to improve their revenue streams and extend the life of their assets.

So one of the outcomes that we got from our work, the digitalization report, is that not everyone is using digital tech, because of the mindset and also because of the increased fear to cyber attacks. This is an area in which we are actively working and to mitigate that risk.

There is also a general reluctance to take advantage of the new digital technologies as there is a lack of clear revenue streams coming from them. The energy projects are still based on the kilowatt hour price or the firm power price. It’s perceived that the digitalization may add efficiency but not add a new revenue stream to the project. There is also a lack of senior level buy-in into the digital mindset, as it was highlighted as one of the biggest barriers to digitalization in the finance industry when compared to other areas.

So, in the last two years I have been travelling around the world talking to lenders, investors and different stakeholders from the finance community towards the energy market. What I’ve seen is that the investment environment is growing in complexity and in uncertainty. So, the companies that use any kind of advanced analytics in order to have more informed decisions to get deeper insights into the markets, will surely have an upside when compared to other companies that don’t use these kinds of tools. And, this kind of more informed and accurate decisions will provide, for sure, an upside on their profits in the years to come.
Transcript:
NARRATOR 2 Thank you Carlos for sharing such valuable insights. Today we heard three new unforgettable facts;

New forms of financing are playing a crucial role in supporting the growth of new technology, with green bonds, totalling up to USD 200 billion, expected to enter the market by the end of 2019.

47% of global finance professionals, surveyed by DNV GL, said they have made digitalization a core part of their investment strategy.

More work is needed however, with 40% of finance professionals choosing not to invest in digital technologies because of uncertainty around future revenue streams.

To hear more facts and opinions responding to the latest news from the global energy transition, listen again next week to DNV GL Talks Energy: Face the Facts.
Transcript:
NARRATOR 1 Thank you for listening to this DNV GL Talks Energy podcast.
Transcript:
To hear more podcasts in the series, please visit dnvgl.com/talksenergy.

Read the news articles cited in this episode here

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Digitalization will guide future renewable energy investment strategies
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Energising the market: how digital solutions spur green investment
Article
Global investment in clean energy slides as China pulls back

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