Think smaller for big results on energy security

Around the world, energy security is becoming a policy priority.

In large part, this new focus stems from a fear of energy weaponisation. In a world marked by increasingly volatile geopolitical tensions, interconnected energy systems can be used as pawns in conflicts. In Europe’s very recent experience with Russia, they already have.

However, there’s also a drive for broader resilience – the ability to keep the lights on and key industries powered as economies search for growth and as the climate changes. You only need to look to April’s blackout across the Iberian Peninsula to see the impact a major power outage can have.

When it comes to bolstering energy security, attention often focuses to the biggest assets, for example, how to build new major power stations or protect major interconnectors.

These facilities, at scale, do have a part to play. However, for the best results, a significant opportunity will come from thinking smaller, to assets that the market would consider as sitting in the mid-market.

Delivering decentralisation and diversification

Energy networks built on a strong ecosystem of smaller, mid-market, assets have several key advantages from an energy security perspective.

One is decentralisation. Distributed, independent sources of energy production – solar, wind, bioenergy plants, for example – provide natural protection from risks that could otherwise disrupt networks reliant on fewer, larger assets, such as cyber-attacks, natural disasters, or simple technological failure.

Another is diversification. Having several sources of energy production makes the overall system less susceptible to downside factors such as fuel price volatility, supply chain disruptions or – in the case of renewables – intermittency.

In addition, energy service businesses, such as smart meter providers or energy cyber security specialists, provide the expertise and solutions to make networks safer, stronger and smarter as they become ever-more digitalised.

The infrastructure element

Recognising the advantages, policymakers are already putting factors such as decentralisation and diversification at the heart of energy policy. The European Union’s flagship REPowerEU, which was, in large part, designed to phase out reliance on Russian imports, is a standout example. In the US, The National Energy Dominance Strategy aims to achieve energy independence through boosting domestic energy production across all sources. There’s clearly a real opportunity for investors to get involved in these policy pushes – especially if their strategies are already energy-focused.

Chosen carefully, the mid-market assets that form the backbone of distributed energy networks deliver the same infrastructure features that investors traditionally seek from larger infrastructure assets: predictable cash flows, downside protection and built-in inflation protection. In addition, they typically provide a higher return on capital.

The political imperative for energy security also creates regulatory tailwinds. The nature of the market supports growth potential and opportunity. The mid-market in particular, where assets are smaller but more plentiful, has significant development opportunities.

Turning potential into power

At Ancala, we’ve seen the benefit of these approaches first hand, and the opportunity for investors in the mid-market to play a key role in generating scalable impact.

Take, for example, our investment into UK anaerobic digestion plant operator Biogen.

We saw the biogas market as compelling from an infrastructure investment perspective. It is a growing sector, using established technologies, with traditional infrastructure characteristics in the form of inflation-linked government support schemes that provide downside protection and strong cash flows. However, it was also highly fragmented, with real opportunity for operational improvements. As an inherently decentralised system, different operators were running plants at varying degrees of operational effectiveness.

Since investing in Biogen in 2017, our proactive asset management approach has grown the business to become a nationwide operator, completing four acquisitions and optimising the performance of the existing and acquired sites. The result has been nearly trebling Biogen’s generation capacity from 13MWe to approximately 36Mwe, which is the equivalent of the annual electricity demand of approximately 100,000 homes.  We’ve also helped build an even stronger management team, and enhance the platform’s focus on health, safety, environment and compliance, all of which also play into resilience, and therefore security.

From an operational improvement perspective, we were similarly able to help our former portfolio company Dragon LNG, a vital gas terminal in Wales that imports around 10% of the UK’s entire natural gas requirement, make improvements that not only build its own resilience but also the entire country’s.

This involved helping the site commission a new reliquefaction plant – unique among similar terminals in the UK and Europe – which means it can act as a gas reserve in times of need. Ancala encouraged the company to develop on-site renewable energy generation that reduced its reliance on other sources of power to operate.

Smart meters – a significant growth opportunity

The mid-market opportunity is far broader than just energy storage and generation assets. Take our portfolio companies Solandeo and Hausheld, two leading German smart metering businesses.

Smart meters play a critical role in energy security by enabling monitoring and management of energy resources in a ‘smart grid’. This allows governments to better plan and ensure the right amount and mix of energy is available.

In Germany, the opportunity is especially strong as the government has mandated a national smart meter rollout for commercial and residential customers, with initial deadlines this year. This has created a regulatory tailwind and strong demand from a motivated customer base.

We saw the opportunity to support Germany’s rollout and make a real impact by bringing together two established players in the sector to accelerate delivery.

Hausheld is the leading provider for municipal utilities undertaking large-scale regional rollouts. Solandeo is the top provider to the ‘prosumer’ market, including leading renewable energy firms such as 1KOMMA5°. Together, they cover the two largest segments of the German market and form the largest independent smart meter platform in the country, scalable at a national level.

Both had strong order books, customer relationships and proven technology, underpinned by long-term contracts that give the assets infrastructure characteristics. However, they needed capital and expertise to scale. Our investment unites their complementary strengths and enables them to fulfil demand faster, helping Germany build real-time consumption data critical to energy security and efficiency.

Looking ahead

A key consideration towards enabling greater energy resilience and diversifying energy sources comes down to the strength of a nation’s grid infrastructure.

To support greater investment in mid-market assets, governments need to continue to upgrade grid infrastructure. This will ensure that networks can accommodate a broad range of energy sources, that energy generated is transferred as efficiently as possible, and ultimately create more opportunities for smaller assets to make contributions.

Large energy assets will, of course, continue to be essential to any network. However, without a robust matrix of mid-market infrastructure, they will remain exposed as single points of failure.

If we want to build a system that is secure, flexible and future proof, then there has to be more investment in mid-market assets. Investing in the mid-market can play a big role for investors looking to enhance energy security from infrastructure risk profiles while achieving enhanced risk-adjusted returns.

Interested to find out more about Ancala’s approach to investing in infrastructure? Register your interest, here.