In this Green Dream episode, James Smith, head of the Global Renewables trust at Premier Miton, discusses the UK government’s plans for energy investment and his trust’s investment strategy.
He also details how renewables avoid playing into the traditional narrative of an “energy trilemma”, scoring well on energy security, being more cost effective than alternatives such as nuclear power and working to decarbonise energy grids.
Watch the full video interview above and read the transcript below.
MN: Hello and welcome to the Green Dream video series. My name is Michael Nelson, and today I have with me James Smith, he’s the head of the Global Renewables trust at Premier Miton. Lovely to meet you, James.
JS: Hi.
MN: So, first I wanted to talk about the new UK government’s position on renewable energy. We’ve seen GB Energy. We’ve seen the National Wealth Fund come into play and the new contracts for difference. And I was wondering what your thoughts are around an investor’s perspective on their priorities.
JS: Well, not all of that is new, of course. The most recent contracts for different auction round for electricity contracts was already in progress prior to the new government. Great British Energy is, of course, new. So, let’s start with that. I don’t think anyone was asking for it. And we don’t quite know what it’s going to do. It’s going to, I assume, be some kind of funding vehicle. But having had a look at the website, it doesn’t really tell you a great deal of what it will be funding.
Now, to my mind, if we’re thinking about building new renewable energy assets, lack of access to capital is not one of the major impediments. So, perhaps GB Energy could have a role in stimulating investment, maybe in some of the more nascent technologies, maybe some of the offshore tidal, for instance, things like that. Hydrogen, things that might need a little bit of help, where the government really can add a bit of value. I don’t see it having a big role, for instance, in offshore wind development. They do have some ambitious targets, of course. Again, partly inherited from the previous government. So, things like offshore wind or decarbonising the electricity system. So, we’ll see. You know, it’s early days yet, but they do seem to be talking a good game.
MN: What are your opinions on the drawbacks of transitioning to renewable energy? I imagine that energy security is one of the biggest problems, initially in the short term, with the lack of energy storage there to hedge against that intermittency.
JS: So, we often used to talk about this energy trilemma. And I used to see triangles with things like security, price and emissions. So, you could have say energy security, but at the cost of high emissions. You could have a low price, but again, at the cost of high emissions. So, you could have low emissions, but it would cost more and give you less security.
Things have moved on a lot over the past five years in renewable energy. And we’ve also had this period, of course, from February 2022, when Russia very sadly invaded Ukraine. And we’ve had to live with very high energy prices. So, we used to believe that if you were kind of plugged into this fossil fuel gas system, you had energy security. Well, then along comes a war and tips up on its head. And it was a good job that we had US shale gas, which could then be exported in the form of LNG or otherwise, of course, we would have had even bigger problems. So, I think now people, when they look at renewable energy, we’re not making those those views about trade offs.
Renewable energy is good for energy security because it’s a homegrown energy source. The energy is generated close to where it’s being used and it’s not an import. So, it’s good in that sense. Obviously, it’s good for decarbonisation, but I don’t think we need to spend too much time on that. And then we have the last aspect, which is cost, which we could perhaps come on to. But, you know, while we’ve seen costs for things like nuclear going up, the cost of producing electricity, for instance, from renewables, has been pretty consistently coming down. So, it’s scoring quite well on all three of those trilemma categories.
MN: And do you have any thoughts around the recent decision around the Rosebank oil field?
JS: I mean, I guess what you could say is although there’s an international market for gas and oil, so, if you’re producing gas in the North Sea, that doesn’t necessarily help with energy security in the UK. Or, it doesn’t reduce the price because, you know, you have to pay the global price, otherwise it would just be exported. In extremis, if there was a, you know, a major international event, the government could direct that energy so that it had to be used in the UK so it could help in a war type scenario with energy security, although it doesn’t of itself help with price.
I think that particular decision you’re referring to was ruled on by the courts in relation to its emissions, or rather, the secondary emissions that would come from using the product, a fossil fuels that it produces and has the government properly taken that into account. And, of course, the government, the new government – this case spanned the government’s – but the new government decided not to fight that, so, effectively, that now is, to my mind anyway, almost a de facto ban on new oil and gas production in the North Sea. To my mind. I can’t see how you could develop an offshore fossil fuel production facility with that ruling.
MN: Do you think the energy transition is a net cost or a benefit to the end user? And do you think that that dynamic is talked about often enough?
JS: Okay. So, when we talk about the energy transition, I think what we really mean is increasing our use of electricity as an energy carrier, as opposed to using directly fossil fuels like gas in your own boiler or petrol in your own or diesel in your car.
If we look at the global picture, only about 20% of energy as used comes in the form of electricity. Now, if we want to use more renewables, we have to use more electricity, because typically renewable energy produces electricity like solar panels, wind farms, electricity is the kind of the energy carrier that they generate. So, we need to get about 20% up to, you know, much higher to reach net zero.
So, we need to have more heat pumps. We need to be driving electric cars, etc, etc. Now, in terms of cost, as I mentioned a while ago, the price of generating electricity with renewables has come down a lot. You know, wind turbines have got bigger, solar panels have become more efficient. Wind turbines, an interesting thing, actually, if you can imagine a wind turbine, the amount of electricity it can generate is based on the size of the swept area of its blades, which is, of course, a circle, which is of course Pi R squared. So, as that turbine gets bigger, you know, you’re producing proportionately more energy. So, we have seen these cost rules.
Now, you mentioned the most recent contracts with contracts for different auction. The offshore wind that cleared that auction, the price it was awarded – it’s slightly complicated because they always quote things in 2012 prices, but, you know, inflating that up to today’s prices – the price that those contracts were struck at is basically very similar to the existing wholesale electricity price. So, really, that contract is not about giving a subsidy. It’s more about giving it a kind of visible flight path, or guide path for the price so that the developer of those projects know what price they can receive for their power for the next 15 years. And, of course, this again illustrates that renewable energy is quite good and it gives you certainty.
So, there’s only really one form of energy that can sign up those long term contracts. If you have a wind farm, you know what your costs are for the next 15, 20 years. You know most of those costs are sunk costs. It’s the financing on the debts that your region taken out. It’s the depreciation of your capital cost you originally invested. So, they are quite good at good things. Being able to say to a company like you can have a long term fixed price from this wind farm. And as we’ve seen over the past few years, with volatile fossil fuel prices, that’s attractive to to companies.
MN: And then, am I right in assuming that offshore wind, I suppose, particularly forms a big part of your trust?
JS: I wouldn’t say that offshore wind is a big part. We do have some companies that have offshore wind assets. The biggest one would be RWA. Also SSI, and we have another company called Northland Power. We don’t currently own Orsted at the moment, and we haven’t for a few years. But I think for the UK, offshore wind really is, you know, if you want to generate electricity in scale, offshore wind is what you need to do that. So, we’re going to see some some big growth.
Whether the government will meet their target I think of 50GW (gigawatts) by 2030… We’re currently at just shy of 15. And there’s about another, I think, 14 either in construction or will be soon in construction, so that might get you to 30. So then there’s this missing, kind of, 20GW of capacity that we need to find over the next five or six years, which I think is a bit of a tall order personally, but we’ll, you know, hope for the best.
MN: And so in what countries and regions of the world are you finding the best opportunities at this point in time? And what’s the trajectory long term?
JS: For me at the moment, I think Europe, including the UK, looks attractive. And the reason it looks attractive is because that whole region, European region, is a big energy importer, and that means it’s quite keen to generate domestically produced energy. And politicians in Europe, they used to be almost entirely focused on price. Now, they are very focused on security of supply and getting more domestically produced forms of electricity, and forms of energy. So yeah, renewables in Europe is, I think, an attractive place to be.
Also, then, the US. I think there’s going to be a lot of investment in technology and data centres, particularly artificial intelligence. So, a very high level of electricity demand in the States, and of course, the States has very geographically some advantages. You know, you can build wind farms and solar farms of almost unlimited scale. You know, you just have the space to do it. So, renewables in the States are very, very competitive, against other forms of energy. And, of course, these companies that want to buy that power from renewables to power their data centres are very focused on, you know, not creating any additional emissions or pollution from the energy that they purchase. So, I think the States looks, attractive.
Maybe, you didn’t ask this, but less attractive regions, more difficult regions, maybe Asia still very much fossil fuel dominated. So, they are, I think, a little behind the Western world. But yeah, Europe and the States are my biggest focus the moment.
MN: Hopefully that stays the same way after the election.
JS: Yeah. It’s a… You’re not the first person to say that, right? I mean, who knows what’s going to happen. Okay. What I would say is we had the same conversation when Trump was previously elected in his first term. And everyone was very worried that he’d basically just ban renewable energy, but it didn’t happen that way. And, if we take the Inflation Reduction Act now, and the way it’s operating, it primarily benefits Republican leaning states. So if you think about, you know, where is most renewable energy being produced, where the big growth areas are, it is, places like Texas, for instance. So, would Trump come and rip that up? I’d be surprised.
If you look at the way the act works, if you build renewable energy in the states, in regions that have high levels of existing fossil fuel generation, you get an extra incentive to do it, effectively to compensate those communities from losing their traditional forms of employment and having to move into the new forms.
MN: Aside from those companies generating that renewable energy, what other opportunities are out there?
JS: Yeah. So, there’s a whole host of different companies that are kind of part of this overall value chain. Personally, my fund, we don’t invest in things like manufacturing companies. So, I can’t really talk to you about the companies that manufacture wind turbines or solar panels. So, we’ll leave those to one side.
But if you think, you know, how do we get the energy from where it’s produced to where it’s being used? So, things like the grid companies, National Grid, SSA or some of the European names, seeing very, very strong growth and, you know, much bigger capital expenditure budgets than they have in the past. And that is because, you know, they are facilitating that transition and it’s expensive. So, I think they are, you know, good regulated growth opportunities. So, for someone who wants maybe slightly higher yield, lower risk investment, still with some growth they might look attractive. We own National Grid, we own SSI. But there are opportunities.
I’m quite interested in the companies that own vessels to install offshore wind farms at the moment. And the interesting thing about offshore is that we’ve gone, over the past ten years, from installing five megawatt capacity turbines offshore, and the new ones are in the 10 to 15 megawatt class – in China, even bigger. So, the vessels that were able to install a foundation and then a turbine for a five megawatt machine, that’s simply not big enough to do a 15 megawatt. And there is, I believe, a shortage of those larger vessels and the supply of vessels compared to the demand. You know, if you look at the target we spoke of earlier, the UK government’s target of 50GW by 2030, I can’t see how the vessels are available to actually achieve that. So I think that’s a very interesting area. We have a couple of investments that play into that.
MN: And then the final question is one we always end on in our Green Dreams videos. What is your favourite sustainable snack or drink?
JS: I’m quite boring. So, the only things I drink really during the day, I just drink tap water. I’ve never quite understood the bottled water thing. I’m just quite happy with tap water. I drink about 100 cups of tea a day. I don’t know, how sustainable is that? I’ll give you a snack as well. I just love fresh fruit. I don’t eat chocolate or anything, but, yeah, give me a nice banana and a glass of water and a cup of tea. That’s me.
MN: Great. Well, thank you very much for being with me today.
JS: Pleasure.
