Gresham House: high power prices reshape net zero opportunities

High UK power prices are having uneven effects on sustainable investment opportunities, according to Peter Bachmann, managing director of Gresham House’s sustainable infrastructure division.

“Labour has been good at driving green energy and battery storage with incentives and support. The challenge is that power prices are very high,” says the co-fund manager for the British Sustainable Infrastructure Fund (BSIF) strategies.

UK power prices are high because of the costs embedded in them that aren't obvious to consumers, he says, such as the direct and indirect subsidies to the oil and gas industry and balancing and non-commodity costs.

He notes that underlying solar and wind generation costs are coming down every year and are well below the prices of gas- or nuclear-generated power. “Renewables are perceived as expensive – but they're very cheap,” he says.

“A typical bill payer sees the green levies and thinks renewable energy is expensive – but they're not seeing the hidden subsidies for the fossil fuel industry. For the transition to work, we need to fully recognise all costs and benefits. We need to bring them into the open and let people decide. To be competitive globally, we must bring the effective cost of power down.

“We have all the wind and solar resources we need – we just need to create the enabling conditions for it to work better including making better use of energy storage through the increased use of batteries, for example.”

Business adaptations

Nonetheless, the UK faces electricity prices that are among the highest in the world and this is hampering industrial production.

Bachmann notes that one of Gresham’s UK vertical farming business faces c.25p per kWh costs while a similar one it is building in the Middle East will have equivalent costs of 2p per kWh. This has led the UK business to seek alternative solutions – and create a source of competitive advantage.

“The cost of power for our vertical farming operation is coming down because we are installing more on-site solar and using efficiency measures and AI tools to optimise growing conditions. Whereas, for traditional farms, fertiliser costs, energy costs and labour costs are all going up,” he says.

Vertical farming has many other attributes that make it an attractive business in the UK. It produces up to 1,900 times less carbon than long-haul imported produce and uses 95% less water, 99% less land and no chemicals and pesticides, according to Bachmann. “We can produce at or below the price of field-grown crops and the product lasts 14-21 days longer. Why wouldn’t you pick a product with all these benefits?”

There is a common misnomer among investors that impact comes at the cost of returns, he says, so the industry “must be very clear that we can create impact without detracting from returns”.

“Impacts can enhance returns and protect companies from the risk of additional tax or regulation. Sustainable companies operate slightly de-risked business models, offer superior products and can help to change unsustainable industry practices,” he adds.

Political risk

Allocations to sustainable real assets are necessarily long-term investments and a change of government in at most four years could led to a radical change in net zero policy. Bachmann acknowledges that political change always brings risk, so Gresham focuses on non-contentious sectors with cross-party support.

“Most people consider nature, children's nurseries and rural internet to be good things,” he says. “Nature is intrinsic to good air and water quality, and productive farming. Both the previous and current governments support these areas – but Reform is an unknown quantity so we can't be entirely sure. But hopefully they would see the virtues of a happy, healthy and productive UK.”

Bachmann is unconcerned about the prospect of falling power prices on renewables projects. “They are attractive in almost any price environment,” Bachmann says. “Solar and wind project costs tend to float around the energy price – the costs roughly fit to net consumer prices. Projects would still be attractive with lower net prices as costs would come down to match them.”