The rise of a renewables major
Mainstream Renewable Power CEO Andy Kinsella says the declining cost of wind and solar power means the era of oil and gas is coming to an end
Mainstream has grown into a global renewable energy development and construction powerhouse under CEO Andy Kinsella. He has been with the firm since its creation in 2008, initially running its offshore business. Mainstream has since added solar photovoltaics (PV) to its offering and aims to accelerate and lead the transition from fossil fuels to sustainable energy.
Eddie O'Connor founded Mainstream after he sold Future Wind Partners and then Airtricity, the latter to traditional utilities SSE of the UK and Germany's Eon for €1.8bn ($2.01bn). Still chairman and majority shareholder, he stepped back from the business two years ago to concentrate on subsidiary company Super Node and passed leadership responsibilities to Kinsella.
The business is now truly global, having started in Europe and expanded into the US. It has four major pillars—Latin America, Africa, Asia Pacific and offshore wind focused on fast-growing emerging markets. By 2016, it was winning more renewable energy auctions than any other firm globally.
Mainstream has achieved a string of firsts in its short history. It developed the then largest windfarm on the planet, the UK's 1.2GW Hornsea One project (taking the title from Airtricity's Greater Gabbard), which it sold to Denmark's Orsted. It broke the record again with the 1.8GW Hornsea Two, which it sold to the same buyer. It is the leading renewables development and construction firm in markets, from South Africa to Chile and Vietnam.
In such a rapidly developing industry, there have inevitably been occasional missteps along the way. It only recently concluded a three-and-a-half-year legal wrangle over a Scottish windfarm that tied up valuable resources and management time. Launching in North America in the wake of the Lehman Brothers collapse was challenging, although it built a 46MW windfarm in Alberta for Ikea and a 106.5MW windfarm in Illinois, the first utility-scale deployment of Chinese-manufactured Goldwind turbines in a western country.
PE: What is Mainstream currently focused on?
Kinsella: Our business is very focused on growth markets in Asia Pacific, Latin America and Africa. We are expanding in Asia Pacific, particularly in Vietnam and the Philippines, and we are acquiring assets in Australia. In April we received a licence to develop an 800MW offshore windfarm in Vietnam, by far the biggest in southeast Asia. We're already developing 170MW over two sites in the Philippines.
PE: Mainstream became a big player in Chile. Why did you focus on this market?
Kinsella: Chile is like a big island—the Atacama to the north, Andes to the east, glaciers to the south and the Pacific to the west—that has no indigenous fuels. It was a high-price electricity market with a growing economy so renewables could be sustained.
We entered Chile nine years ago and we are now the biggest renewables player. We are deploying $1.6bn to build out 1.35GW of wind and solar PV. Two-and-a-half years ago we were the big winner in an energy auction, taking 28pc of the GWhs available. We will reach financial close on two portfolios of wind and solar PV projects late this year and the remaining projects in the middle of next year.
The auction was unique in that it was subsidy-free and technology-neutral—we competed against new coal, new gas, incumbent coal, incumbent gas and hydro. It did not matter whether it was fossil fuel or renewables. And it is firm power—if the wind does not blow or the sun does not shine we have to buy power in the spot market over the 20-year term. We bid an average price of $42/MWh with no subsidy.
PE: Can renewables win technology-neutral auctions under normal circumstances?
Kinsella: Renewables do not need subsidies. The economics of solar and wind is proven and levelised costs show renewables beating all other technologies. The global price for wind is $40/MWh and, depending on where you are, the price for solar PV is $20–40/MWh. It can even be cheaper to shut down an operational coal plant and build-out new solar PV. In India, solar costs $30–40/MWh and new coal costs $60MWh, or $70MWH if it is imported coal.
PE: How do you establish renewables in new markets?
Kinsella: South Africa announced in 2008 that it would set up a feed-in tariff. We put boots on the ground to look for good development sites. Mainstream and [Italian utility] Enel were the two big winners of the four auctions. Initially there were relatively high tariffs—slightly over €100/MWh—but over the four auctions the tariff fell for solar by over 60pc and for wind by over 50pc. I am sure the figures will come down again in the fifth round later this year. We have built nearly 850MW of solar PV and wind—600MW is up-and-running and 250MW will be next year.
North African countries and South Africa have moved forward but the rest of Africa is more challenging as there are so many different policies and regulatory regimes. Some are making strides—we have a 158MW project under construction in Senegal—and the World Bank is helping in certain countries.
The Vietnamese understand, as the South Africans did, that a financial incentive is needed to kickstart a new industry. There are offering high feed-in tariffs—but as international capital becomes comfortable we will see the same glide path as in South Africa and elsewhere.
PE: Do profitable opportunities still exist in Europe?
Kinsella: One of our Scottish projects won with a bid price of just over £114/MWh. At the time the UK industry said our bid was too low and that we were mavericks. Well, two years later the next round of competitive auctions was at £57.50/MWh. We spent £48mn developing it and sold it for £659mn—so we got it right.
It is very clear that climate change is the most important question of all our lives, both economically and politically. We are at a tipping point—the linear expansion of renewables is moving to exponential expansion. A decade ago, annual capex spending on renewable energy generation plants was 4pc of global investment in generation plant but now it is over 66pc. Likewise, from just 30, 175 out of 196 countries, or 89pc, have renewable energy regimes. Last year, total renewables capex was $304bn—twice that for fossil fuel and nuclear ($154bn).
European offshore wind opportunities disappeared a couple of years ago but we have just re-established our centre of excellence in Edinburgh in preparation for new UK offshore rounds later this year.
PE: Why has EU renewables capacity expansion slowed?
Kinsella: There is still buildout of renewables, just not at the pace of the Gulf or developing world. Energy efficiency improvements mean electricity demand growth has slowed. Electric vehicles (EVs) will boost renewables and, less obviously, heat pumps will need as much electricity as EVs.
Worldwide, conventional plants are becoming stranded because renewables have just become so cheap. Europe has €158bn-worth of stranded coal and gas plants. The global use of fossil fuels [for power] has declined each year in the last five years, and that is going to accelerate.
PE: How much further can cost of solar and wind hardware decrease?
Kinsella: We have seen a dramatic shift over the last decade. Solar PV costs are down 80pc, onshore and offshore wind costs are down at least 45pc and battery costs are down 55pc. To paraphrase Bill Clinton, ‘It's the economics, stupid'. Renewable energy is beating coal, gas and nuclear.
PE: Why do the oil majors seem reluctant to heavily invest in renewables?
Kinsella: They are on a journey, but are still relatively minor players. In Europe, BP, Shell, Equinor, Total and Eni are all making moves with 3-6pc of their capex in clean energy. Some players are taking significant positions in offshore wind in Europe and North America. But the big trend over the next five to 10 years will be the flight of capital out of oil and gas and into renewable energy.
PE: Have the majors expressed an interest in Mainstream?
Kinsella: The majors want to cooperate with various parts of our business in different parts of the world. There is broad-based interest because, uniquely, we are a developer of on and offshore wind and solar PV with a global footprint. We are also seeing interest from utilities and pension funds.
When I became CEO I deliberately did not rule out an IPO—but that is not the logical outcome. Developing and selling projects is very profitable but results in a very lumpy revenue stream. Last year's profit was just shy of €0.5bn but the previous year we made a marginal loss. We would be more attractive to a strategic investor than the IPO market—perhaps an oil and gas company or a utility.
Last autumn we ran a grey market. 250 retail shareholders in Ireland together own 40pc and there had been no liquidity event since we started. About €45mn in shares traded and there were more than enough buyers. Most exited on a 3X multiple of their original investment. We will run another grey market during H1 2020 for fresh investors.
At the same time, we bought out [Japan's] Marubeni, which made a 2X multiple on its 15pc, and [UK bank] Barclays, which made a 2.7X multiple. Eddie, the management and the staff collectively own 60pc.
PE: Which entities are interested in buying wind and solar projects?
Kinsella: There is quite a range, from big commercial entities and utilities to private equity infrastructure funds and institutional investors. We have built projects on behalf of Ikea in Canada and Ireland and built and exited offshore projects to [French utility] EDF and Orsted. In Africa, our joint venture with UK private equity fund Actis, called Lekela, is Africa's largest pure play renewable development company with projects in South Africa, Egypt, Senegal and Ghana. Our other joint venture partners in Africa include The Rockefeller Brothers Fund and Sanlam.
Our current three-year plan means we will expand from 190 people to just over 400. This year we opened new offices in Edinburgh, Bogota, Hanoi, Ho Chi Minh, Manila, Melbourne, Accra, Ghana and a regional office in Singapore. We are conducting market reviews for India, Indonesia, Japan, Taiwan and Malaysia—next year we will open offices in three or four more Asian countries.
These offices are mainly for development teams, which pick sites, create partnerships and then develop those sites. It takes between two and five years to develop wind to financial close before we can start building.
PE: What factors constrain the growth of renewables globally?
Kinsella: Development is a game full of risks. Our Neart Na Gaoithe offshore wind project in Scotland took 10 years from tender to exit as we lost three-and-a-half years in the middle to court cases. There are a lot of planning and regulatory risks in the UK. Likewise, we spent over €10mn developing a 1.2GW offshore wind farm in Germany—and then three years ago the law changed. We and three other entities are in the German courts looking for compensation.
We have been in Chile nine years and only started building in the last year-and-a-half. Development is high-risk but also high-reward so you must be patient—we deployed €100mn in our UK offshore business and may exit for over €800mn.
It is not just about generation, you have got to look at integration into the network. There is a profiled cost, a balancing cost and a grid cost—the technology breakthrough is in smart grinds. The customer will increasingly also become a provider to the grid. For smaller scale renewables—where a household has its own solar PV, batteries, heat pumps, etc.—smart grids will be very important. Batteries are also hugely important. [Consultancy] Bloomberg NEF estimated the cost of lithium ion batteries fell by 38pc in H2 2018.
PE: If renewables are so competitive, are incentives and carbon taxes still needed?
Kinsella: We are way behind in using fossil fuels for heating, cooling ventilation and transportation—carbon taxes would drive change globally. 42 OECD and G20 countries account for 80pc of global emissions. The OECD's report on effective carbon prices indicates what polluters should pay to meet the COP21 climate goals—today the average carbon cost should be €30/t CO2e and by 2022 it needs to be €60/t CO2e.
If we had a €30/t CO2e carbon tax the gap would be zero—but it is 76.5pc on average across OECD countries so there is a lot to be done. Carbon pricing will allow renewables to become more competitive and allow electric vehicles, heat pumps and other technologies to thrive.
PE: What are the chances of this carbon gap being closed globally?
Kinsella: It has been slow but it is gathering pace. China launched emissions trading and by 2022 and, if it delivers, would reduce the gap to 63pc. Canada, the UK, India, France, Mexico and South Korea all have reforms in place. Ireland charges €30/t CO2e and it will go to €80/t CO2e by 2030. It's going to take time to get to €80-100/t CO2e—but there is no doubt it is accelerating. Switzerland is at €81/t CO2e and Sweden is at €112/t CO2e.
Big financial players are moving out of coal completely and are starting to question oil and gas. The big four insurance companies will not insure coal plants. Coal is just dead. We will see a major flight of capital from fossil fuels to renewables over the next decade. Institutional capital will flee oil and gas—the game is up. We will see a different type of major in the next five to 10 years—the renewable energy major.