Unlocking Australia's renewable riches: The investment opportunity of a lifetime

Having cut his teeth in the renewable energy space in the UK where there is not a great deal of sunshine, Sam Reynolds, Managing Director at Octopus Investments, believes Australia is the lucky country.

“Australia's got a massive renewable energy opportunity. We've got plenty of land, plenty of wind and solar resources.

I was in Singapore and Korea recently, I'm going to Japan in November. These countries [along with the UK] look at Australia as the lucky country because we do have these amazing resources for renewable energy, but also mining and rare earth minerals to help with the future of renewables.

We're really lucky in that regard”.

It's one thing to be lucky, it’s another to capitalise on that luck.

Octopus is focused on building a portfolio of renewable assets and understanding and delivering to the future energy needs of Australia. There are only a handful of managers in this space, and Octopus was the first major player, setting up in 2018.

In that time, Octopus has established more than $1 billion of projects locally, and has a large development pipeline – such is the desire for renewable infrastructure.

In this interview, as part of Livewire’s Alternatives in Focus series for 2023, Reynolds talks about the role renewables will play in solving Australia’s energy woes and discusses some of the challenges in the space. 

He also highlights some of the major projects Octopus is working on now and into the future, and outlines the Octopus investment opportunity.

 Note: This interview was recorded on Thursday 12 October 2023.

Edited Transcript

LW: For those who don't know Octopus, can you just briefly explain your investment philosophy and how you invest?

Octopus has been on the ground for five years, since 2018 in Australia, but we've been renewable energy investors probably for about 16, 17 years in the UK.

The way I look at the Australian business is in three parts;

1. Renewable energy infrastructure
2. Energy markets and technology, and then what we call...
3. Change. 

Renewable energy infrastructure: We're a fund manager. We raise money from superannuation funds, pension funds, as well as the wholesale market. We did development. So, the early-stage riskier part of the asset life cycle, when you're organising planning, grid, and land. We do asset management, so that means having engineers and grid people in-house. 

Energy markets and technology: This is a team of data and analytical specialists looking at the future of energy, and this team helps us choose which assets go into our portfolio. So we want a mix of wind, solar, and storage all in our portfolio, all generating, supplying electrons to the grid at different parts of the day. This allows us to create really interesting products when we're selling electricity, which hopefully will be sold for us providing a green block of energy over a 24-hour period.

Change: This is how we work with communities. It's our indigenous joint venture, Desert Springs Octopus, that we're working with indigenous communities up north. Energy is challenging and we want to be as close to the government - and work with them on solving these challenges - as we can. Change is a big part and part of our DNA... we want to make a real lasting long-term impact.

LW: We're suffering through an energy crisis at the moment. Power bills are through the roof and industry is starting to suffer as well. Can renewables solve the problem and how long will it take?

Renewables are only part of the solution. 

September was the lowest energy pricing for probably two or three years, mostly because of new renewable coming on, keeping that energy price low as well as lower demand in the market from mild weather. So things are happening. 

Some of the government policy is starting to create more interest in renewables. More electrons, more supply is being added to the market, which is helping to keep that energy price lower. The other impacts around the world, are the supply chain impacts. Renewable energy is not necessarily going to be cheaper, because the supply costs of bringing in kit from overseas is still going to keep the energy price high for some time.

Another thing within Australia is we've got an ageing coal-fired power station fleet. So if you have a car that is 30, 40 years old, it's going to be costly to run. 

All of that features in your energy price, and that's what Australia's dealing with. 

So we need to change and adapt and make sure we're looking at the next generation of energy to provide the supply that Australia needs over the next 10 years, as these coal-fired power stations start to come off and reach the end of their natural life.

LW: Last time you spoke to Livewire, you had one project - Darlington Point. Now there are four major projects. Can you talk through some of the key milestones of these projects and a little bit about what they are?

The next project into the OREO fund is Dulacca, so that'll come in at the end of this month. Dulacca is a 180-megawatt wind farm in Southern Queensland. It's got a 70% PPA, selling 70% of the energy to the Queensland government. It's a really strong asset. A great asset for us because it actually turns on and generates at about 4:00 pm in the afternoon, runs through the evening and turns off in the morning.

With some of the other assets we're developing in Southern Queensland, solar and storage, we just announced a one-gigawatt storage asset in Queensland called Blackstone. That is under development. 

It allows us to create this energy mix of creating energy over a 24-hour period, which underpins quite a lot of the risks to our investors.

Other assets that will come in, we've got our Fulham Solar and Storage, which is in Victoria, which is in Gippsland. That'll start construction early next year. That is a solar and storage asset that was also part of the Victorian government tender. So the electricity on that asset will be sold back to the Victorian government. 

And then an asset coming towards the end of next year, which is called Blind Creek, which is a large-scale solar and storage asset between Sydney and Canberra, but a great part of the grid in between those two major cities, two major demand centres.

LW: Are there any projects that you can talk about, aside from the four that you've just mentioned? What does the future look like?

Hopefully we'll be able to announce another storage asset before the end of the year, which will be in a state we haven't invested into yet, so that'll be exciting. 

The team is working on a number of other assets, but really, what we're looking at is to have a really good mix of wind, solar, and storage down the national energy market, down the Eastern Seaboard. 

That allows us state diversification, but also technology diversification of generating in different parts of a 24-hour period. 

Ultimately, for investors, that de-risks and improves returns over just investing in asset by asset, just adding another solar asset here and there. 

Our strategy is a lot more integrated to build in those different technologies and build in different times and when those assets are generating over a 24-hour period.

LW: Sam, you've talked in the past about the grid being one of the challenges of investing in this space. Is it still the case, and what are some of the other challenges that you face?

The grid is definitely one of the challenges, but Australia's getting better. Australia was adding big lumps of renewable energy over the last two or three years to the grid and the grid operators were struggling just to keep up, but they're a lot more advanced in how these assets are going to be added to the grid. 

So we're quite advanced in working with the grid operators and getting that done. The other challenge is the supply chain. Australia still imports all the kit for renewable energy. Australia getting access to the kit that is over the US and other parts of the world is a challenge. 

At Octopus, we're working with some big strategic players in global renewables to help use their buying power to get the kit into Australia.

LW: You recently raised $250 million. Some of that money came from REST, the big superannuation fund. How has the appetite been from institutional investors?

It was great to get REST on board. They're a great partner, very much aligned with our strategy in renewable energy and looking after communities and looking after indigenous engagement. 

They're difficult to win, these superannuation funds. It takes a number of years. They're very diligent. I think, quite rightly so. They're looking after the nation's savings. 

So, difficult to get in, but they're great partners to have. Institutional interest in what we're doing has been very strong, but they do take time to land. But they're great partners once you have them in your stable.

LW: You've talked a little bit about OREO, but you've got another fund, OASIS. Can you just talk investors through that opportunity and what's involved in the fund?

OASIS is our institutional fund. We launched that 12 months ago. That's what REST has invested in. Hostplus and the Nest Pension Fund from the UK are also invested. 

OREO is a long-term yield fund, so slightly lower risk, better liquidity options. OASIS carries a bit more risk because it has development. So development is a riskier end of renewable energy. It's when you're trying to organise the land, planning, and grid. But done properly, it can be very lucrative - but it is also risky. So the returns are a bit higher. We're looking at net 10-12% returns for OASIS versus 7% for the lower-risk OREO. 

There are also some lockups, a five-year lockup, on OASIS for funds. So it doesn't quite have the liquidity that OREO has. But it is exciting for investors who want something a little bit up the risk and return scale, and they can mix between OREO and OASIS if they're interested in some of that development risk.

LW: You are in the middle of a fast-growing space in terms of renewables, you're seeing the whole landscape. What is the one thing that you've learned that perhaps you wouldn't have learned if you didn't have that broad view? What is your view from the top?

When we first set up in Australia in 2018, we really focused on selling to big institutional investors, the green credentials. 

It was the wrong approach. Big investors need to focus on fundamentals, they need to focus on the returns. It's what you want them to be doing, looking after your savings, and they're not nasty capitalists. 

We need to focus on the fundamentals of why renewable energy is right for your infrastructure portfolio, because of the returns, because of the risks, because of what we're doing in the community. It has to make sense on that first, and the green credentials are somewhat of a benefit. But the big supers, they definitely want both and they definitely want to lead with the returns.

Leading Australia's drive towards a cleaner future

Octopus invests directly into the Australian renewable energy sector, helping to provide the innovative solutions it needs during its transition to a clean energy future. Visit our website for more information, or the OREO fund profile below.

Managed Fund

Octopus Renewable Energy Opportunities Fund (OREO)

Alternative Assets

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