With the onset of climate change and growth in renewables, there are new fundamental considerations for investors looking to put their money into energy.
Using the case study of the New Zealand market, investors can learn how to spot a winner in 2019 and beyond.
From an investment point of view, the New Zealand electricity industry is considered far more predictable than the Australian market, leading to less volatility in the market and strong returns for investors.
What are the benefits of the New Zealand market?
The New Zealand energy market is currently 80 per cent renewable, with that number set to rise, according to Chris Tan, Co-Fund Manager of the Pengana Australian Equities Income Fund.
Having a renewable source of energy has led the New Zealand being priced accordingly due to stability in the market.
“New Zealand is in the happy position of being mostly renewable through hydroelectric, which is about 60-70 per cent – with wind, gas and coal making up the rest,” said Mr Tan.
“They are great businesses because they have this portfolio of basically irreplaceable and irreplicable dams and power stations,” Mr Tan continued.
Despite large-scale schemes such as the Snow Hydro Electric Scheme, Mr Tan does not believe Australia can follow this more modern generation.
“Australia doesn’t have the ability to generate 60 per cent of its electricity from hydroelectricity as it simply does not have enough water,” said Mr Tan.
Mr Tan also believes it would require huge investment in order for Australia to go down the renewable path through solar or wind.
“One of the issues with most, although less so with hydro, it is intermittent in nature, it’s there when the sun shines or the wind blows,” said Mr Tan.
The other side, the transmission grids have been designed and built for more steady base load generators like coal.
“So there needs to be a big investment into the grid for this intermittent power where sometimes the power is coming from the solar plant or wind farm or not, and with rooftop solar that is sending power back into the grid, not the other way round,” said Mr Tan.