Q&A – Triple Point: Maintaining first mover advantage

Managing the risk of early market entry with the reward of higher impact and better returns is something that mid-market investors like Triple Point continue to try and balance.

With approximately 250 employees across its business, Triple Point plc boasts a portfolio of more than £3.7 billion (£3.06bn $3.93bn) assets under management, in verticals such as digital infrastructure, energy efficiency and social housing.

In the energy space, £150 million has been invested in assets such as solar, hydro and anaerobic digestion projects.

In addition, Triple Point Heat Networks Investment Management was named delivery partner for the UK Government's £320 million Heat Networks Investment Project.

Triple Point Heat Networks Investment Management is a consortium led by Triple Point Investment Management and includes AECOM, Amberside Advisors, BDO, Ecuity Consulting, Gemserv and Lux Nova Partners.

Earlier this year [2024], Triple Point helped fund Ethical Power's pipeline of solar-BESS projects in the UK, as part of a £7 million debt facility.

Jonathan Hick, Head of Energy Transition at Triple Point, sat down with inspiratia to discuss the energy transition market outlook here in the UK, the decision to wind down Triple Point Energy Transition (TENT) and the ongoing impact of the Liz Truss Budget of 2022.

What is Triple Point's role and investment strategy in the renewable energy sector?

Our approach is distinct in that we work across the capital structure and across sectors. When we engage with developers, we come to the table without preconceptions about what they might need. This is unique in the way we originate our deals.

Another focus for us is originating in areas of the energy transition that often receive less attention. We recognise the importance of established players—they play a critical role. But we see our role as complementary, focusing on niche areas within the lower mid-market scale, rather than the larger, high-ticket deals in the hundreds of millions.

We are targeting parts of the sector that are vital yet have not fully scaled, allowing us to secure a first-mover advantage. This approach enables us to achieve better risk-adjusted returns and enhance our impact.

For example, we have invested in hydroelectric power assets in the UK. There are only around 400 of these assets, and we have built a solid portfolio within this niche. By comparison, solar and wind are quite established—an essential backbone for a net-zero power system. We are excited about their growth, but we also see an opportunity to fund less-established niches, where we believe we can make a distinct impact and achieve competitive returns.

How do you manage the risk profile of these less established niches?

Everything starts as a niche. Solar was once a niche, as was wind at one point. That is what I would call first-mover advantage. We absolutely need a robust approach. What we are not doing here is clean tech, which is the first of its type, like certain plastic recycling technologies. Instead, we aim to step in once the technology is proven and then help scale it.

A practical example is what we did in battery energy storage. Two and a half years ago, we lent to a company called Field, marking the first lending on a merchant basis to battery storage without contractual revenues.

There has never been an infrastructure asset class that scaled without the debt market. When we lent to battery storage without a contractual floor, there were only three or four lenders in the market. However, we felt it was important for the energy transition to build more battery capacity, so we decided to step in and become pioneers in battery lending. In 2022, we did Europe's first battery debt deal without a floor, and since then, banks have funded over half a billion pounds of risk. That is great for catalysing the transition, which is what we are all here for. It shows that while we took on more risk at the time, those investments worked out, and others have since followed.

We understand the markets, so we are comfortable taking on some market risk, but not as much technology risk.

What is Triple Point's pipeline of renewable energy projects now?  

As a firm, we are predominantly UK-focused and are now looking to expand into Europe. We are on that journey, though not quite there yet.

We recognise there are many opportunities in Europe, particularly in battery storage in markets like Germany and Italy. Poland and Romania have some of the highest imbalance costs, which also present interesting opportunities, though these are a bit earlier stage.

The stages, as I see them, are threefold: development, construction, and operation. Most investors are comfortable with the construction and operation stages, as they are relatively low risk. Development, however, is seen as higher risk, which is why it offers higher returns. But to me, this is more a perception of higher risk than a reality.

Development is often labelled as risky or speculative, and it certainly is in the early stages. But late-stage development — where there is already a grid connection offer, a connection date, and an option agreement with a landowner — is not as high-risk. Some of the best developers we work with have success rates of 95-100% in getting projects through planning.

While UK planning databases show around a 75-80% success rate, the risk is not as high as many believe. If we lend, for example, against a portfolio of 10 energy development projects, statistically, seven or eight will succeed. We only need about five of those to be sold to recover our debt, which ultimately creates a solid risk-adjusted return.

I am particularly drawn to the development stage because, if you invest across a diversified pool of late-stage development assets, the perception of risk often exceeds the actual risk. This can be done responsibly, protecting investors while still capturing strong returns.

Currently, the biggest challenge for UK projects is connection times, though reforms like TMO4 are on the horizon. At the moment, grid connection is on a first-come, first-serve basis — even if a project has not secured land or spoken to a landowner. This low barrier to entry has prevented quality assets from advancing.

These reforms should bring about a necessary shakeout in development, allowing more established developers with institutional backing and robust proposals to drive projects toward net zero. Developers taking a more speculative approach will likely fall out of the queue.

We believe institutional capital like ours has a crucial role in accelerating this consolidation to build viable sites. The shakeout over the next 12 months presents exciting opportunities for us to make a significant impact and achieve better risk-adjusted returns.

Are there plans to invest in the Hydrogen space? 

In newer areas, we often start by lending to some of the best management teams in the industry. If we are impressed, we may later consider equity investment, but this approach allows us to back strong management teams early on.

From a risk perspective, hydrogen is not necessarily difficult. Electrolysers and foundation plants have been around for some time, so the technology itself is not the primary challenge. The real issue is the economics. The cost of green hydrogen remains high, making it less affordable compared to alternatives like gas.

At the same time, the storage aspect is still being worked out. Technologically, I do not think hydrogen is too nascent, but economically, it is a different story. There are subsidies available for green hydrogen, and some projects benefit from them, which could make them interesting. However, we have not yet seen a significant volume of viable projects. We remain interested and have a couple of green hydrogen deals in our pipeline, but I would not say we are overwhelmed with opportunities at this stage.

Are co-located wind and solar projects a trend that is here to stay? 

In places like America, storage is very much part of the future. You would not build a site without it, particularly since it is sunnier there.

In the UK, we are seeing many collocated sites, and I believe the business model is proving itself. Solar, in particular, is a more advanced use case because the goal is to shift energy. This is becoming increasingly relevant due to the rising number of negative price periods in the half-hourly settlement periods for solar. For example, if I have a solar farm that hits peak production at midday or 1pm, when every other solar farm is also producing at peak, the price drops. This is great for EV owners, but not so beneficial for asset owners. Negative pricing that is not covered by Contracts for Difference (CfD) can be problematic. If you can store and shift that energy to 4 pm, when demand is higher, it is incredibly helpful.

Wind, however, presents a different challenge. Wind tends to come in weeks or storms, not hours. For example, there may be weeks without wind, and currently, we do not have multi-week storage options apart from pumped hydro, which is separate from wind. This is where hydrogen can play a role, using excess wind to drive an electrolyser.

To be clear, we have focused more on solar and battery energy storage systems (BESS) than on wind. For wind, the collocation aspect is less clear, as lithium-based storage is not ideal due to the need for long-duration storage.

What needs to happen for the National Grid to keep up with all this renewable energy? 

There are two key considerations: what we can do without building new infrastructure, and when it is necessary to build. In terms of connection reform, the question is whether we can secure sites that are ready to connect more quickly. There is a lot we can achieve without significant spending, particularly in reforming the connection queue process as quickly as policy allows.

The larger obstacle is the capital expenditure (CapEx) side. We need more pylons, and there is no way around that. Connecting assets to the grid is essential for enabling the transition, especially from top to bottom, starting in Scotland and extending across the UK. This is an inevitable part of the transition, and infrastructure is required for reaching net zero.

The Review of Electricity Market Arrangements (REMA) is another piece of legislation that could help, as it explores whether we can move towards more regional power markets.

As for where the investment will come from, transmission is owned by National Grid Electric System Operator (NESO), and as a market-listed company, a lot of the physical CapEx will come from them. Distribution network operators, owned by large international investors, will likely see much of the investment come from private capital.

Ultimately, what is needed is clear policy from the government. As investors, we need to know what returns we can expect. If there is a clear investment case, there will be no shortage of capital.

Where in the renewable energy space are the biggest risks, and how is Triple Point mitigating these? 

Grid policy risk is a key consideration. More broadly, energy market pricing and REMA are also important. If investors are spending significant capital on assets in Scotland, only for their revenue expectations to be impacted by regional pricing, that would be suboptimal.

Another concern is the potential for tariffs on panels from China. Additionally, as an ESG-aligned investor, we are always mindful of the supply chain. Around 95% of solar panels come from Xinjiang, amid reports of forced labour. Often, we are not great at balancing the trade-offs involved. While installing solar panels can bring significant environmental benefits — a win for the 'E' in ESG — the 'S' is less favourable due to the challenging supply chain and labour issues. As an environmental funder, we cannot simply ignore these concerns.

What is Triple Point's biggest growth opportunities for future investment?  

The key area would again be development, given the increasing cash requirements due to rising connection costs. For example, if you have a large battery in Scotland, which is where many of the large batteries are located, and you want to connect it to the grid, the response from the grid operator is typically, "You will need to pay for what is called reinforcement work." This means that you would cover the costs associated with upgrading the grid infrastructure, as we discussed earlier.

For investors, this results in a significantly higher bill, running into the millions of pounds, whereas in the past, development projects might have cost tens or hundreds of thousands. The funding requirement to build and develop is now at a completely different scale compared to what we have seen before. This creates a funding opportunity for us, as the higher capital requirement due to increased connection costs presents an opportunity for us to deploy more capital.

What about the growing prevalence of data centres in energy space? 

This is a relatively new trend. One perspective is that these connections should be used for clean energy to benefit the whole country. On the other hand, data centres also contribute to the country's needs and require that power. However, if all the connections intended for energy projects end up powering data centres, you are not generating new power and, in practice, you may be extending the life of gas-fired assets.

Another part of Triple Point focuses on heat networks, and we have previously invested in a data centre in London that provides an enormous amount of heat. This heat may be linked to a heat network, delivering low-carbon, affordable heat to local communities. So, there are certainly some fascinating niche opportunities where waste heat can be repurposed to heat homes in urban areas.

In March of this year, we learned that Triple Point Energy Transition (TENT) made the decision to implement an orderly wind-down of the trust. What were the drivers of this decision? 

TENT was launched prior to my joining Triple Point with the aim of investing in the energy transition. Like many investment trusts from the 2020 vintage, it raised capital from investors and deployed it accordingly. The performance aligned with our expectations – at the IPO, we projected a return of 7 to 8% for investors, along with a covered dividend, and for the year ending March 2023, that is exactly what we delivered.

Since the Liz Truss Budget of September 2022, however, the market for infrastructure investment trusts has become more challenging. They are now all trading at a discount to net asset value, from the largest to the smaller trusts.

The lack of liquidity, due to a withdrawal of investors from the market, has made it increasingly difficult for existing shareholders to sell their shares. Because these are listed products, not private ones, investors expect the ability to sell their holdings. Liquidity, therefore, is a key factor in our response. TENT investors made it clear that they wanted more liquidity. The only way I, as a fund manager, could provide this at a meaningful level was by selling assets. Many others are also having to take similar action. We believe this decision is the right one, as it has enhanced shareholder value and demonstrated the quality of our assets.

The larger issue at hand is the impact on the energy transition. The entire listed market for energy transition assets has effectively closed. While there are private funding sources available, they do not adhere to the same level of disclosure and transparency required of listed companies. If public markets are unable to allocate capital effectively for the energy transition, achieving Net Zero will become much more challenging.

In any transition, we all have a responsibility to make our market attractive and deliver competitive returns compared to other asset classes such as bonds, credit, and real estate. When government subsidies were abundant, and the cost of capital was low, it was easier for everyone to perform. Now, with fewer subsidies and a higher discount rate, the challenge has become greater. We are entering a phase where only those with the right expertise will succeed. For us, offering higher returns is key to attracting more capital into the market, and that is what we are striving to achieve.

Looking ahead, what are the biggest priorities for Triple Point over the next 12-24 months? 

For me, the focus is on identifying the next key area in the energy transition. My role is to anticipate what comes next, and that is something my peers are also focused on. A few years ago, it was batteries; before that, solar; and prior to that, wind. We have also discussed green hydrogen. Currently, natural capital is emerging as a significant area, closely related to carbon credits, carbon capture, and biodiversity. While some aspects are still somewhat early-stage – aligning with the idea of 'not getting in too early' – they are also nearing readiness for wider implementation.

I also spend considerable time reflecting on the development sector, which is at a critical inflection point. We have a 12-24 month window to accelerate efforts and meet the 2030 clean power targets. We consider ourselves one of the leading investors in development, rather than developers ourselves. This positions us at the centre of these conversations, where we aim to invest strategically and support the right developers in backing the right projects.