Meadow Partners’ J. Andrew McDaniel discusses the intersection of real estate and energy transition investment opportunities and how Meadow is approaching this bourgeoning asset class.  

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What is the energy transition and why will it happen?

The energy transition is a global effort to increase electricity generation and distribution to dramatically increase the electrification of commercial and domestic heat, general industrial activity, and transportation in ways that use more intermittent, renewable energy resources in lieu of fossil fuel-based generation.

The energy transition is happening because of two broad concerns: 1) a combination of energy independence, cost stability, and resource adequacy (factors that differ by country and region) and 2) the desire to reduce pollution caused by using fossil fuels to produce electricity and to fuel wider industrial activity. While there are numerous political targets with respect to timing and the amount of projected transition in different jurisdictions, which can be complicated, the broad trends are the same across the developed world.

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Why is the energy transition important to a real estate investor?

The simple answer is that the energy transition is creating robust, new demand for physical space that has a grid connection and/or is located in close proximity to a significant energy user. These assets are in short supply and are forming a new real estate investment class alongside the energy transition itself. Energy transition real estate assets produce long-dated, inflation-protected income on sites that have increasing intrinsic value, given their ability to produce, use, and/or distribute power.

In a greater sense, it is reasonable to say that the energy transition – and the combination of an aging (and, in some jurisdictions, declining) population and increased urbanization – are the two megatrends that will most impact the real estate investment environment over the next 40+ years.

Today’s electricity grid is vastly more complicated than yesterday’s, and the future grid will be even more complicated. As just one example, take Battersea Power Station in central London. At its 1950’s peak, Battersea Power Station produced about 20% of London’s electricity (around 500 megawatts or roughly equivalent to 200 modern, onshore wind turbines). At that time, electricity production and use occurred near one another, and production almost wholly relied on fossil fuel combustion.

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Now compare that Battersea Power Station to one of Meadow’s current energy transition real estate assets. In Coalburn, Scotland, Meadow identified a ground lease investment on a 37- acre site that houses a 1,000-megawatt-hour battery energy storage facility that will come online in 2026. The batteries onsite will import from and export to the grid almost instantaneously, which means intermittent wind and solar power can be captured and stored for optimized use at a different point in time anywhere on the grid. Putting the size of these batteries in perspective, they can hold two continuous hours of peak Battersea Power Station production and can import and/or export it to the grid (which means they can indirectly power London from 320 miles away).

There are numerous real estate challenges facing the energy transition. Land availability and permitting issues are major concerns but are also major drivers of value. Determining the economic and practical use value of physical space is an overriding issue as well. For example, should a respective piece of land have a solar farm on it or be used for arable farming? Energy production density (kilowatts produced per square meter, for example) is an economic constraint.

The bottom line is that we now have a new, momentous, and significant driver that will dramatically impact the built and physical environment, and it is called the energy transition.

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Is the energy transition really going to happen?

Yes, it is already happening and has been for decades.

According to Statista, global electricity production was 11,896 terawatt-hours in 1990 and 29,480 terawatt-hours in 2023. Annual electricity production growth equated to a 2.8% compound growth rate over the period, which compares to global population growth of approximately 1.3% per annum over the same time period.

At a global level, increased electricity production has mostly come from the developing world. Many developed countries have had relatively constant amounts of electricity production since 2000. Two broad trends drove this: 1) shifting industrial capacity to the developing world and 2) significant increases in efficiency (examples of improved efficiency include better insulation, LED lighting, and smart appliances). While these two trends will likely continue, numerous emerging trends will increase electricity demand. The leading forward demand generators will likely be the electrification of building heating and hot water systems, increased electrification of transport and personal mobility (including electric cars), and advancing new technology uses (cloud computing, AI, etc.).

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Significant change in electricity production has already occurred and is now accelerating (especially in most G7 countries). In the United Kingdom, for example, coal produced a decade-high 41% of electricity during the 2010s but accounted for only 2% of annual production by 2019. In 2023, solar, wind, and nuclear produced a combined 48.5% of U.K. electricity production (wind produced 29.4% of total electricity).

In the U.S., coal produced 51.3% of electricity in 2000 and 19.5% in 2022. U.S. wind production as a percentage of total electricity produced was 0.2% in 2000 and 10.2% in 2022.

China, which overtook the U.S. as the world’s largest electricity producer in 2011, produces about 30% of global electricity. The Chinese grid is modifying quickly (significantly increasing solar and wind production) but is still heavily coal-dependent (about 60% of Chinese electricity production comes from coal). The global ability to reach pollution targets will be heavily but not solely reliant on reducing the amount of coal-produced electricity in China over time.

A common misconception concerning the energy transition is that zero fossil fuels must be used to accomplish the transition. To debunk this myth, look no further than the increased use of natural gas, 22.5% of a larger amount of electricity produced in 2023 versus 14.7% of a lower amount of electricity produced in 1990. The energy transition is happening, and the world is using more natural gas to produce electricity. What is important is that natural gas is cleaner than coal and other fossil fuel alternatives, reducing aggregate pollution. The question of whether global electricity can be produced without any fossil fuel production goes beyond the concept of the energy transition. At least in the near term, to meet the projected electricity demand, an “All of the Above” mentality will need to be embraced. Some aspects of the energy transition go well beyond the amount and production source of electricity. A non-exhaustive list of examples:

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• How much impact carbon capture can have

• How land, air, and sea-based cargo transport is powered

• How personal mobility and aviation are powered

• How non-electric building heating is accomplished.

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While these areas are fascinating and could yield future real estate investment opportunities, Meadow is most focused on electricity distribution, production, and storage because that drives today’s energy transition real estate investment opportunity.

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What do future projections tell us about expected electricity usage levels and how does that impact your investment thesis?

Let’s consider projections for one of Meadow’s target investment markets, the U.K., in the context of relatively flat electricity usage across most of the developed world since 2000.

In the U.K., the Government is projecting electricity usage to go from 301 terawatt hours in 2022 to 387 terawatt hours in 2040 (a 30% gross increase). The U.K. Government was projecting electricity usage to drop in the early years of the series, which happened according to 2023 actuals, so the net move in demand is projected to be larger than the gross. A simplified explanation for this is that in the early years, increased efficiency is a stronger force than the expansion of electric mobility and conversion of building heat to electric. Personal transport will likely still be heavily reliant on fossil fuel combustion in 2040. Longer-range data projections indicate a much higher expected growth in electricity demand.

Another interesting feature of the U.K. Government projection is that renewable-sourced generation (excluding nuclear power) is expected to go from approximately 45% of total production to approximately 75% of total production from 2022 to 2040, respectively. Natural gas is still projected to produce about 7% of the total U.K. electricity in the Government study.

Let’s look at another source. The National Grid, which operates in both the U.S. and the U.K., is projecting electricity consumption to increase by 50% by 2036 and more than double by 2050 in the U.S. and U.K. combined. Bottom line: more electricity will be consumed, and the grid needs to be stable enough to support this increased consumption.

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What types of real estate assets will benefit from the energy transition?

Let’s start by defining what Meadow is trying to create and invest in: long-dated, inflation protected cash flow streams generated by physical assets that have significant intrinsic value given their respective location in close proximity to the electricity distribution grid and/or energy users.

Below are examples of investable real estate assets:

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How will Meadow capitalize on the energy transition investment opportunity?

Meadow is a proactive, thematic real estate investor, and we believe that the energy transition is one of the megatrends that will significantly impact the real estate environment in the long term. Indeed, by using our time-tested, proprietary sourcing capabilities, Meadow is already investing in the energy transition.

A selection of Meadow’s existing investments and pipeline include:

• A portfolio of convenience and quick-service retail assets that offer EV charging in the U.K.

• The freehold ownership of a 37-acre battery storage site located in Coalburn, Scotland (the prime onshore location for wind energy generation in the U.K.). Meadow benefits from a 40-year, index-linked lease to a major battery operator. The stabilized yield is 7%, a 650- basis point premium to comparable term inflation-linked gilts.

• A programmatic JV with an experienced U.S. solar farm and BESS operator to acquire land with in-place or approved grid interconnections for development. The initial property acquired is a nearly 100-acre former office park in a prime New York City suburb that benefits from an 80 MW grid interconnection. The joint venture will develop a combination of solar, battery storage, and data center uses on the site and will benefit from long-duration (25+ years) credit-backed income streams at above-market yields.

• The formation of a programmatic partnership with an experienced EV operator to create new, net-leased EV charging sites in the U.S. and Canada that benefit from co-location with quick-service retail.

As the world continues to move to a lower carbon economy, Meadow stands prepared to source and execute novel investment opportunities at the intersection of real estate and the energy transition.