Ole! What the sale of Infigen Energy tells us

Infigen Energy has been sold to Spanish energy giant Iberdrola for $864 million after a bidding war with Phillipines based UAC Holdings. It’s a remarkable turnaround for Australia’s largest listed renewable energy generator burdened with crippling debt for most of the past decade.

At times Infigen appeared more likely to end up as the subject of a fire sale rather than international takeover. So what happened? Understanding the commercial story of Infigen Energy is insightful into how electricity markets and businesses are evolving to transition from a thermal to a renewable based system.

Infigen was born from the catastrophic Global Financial Crisis collapse of investment company  Babcock and Brown in 2009, inheriting a portfolio of 41 wind farms in Australia, Europe and the US and a mountain of debt. Most of the European and US assets were sold off and Babcock and Brown Wind was re-named to Infigen Energy to continue its development of wind farm projects behind the expanded Renewable Energy Target.

Infigen Energy share price 2010-20 source: ASX

Under then CEO Miles George Infigen Energy focussed on being a renewables-only generation business, relying on revenues from the sale of electricity from its projects and the supply of renewable certificates to retailers. It was a business strategy reflecting the times. Confidence in the size and scale of the 41,000GWh Target and the pure-renewables play attracted global ethical institutional investors like The Children’s Investment Fund.  Infigen’s share price soared.

The problem with this business model was it was heavily dependent on bullish demand for renewables to sustain the income needed to service Infigen’s debts. The loss of confidence in renewables with the impending election of the Abbott Government in 2013 saw Infigen’s share price plunge. It sold off solar and wind assets in the US to keep its head above water, while the value of its main sources of income – wholesale electricity prices and renewables certificates – both softened.

Infigen’s business model was like riding a political roller coaster, the value of the business heavily dependent on political head or tail winds, with George becoming a lobbyist for pro-renewables policy to save the business. It was over-exposed to spot market fluctuations, meaning income varied heavily on seasonal variations of heat (demand) and wind (generation). The re-set rather than abolition of the RET in 2015 revived confidence in the business.

A change of management in 2016 saw former Board member and veteran Queensland power utility executive Ross Rolfe run the business. He moved the business away from the pure-renewables model, buying a 123MW gas peaker in western Sydney in 2019 and leased one of the 120MW South Australian government’s gas generators brought in after the 2016 system black. He also installed a 25MW battery at its Lake Bonney wind farm so they could participate in the Frequency control services (FCAS) market.

With this firming capacity, Rolfe was able to push around 75 per cent of Infigen’s 750MW of renewable generation onto agreed price contracts with commercial customers and power purchase agreements with retailers. They now also sell derivatives like price caps. This has removed most of the revenue volatility and the quantity of firming capacity is able to support further expansion into more intermittent generation capacity.

Infigen still had nearly $600 million of debt when Iberdrola came knocking, but its ability to service that has become more certain. The blending of firming capacity and more diversified income streams provide headroom for new renewables investment and a more sustainable business model. This all made Infigen Energy an attractive investment opportunity.