This London firm is using Middle Eastern oil money to finance the green transition

By Louis Goss

The world needs more hydropower to hit its net-zero goals. Here's how Augusta & Co. is helping to get there.

In the mountains of Norway, beneath the vast lakes carved into the landscape, lies an engineering wonder - a sprawling network of tunnels, six meters wide, leading to water-powered turbines. These turbines, which have supplied Norway with over 90% of its electricity for decades, are the backbone of the Scandinavian country's energy grid.

Fed by a continuous supply of rainwater, these reservoirs essentially act as gigantic natural batteries. In simple terms, water is stored in the lakes until demand for electricity peaks, often in the cold winter months. The turbines are then switched on in a process that produces power almost instantly. Unlike coal, nuclear, wind or solar energy - which either take time to ramp up or rely on suitable weather conditions - Norway's hydroelectric facilities have the capacity to go from zero to full power in eight seconds.

For decades, these hydroelectric assets have powered Norway's electricity grid - and have also turned a tidy profit for the state-owned companies, like Statkraft, that have in some cases managed them for over 100 years. The ability to produce power on demand allows these plants to sell electricity to Norway's utility companies at premium prices during peak times, outpacing average market rates by as much as 25%. Yet traditionally, Norway's hydropower projects have been almost entirely inaccessible to outside investors.

Enter Augusta & Co., a small but ambitious seven-person investment firm based out of a townhouse in London's Mayfair neighborhood. Originally focused on mergers and acquisitions, Augusta has carved out a niche in the world of renewable-energy investments, having spotted a major opportunity. In essence, the firm has devised a new way to let global investors - including top European pension funds and the sovereign-wealth funds of oil-rich Middle Eastern nations - tap into the lucrative world of Norwegian hydropower without actually having to own the projects themselves.

More broadly, Augusta's business model has the potential to provide a new means of attracting much-needed investment to the hydroelectric sector as the world transitions away from fossil fuels. The London firm's push to transform existing hydropower facilities into investable assets offers a model of drawing finance into the renewables sector that could be replicated elsewhere to help reach climate goals.

Tapping into a typically inaccessible sector with little risk

In its own effort to transform Norway's hydropower facilities into investable assets, Augusta buys power directly from Norway's state-owned hydroelectricity projects through 15-year power-purchasing agreements. Augusta then resells this power through its own short- and long-term PPAs, generating impressive annual returns of at least 12%, according to the firm. It's a model that offers investors the reliability of Norwegian hydropower without the complications and risks of direct ownership of the projects themselves.

PPAs were first introduced in the 1990s as a means of drawing investment into the power sector in newly liberalized power markets in the U.S. and Europe. The contracts, which typically run over periods of five to 20 years, are now standard across the energy sector and are used to sell electricity from projects such as wind farms off the coast of Scotland and coal-fired power plants in China.

For the most part, PPAs are used to set terms between power producers and their direct customers, including utility companies and industrial businesses. Augusta's model instead sees it trade the hydropower it buys through PPAs, meaning its investors are able to invest in a power-producing asset without having to enter into a PPA contract themselves. In doing so, Augusta's business lets institutions put their money into the relatively inaccessible hydropower sector with relatively little commitment.

"Legally, in Norway, you can only buy up to 33.32% of a hydro project, but that never happens because it's all state-owned, and the state doesn't sell those assets," Mortimer Menzel, managing partner at Augusta, told MarketWatch.

For the Norwegian state-owned companies that control these hydroelectric facilities, Augusta's deals offer a means of generating reliable returns over extended periods in the face of volatility in global energy markets. The London firm's investors are, in turn, provided with reliable returns themselves, generated through selling this power at higher prices on shorter-term contracts to buyers that include industrial consumers and utility companies.

"We're a gateway," Menzel said. "There's no capital expenditure, no operational expenditure. It's an investment in power production that's already been there for 100 years. We're a different way for investors to invest in renewable energy."

The risk for Augusta is that energy prices crash, which would see the London firm and its investors having paid over the odds for the power purchased via 15-year PPA contracts. A slump in electricity prices driven by anything from a major economic slowdown to the discovery of a new source of energy would have a sharp impact on Augusta's business. The firm is, however, making a bet that power prices will continue to rise in line with surging demand for electricity driven by the growth of the technology sector and the ongoing global energy transition.

One European institutional investor told MarketWatch that Augusta's investment products offered them a means to diversify their portfolios by capitalizing on shifts in the energy sector, including fast-paced growth in power demand from data centers. "We considered that the investment product is well positioned to take advantage of future opportunities in the European energy market," the investor said.

Fueling a shift among oil and gas investors

Augusta is now seeking to sell its investment products to the sovereign-wealth funds of Middle Eastern countries, which are becoming increasingly eager to diversify their portfolios due to the global shift from fossil fuels. These funds, flush with cash from decades of oil and gas revenue, are drawn not only by the high yields of Augusta's hydropower investments but also by the immediate returns they offer. This makes them an attractive alternative to many of the investment products offered by private-equity firms, which provide similar returns but with much longer lock-in times.

"Even though they're very rich, they like to see yield, they like to see cash," said Tristan Elbrick, Augusta's managing director. "They don't really like being locked into private-equity funds for five years."

For many investors, the appeal of Augusta's hydropower-focused business model also goes beyond simple financial returns. In a world increasingly concerned about environmental, social and governance, or ESG, impacts, the London firm's investments have strong green credentials in alignment with the net-zero goals that have been taken up by countries worldwide, including in the Middle East.

"The world is going green," Menzel said. "The Arab states understand this, that in 50 years it will eventually be over. We've had these massive transformations in energy before. We're in the middle of the renewable one now."

As the world's major economies push ahead with plans to reach net zero by the middle of this century, experts say the world needs to build out significantly more hydropower capacity. The International Renewable Energy Agency says global hydropower generation capacity will need to roughly double by 2050 in order to keep the rise in global surface temperatures below 1.5degC.

In order to achieve this goal, investment in the hydroelectric sector will have to increase sharply, Gordon Edge, head of policy at the International Hydropower Association, told MarketWatch. "We need a lot more investments in hydro globally," he said. "There's a big global opportunity here in terms of the investment now. The large majority of that extra amount is going to have to come from private finance."

The pace of the buildout needs to more than double by the end of the decade in order to achieve the aims of the Paris Agreement, Edge said - from the current 20 gigawatts per year to 50 gigawatts each year by 2030. Annual investments will, in turn, have to more than double over the next five years, from current rates of around $60 billion a year to rates of around $130 billion per annum by 2030, Edge said.

As of now, the bulk of investments in hydropower projects comes from the public sector, either through national governments or multilateral institutions including the World Bank and the European Bank for Reconstruction and Development. This is largely due to the huge up-front costs involved in building new projects and the extensive timelines generally required to reap returns.

The European institutional investor who spoke to MarketWatch said that Augusta's hydropower investments are also particularly well placed to take advantage of an expected increase in volatility in energy markets, due to the fact they are dispatchable and can start producing power in a matter of seconds.

Beyond the hydropower sector, the wider infrastructure-investment industry is booming. Since the 1990s, institutional investors have seen the potential that infrastructure projects - from power plants to sewage facilities - hold as a means of generating reliable returns over multi-decade periods. The sector has grown particularly sharply since the 2008 financial crisis, as governments with ever-increasing national debts seek out ways to finance new infrastructure projects.

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