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Daiwa: 100 billion yen invested in solar energy projects worldwide

Interview - August 14, 2023

Part of Daiwa Securities Group, Daiwa Energy & Infrastructure is looking to provide Japanese investors with renewable energy opportunities in Japan and around the world.


Japan is an island nation that relies on 95% of its energy being imported and under the Kishida administration, the basic energy plan has been revised to focus more on renewables. Since the Fukushima disaster in 2011, nuclear energy has fallen out of favor but despite this, advocates for nuclear champions its ability to reduce industrial manufacturing costs, which are currently three times higher than those in China or the United States. The narrative suggests that Japan's current energy mix is hindering its competitiveness. As a green energy investment firm, what is your take on the energy mix that you think is best for Japan?

To be honest, the best energy mix changes over time, and it is difficult to foresee what will be the optimal mix for 2050. However, the ultimate target is to achieve carbon neutrality and zero emissions by 2050. Currently, people are searching for the best energy mix to achieve these goals. Technological advancement is crucial in this regard. For example, if solar power with batteries becomes advanced enough to significantly reduce costs, it could be the primary energy source. However, at present, solar power does not possess that capability. Therefore, nuclear energy remains a viable option within the energy mix, especially with the development of small-scale nuclear power plants called SMRs (Small Modular Reactors). Nevertheless, the ideal scenario is to increase the share of renewable energy sources.

Japan leads the world in terms of the ratio of solar panels per land area. However, there are other potential areas for solar panel installation, such as roofs and walls, so there is still a lot of potential. Domestically speaking, Hokkaido still has land that can accommodate solar power. The current challenge lies in the limitations of the existing power grid to distribute the generated power. The Japanese government is actively working on increasing the transmission capability, including plans to transport Hokkaido's power to mainland Japan through undersea cables. Another potential solution is offshore wind power. The installation and operation costs of wind farms in Japan are currently high. However, if there are technological breakthroughs that reduce the cost of wind power generation, offshore wind could become highly promising.


Japan faces multiple challenges in achieving its energy goals, including high installation costs, the need for carbon neutrality, a lack of resources, and a high dependence on the Middle East. In your opinion, what must Japan do to overcome these challenges?

Speaking of the LCOE (Level of Cost of Electricity), the cost of electricity generation from renewables has considerably reduced and is now comparable to coal or thermal power generation. Solar power has much higher cost efficiency levels in Australia and the Middle East. When compared to fossil fuel-based thermal and coal generation in Japan, solar power is becoming competitive and can pay off. Moreover, advancements in battery technology have begun to lead to a reduction in battery prices. We need battery penetration to increase and solar power to be stored and used during night-time. Japan has struggled for centuries with high energy costs, but now with the advent of solar generation, Japan could enhance its international competitiveness.


Critics often argue that the government has not provided enough support or has been late in taking action. Europe is far ahead, and Chinese technology is more advanced in terms of adopting electric vehicles. The government has implemented feed-in tariffs and other initiatives. What is your assessment of these measures? Furthermore, what advantages does a private company like yours have in helping Japan transition to renewable energy that the government alone cannot provide?

The Japanese government has been slower than Europe in introducing support for renewable energies. However, since 2012, the government has actively led the penetration of renewable energy resources through measures such as feed-in tariff subsidies. This has been successful in spreading renewable energies, and one could argue that the level of support is similar to that of European governments. It is worth noting that European countries have already transitioned away from the feed-in tariff system and adopted corporate power purchase agreements (PPAs). Japan, on the other hand, is still in the earlier stages of this transition.

Private enterprises, including our company, play a crucial role in collaborating with the Japanese government to create a post-feed-in tariff system. As financial investors, we work together with the government to invest national capital in renewable energy sources. Individuals in Japan have substantial savings and pensions, and through financial institutions like pension funds, we introduce new financial investment assets, such as renewable energy infrastructure, to these individuals.

You have collaborated with Aquila Capital, in which you hold a 40% stake. This collaboration provides Japanese investors with access to renewable energy projects in Europe that they would not have otherwise. These projects may offer faster returns and be more established. Can you tell us a bit more about your role in providing access to funds that invest in US or European stock that Japanese investors would not otherwise be able to access?

It is not that we are now creating funds for Japanese investors to invest in. Rather, we are focusing on private investments of the Daiwa Securities Group as seed assets for future funds. We currently offer domestic solar power projects as private funds to Japanese clients, including pension investments and banks. In the near future, our plan is to create a private fund specifically for Aquila Capital's managed assets and European infrastructure, which we can offer to Japanese clients.


In your short five-year history, you have invested in a range of businesses, specifically focusing on renewable energy and infrastructure with total investments exceeding 100 billion Japanese yen. Can you tell us what was the motivation behind the establishment of Daiwa Energy and Infrastructure, and what are some of the lessons that you have learned in your five-year history as a company so far?

While Daiwa Securities Group has significant capital, investment areas were becoming saturated. In order to find new investment paths, at the time of establishment, there was a global discussion on reducing carbon dioxide emissions as a business opportunity, so Daiwa Energy and Infrastructure was established. The purpose was to leverage Daiwa Securities Group's expertise and create a fund that focuses on renewable energy development and infrastructure, offering it to the clients of Daiwa Securities. Additionally, we are considering the use of blockchain technology to create products for private investors interested in solar panel projects.


In addition to your work with solar, you are also involved in wind energy projects. For example, in collaboration with Capital Dynamics, you have invested in an onshore wind farm in Scotland developed by a German developer. Construction is scheduled to begin, and operations are expected to start in 2025. What are your expectations for this project once operations begin?

The purpose of this project is to participate in the greenfield development of renewable energy sources in Europe. By partnering with companies like Capital Dynamics, who have extensive knowledge and experience in the field and the region, we can successfully execute these investments in new assets, particularly in Europe and other foreign countries. We partner with new companies whenever we invest in a new asset. In Europe and other regions, it is important to find local partners who have extensive experience in the field.


Are you currently looking for more partners for renewable energy projects?

We are constantly seeking new opportunities and partners. Having said that, we have already established a substantial network of trustworthy relationships with partners across every region we are focusing in. We believe we have accomplished our goal in this regard. Specifically, for solar power, our focus regions are North America, Europe, and Australia, where we have already established partnerships with companies.


You have also invested in Infostellar Corporation, which provides infrastructure for telecommunications, communication support services for orbiting satellite operators, and others. Why did you decide that Infostellar was a worthy investment, and are you looking to make further investments when it comes to telecommunications infrastructure?

We consider space to be a crucial part of future infrastructure. However, the space market is still in its infancy, and there are significant risks involved. Therefore, we start with smaller investments. The purpose of the investment is not to focus solely on the company itself but on the potential assets it may develop. Our goal is not to gain profits from an IPO, but rather to invest in ground stations, and the services they will provide to satellite operators.


If we were to conduct this interview again in another five years, is there a personal goal or ambition which you would like to achieve?

Our business model aims to resemble Macauley Capital, where we own and develop seed assets that allow us to create a future fund for Daiwa Securities' clients. Our one focus is on investing in greenfield development of renewables, where conventional institutional investors may not be able to invest. We own the assets from the development phase up until operations begin. Then, based on the potential revenue it can generate, we create new financial products, tracking and utilizing the asset's potential.

Renewables and infrastructure offer stable cash flow, and once operational, we can create private funds. By entering at the development phase, we open up investment possibilities and use the asset to provide services to Daiwa Securities' clients. Over the next 5-10 years, our mission is to strengthen the pipeline so that Japanese investors can invest in renewable energy and infrastructure. Currently, we own a fund of approximately 100 billion Japanese yen in solar power generation, but we aim to further expand that.


Currently, blockchain is heavily associated with cryptocurrencies. The concept revolves around an open ledger where all transactions are visible to everyone. Could you explain how blockchain specifically relates to renewable energy and infrastructure investment? How does it benefit your clients to have operations recorded on the blockchain?

In the case of solar power generation, the investment required is often too high for individual private investors to fully participate. Converting a private fund into a smaller fund to accommodate private investors would result in excessive administrative work that would not pay off. However, by introducing blockchain technology using security tokens, we can alleviate this administrative burden and enhance the product's safety.

Interview conducted by Karune Walker & Paul Mannion