Q&A - DIF Capital Partners: Attractive returns from 'vanilla' assets

DIF Capital Partners is an independent infrastructure fund manager focusing on mid-market investments, primarily in Europe, North America and Australia. 

The firm's traditional DIF funds primarily invest in lower-risk mid-sized infrastructure projects and companies in the energy transition and utilities sector. 

DIF's Infrastructure VII fund, launched in 2022, made significant a significant investment in co-located solar in November of that year [2022] when it acquired a portfolio of seven ready-to-build sites with 380MW solar capacity and 340MW battery energy storage systems, giving a combined capacity of 720MW. 

inspiratia talks to Allard Ruijis, partner and chief investment officer at DIF, about why solar is not a "vanilla" investment as many in the industry believe, and how the company maximises returns from solar projects.  

What sectors and regions is DIF interested in right now? 

We are a diversified manager that looks at the whole infrastructure spectrum. The DIF Infrastructure VII fund has a strong renewables component and also invests in energy transition and in more utility-style investments, PPPs and concessions.  

We also have another fund strategy, the DIF Core-Plus Infrastructure Fund III, which invests in digital sectors like fibre and data centres, but also in energy transition investments looking at newer markets and rising trends in the infrastructure sector such as EV charging. Globally, we are seen as one of the leaders in the mid-market.

In renewables, we are mainly investing in wind and solar investments. We invest both at the project level - that is, buying operational and construction phase projects - and in platform companies, which are for example, development companies that have a strategy to become an independent power producer, so that they are able to build and operate a large renewables portfolio.  

That can also be platforms that invest in relatively newer sectors, like hydrogen and battery storage. At the end of the day, these are markets that have significant potential, because, in the case of batteries, you can't have a well-operating renewable generation market without battery storage. So, we are also focusing more and more on integrating battery storage solutions in the generation portfolios. So that is something we are currently working on in the markets that also have the right schemes in place to back those investments. 

What are the advantages of having co-located batteries? 

There are major advantages because you can use the same grid connection and land. You could even start integrating your production and offtake with your battery. So that's obviously the most logical thing to do. So you can sell energy when it is needed, and not only when it is produced. I think it's the only way forward to be able to have net zero energy generation in the longer term. 

As an example, we invested in the largest portfolio to be built of co-located, solar and battery storage in the UK. The 720MW portfolio is a good example of where we invest in 350MW of solar projects to be built in seven different locations. But at all the sites, we also build battery storage, leveraging on the same infrastructure and land and making it, therefore, also more economical to build these sites. This is also backed by a relatively clear support scheme, from the UK regulator. I think the UK is an interesting market to invest in at the moment. 

You mentioned that the UK has good market regulations for batteries. How does that compare with the rest of Europe?  

I think the UK is ahead of the rest of Europe, but there are also other countries, like Italy and Germany, who are also moving in the right direction.  

In the UK, you have the capacity market and revenue floor contracts which offer a minimum return for your battery. This, combined with a clear regulatory framework, helps to reduce the risk and provides somewhat of a minimum return.  

These revenue mechanisms are still under development in other countries, where projects may need to be fully merchant, whereas, in the UK, that's not necessary. This mitigates the risks of your investments. 

A lot of companies are losing interest in wind and solar, feeling that they're a bit too vanilla of investments right now. Why does DIF still find them attractive? 

For others, the return expectation in wind and solar has come down also as a result of the stability and the quality of these investments. For us, it doesn't always match the investment mandates that we manage, and we need to look for the right opportunities that work for us.  

For example, in combination with battery storage, we can realise a higher return making it an overall very attractive investment. So you take a bit more risk on the battery side and you have a high certainty on the solar side, then on balance, you have an acceptable risk-return. 

Also, for example on the solar side, we bought into a global solar development company, ib vogt, and through such an investment, we build solar projects that the company continues to hold. In this way, we keep the development margin for ourselves. That enhances the overall returns on such investments and therefore, we are able to make still attractive IRRs on solar investments.  

DIF recently secured the UK's first bankable and unsubsidised co-located PPA and optimisation agreement (hybrid PPA) for solar energy. What are the advantages of such a PPA? 

One offtaker for the solar and BESS is a new type of PPA that we have pioneered. It is not always required to have one as you could have a separate solar offtaker and BESS optimiser, but it can be useful as it eliminates interface risk between contracts and allows the BESS optimiser to have full visibility on the solar generation that can lead to higher BESS optimized revenues. 

DIF recently acquired a geothermal company called Diverso, what was the rationale behind that? 

Diverso builds thermal insulation in big accommodation projects. There is legislation that is an extremely ambitious net zero ambition in Toronto, one that's, steeper than many other places in the world. 

The Toronto Green Standard effectively requests 'all electric' heating systems for new build developments, which drives further growth of this market. Natural gas solutions are therefore not possible for any new build. 

That effectively means that if you build a new accommodation project, it needs to be carbon neutral, in order to get a building permit.  

Everything that they build now needs to be with modern technologies like air-sourced heat pump installations, geothermal installations, or electric boilers, and to make it as energy efficient as possible. Geothermal is one of the best options for providing heat in Toronto, given the very cold winters. The efficiency is very good, and the lifetime of these installations is very long. It has a relatively high upfront cost, but overall it has one of the lowest energy costs. This company has a strong pipeline of projects that they can build in the short – mid-term, and we make the capital available to build this pipeline of projects within these accommodation projects in the Toronto area. 

In terms of emerging technologies, how interesting is hydrogen to DIF? 

We are following the market and we believe in the technology and the future, but it also requires an appropriate regime for compensation like subsidies, feed-in tariffs, etc, and to give clarity on how it can generate revenues. If that's available, then yes, we are also surely interested in investing in this sector. 

We're not very actively investing in this market at the moment, but we have made our first investment already in two Dutch hydrogen projects that have secured 15+ years of subsidies to be built, and we're working with the same development company on more interesting projects in the Netherlands and Germany.  

We have made out of the first steps, but they are relatively small-scale facilities so far.