Investments in infrastructure boosted by the energy crisis
The energy crisis has boosted investments in infrastructure, experts agreed at Real Asset Media’s Infrastructure Outlook 2023 – Investing in new energy briefing, which took place online recently on the REALX.Global platform.
“Infrastructure platforms are really growing in importance,” said Tania Tsoneva, senior director, global infrastructure research, CBRE Investment Management. “Fundraising has reached €150 billion this year, 50% higher than in 2020, which shows the appeal of infrastructure in a downturn.”
As macro-economic conditions are challenging due to high inflation, rising interest rates and looming recession, dark clouds are gathering but infrastructure can be seen as a way to look beyond them.
“The move from the pandemic through the energy crisis has been a real test for infrastructure, which has shown how resilient it is,” said Tsoneva. “We’re very confident about the performance of this asset class, which is very diverse. Also, the renewables sector is less exposed to the economic cycle and to commodity price fluctuations.”
Private capital has a big role to play. “We’re already seeing the behemoths of US private equity invest in infrastructure assets in a big way,” said Jim Wright, listed infrastructure fund manager, Premier Miton Investors.
There is a lot of dry powder in the sector, which offers more sophistication and more diversification now. “It’s value-add as well as core, and it’s a good thing for investors who can differentiate,” said Tsoneva. “You can invest in a platform that includes electrification, renewables and storage and get a good return on the entire value chain now. Prospects are very positive for the year ahead.”
There are a lot of moving parts to this transition phase. The risk of stranded assets is ever-present, as no one knows if a gas pipeline or a solar power plant will be needed in the future.
“We’re trying to work out what is low-risk,” said David Bentley, partner, Atlas Infrastructure. “The secular trend is a massive increase in the use of electricity, which implies a fundamental change in our energy system. Huge investments are needed in the grid, so that’s the safest place to find good returns.”
In the energy market three competing factors need to be balanced: the affordability of energy, security of supply and carbon reduction and the need to tackle climate change.
“It is a trilemma,” said Wright. “The decarbonisation agenda had been strong before the invasion of Ukraine, while we had been a bit complacent about affordability and security. The war has been a game-changer and has refocused minds, leading to a realisation that those needs will only be met through the increased and better use of renewables.”
Long-term planning needed to ensure secure supply of energy
Companies need to plan ahead like never before because the current energy crisis and the necessary energy turnaround involve high risks, delegates heard at Real Asset Media’s Infrastructure Outlook 2023.
“Security of supply and high costs are a real issue now, as challenges and uncertainties continue to increase,” said Folker Trepte, Partner, PwC Germany.
Energy prices have fallen back but are still at a high level and inflation continues to bite. As well as the issue of costs, companies must also deal with energy efficiency.
“Optimisation is not just about reducing use but also using energy better and choosing different times,” said Trepte. “A scenario analysis is necessary for strategic orientation and long-term planning and companies need a framework for hedging and managing electricity price risks.”
There is a growing awareness among companies that they need to plan ahead, as long as four years before delivery, determining their demand profile and closely monitoring the hedge effectiveness required.
The other noticeable development has been an increased willingness to explore possible sourcing options for renewable electricity.
“Many companies have embarked on strategies to achieve carbon neutrality by 2030 or to significantly reduce carbon emissions,” said Trepte. “They are also aware that reputational risks materialise if they fail to deliver on their carbon-neutral agenda. Power supply is a major lever in this regard.”
The upshot is that there will be a significant increase in demand for renewable energy. Companies will try to secure the supply of green electricity at competitive prices, have access to technology to ensure maximum decarbonisation of production processes, and access to skills that will enable their energy independence in the future.
One way of doing it is through strategic cooperation or joint ventures with project developers, operators or renewable energy companies.
“There are several strategic options for achieving the target, but substantial investments are required,” said Trepte.
Investing in a brownfield project involves the acquisition of existing assets or shares in projects. Investing in a greenfield project involves the acquisition of rights to build a plant. Another option is acquiring project developers or operators or renewable energy companies.
All these strategies are highly capital-intensive and not all companies are prepared to make that investment.
“It is still the case that many companies want to invest in their core business and not in energy generation,” said Trepte, “but they must think of their competitiveness over the long term, not just in Europe but also against Asian or US companies.”