Energy infrastructure will remain a relevant and interesting field for asset owners as governments look to plug the investment gap, finds Jonathan Williams

In recent years, numerous reports have highlighted the private sector’s need to invest in infrastructure, citing projects worth tens of trillions of dollars over the coming decades. 

Energy projects claim a large share of this pipeline and, according to the International Energy Agency (IEA), $53trn (€47trn) of investment would be required by 2035 to give governments “a chance” of meeting the 2°C global warming target viewed as crucial by the Intergovernmental Panel on Climate Change. Since the IEA’s World Energy Investment Outlook was published in 2014, the UN Climate Change Conference in Paris has set itself an even more ambitious target of limiting the global temperature increase to just 1.5°C above the pre-industrial average, requiring an even greater investment in both green energy supply and energy efficiency. 

Despite the emphasis on reducing the carbon output of energy producers and the accompanying increase in renewable investment to an all-time high of $289bn, according to the Frankfurt School – UNEP Collaborating Centre for Climate & Sustainable Energy Finance, the increase has largely been fuelled by developing countries rather than developed nations phasing out ageing power plants.

“The developing world including China, India and Brazil committed a total of $156bn, up 19% on 2014, while developed countries invested $130bn, down 8%,” the Global Trends report of the Frankfurt School of Finance and Management noted, adding that a large part of the developing market growth stemmed from Chinese investment, which grew by 17% to $102.9bn, to account for nearly a third of global investment. 

Low-carbon investments will not only target renewable energy projects but also retrofit the most polluting coal power plants and finance the shift away from coal to less carbon-intensive gas plants. 

According to 2015 research by Preqin, over 90% of institutions interested in the natural resources sector were interested specifically in the energy sector. While pension funds have not yet showed an interest in taking on the construction risk associated with such undertakings, activity has recently increased to acquire completed assets, in turn allowing national utilities to re-deploy capital. 

Recent energy infrastructure investment activity

Disposal of assets has been one way institutions have accessed energy assets over the past year, including a recent deal where the UK’s London Pensions Fund Authority and Greater Manchester Pension Fund joined with Greencoat UK Wind to acquire a near 50% stake in a Scottish onshore wind farm. The farm’s stake, which remains majority owned by energy supplier SSE, was put up for sale by the firm in 2014 as part of an effort to raise £1bn (€1.25bn) from the sale of non-core assets.

A second saw several Swedish investors join with Canada’s Borealis Infrastructure in May 2015 to acquire Fortum’s Swedish electricity distribution network. The transaction, worth SEK60bn (€6.6bn), saw AP1, AP3 and Folksam acquire minority stakes in the network, while the infrastructure business of Canada’s Ontario Municipal Employees Retirement System (OMERS) took a 50% stake. 

At the time, OMERS Private Markets CIO, Michael Rolland, praised the transaction network as a “rare, high-quality asset”, which would see the consortium responsible for a network supplying close to one fifth of Swedish electricity. A similar deal in late 2013 saw Borealis and local pension providers Keva and LocalTapiola (now Elo) join a consortium that bought the majority stake in Fortum’s Finnish distribution network for €2.5bn. 

The vehicle set up by the UK’s Green Investment Bank (GIB) is in the process of being privatised by its government. The £1bn vehicle was part of GIB’s attempt to attract outside capital, allowing it to better leverage its otherwise limited £3bn initial government investment. The fund was immediately seeded with several offshore wind assets owned by the bank, attracting support from UK pension investors and the Abu Dhabi Investment Authority. 

In an effort to attract the interest of institutional investors, some asset managers have also begun constructing funds that give pension investors exposure to both the underlying assets’ debt and equity funding. 

Outside of renewables, in the US shale gas projects have been generating interest. Institutions remain interested in oil and gas projects over renewables – with 83% of investors surveyed by Preqin opting for the former sector over 43% showing an interest in the latter.

“Seventy-nine per cent of investors are open to both upstream and midstream opportunities, with 62% investing in downstream; this seems to illustrate that investors are typically open to any stage of investment,” the survey said.

Conducted before the current lull in oil prices, institutions were also more interested in oil and gas exploration, with 84% remaining open to such exercises due to the better risk/return profile. 

Investment in fossil-fuel plants will remain a relatively small portion of overall energy investment through to 2035, according to the IEA, which estimates it will attract funding of $2.6trn, roughly half of the $5.8trn expected to flow towards renewables over the same period. 

Governments will also be hoping to attract institutions to the construction of transmission lines, such as the ones acquired by Borealis, as the IEA identifies a need for $5trn in investments over the coming 20 years. Some of this will fall into better interconnectors between nations, as those countries, such as Denmark and other renewable energy market leaders, struggle with the question of who will buy the now over-abundance of energy.