In ancient Greece, the three Fates were always said to be fickle. No Hellenic hero could escape the clutches of the sisters, destiny weaved into the threads of life and literally cut short by a pair of sacred scissors.
For US President Joe Biden, it must almost seem like some force above is purposefully laying obstacles in his path. Just as the economic impact of the pandemic was starting to recede, and the dust settling on his landmark Infrastructure Investment and Jobs Act, Russia’s decision to invade Ukraine has triggered arguably the greatest threat to peace and security in Europe since the Cold War.
The war in Ukraine also has major repercussions for the energy transition, while broiling volatility across financial markets is directly influencing private investment appetite, shifting the dial on short-term opportunities as well as for long-term climate goals.
“The law’s impact on investment has been difficult to measure due to the volatile and challenging economic backdrop caused by inflation, supply chain challenges, and the rising cost of energy following Russia’s invasion of Ukraine,” says Andrew Ward, managing partner at Clearstream Capital. “Within energy infrastructure specifically, system reliability, security and affordability have become of paramount importance, replacing the previous singular focus on climate impact.”
This change in sentiment is stimulating investor interest in practical, near-term energy solutions such as liquefied natural gas, says Ward, which is low carbon but not “green enough” to qualify under the Jobs Act or other US clean energy programmes.
In November 2021, when the Jobs Act was signed into law, few would have predicted that Biden would spend much of this year pleading with oil and gas producers to lift output and ease energy price pressures on consumers, especially considering the government’s early freeze on new federal oil and gas drilling at the start of the year.
“Government programmes aside, the world is realising that we cannot let the perfect be the enemy of the good, and natural gas applications have a chance to make a sizeable and immediate positive impact from a reliability and emissions standpoint,” says Ward.
“Given the size of the investment in infrastructure being made across the country and the timespan covered by the law, it will understandably take some time to get all the parts moving”
Taking baby steps
The key question is how long supply-chain disruption, labour shortages and high inflation are going to last for. When the historic Jobs Act was signed, few realised the scale of President Vladimir Putin’s ambitions across the border and the immediate hit Russia’s invasion would have on global markets. As 2023 looms, the world waits anxiously to see if the situation proves to be a short-term blip or the precursor to a longer, more serious recession.
“The infrastructure bill is a multi-year plan, which is smoothing over some of the impact, but they have to be careful how they spend the money and where to focus on, as clearly materials and labour are becoming more expensive,” cautions Thomas van der Meij, senior portfolio manager, infrastructure, at Kempen Capital Management. “[The infrastructure rollout] might take longer than initially assumed and it will be important for the US administration to show the benefits of the programme.”
Biden’s first thunderbolt, the $1.2 trillion Jobs Act package, was a landmark moment for US infrastructure and already the government has been quick to start divvying it up. California has received by far the largest share of national infrastructure spending, already absorbing $9.2 billion in total funding. So far, 250 projects have been announced, with roads and bridges apportioned $5.5 billion. Over the next five years, California is projected to receive approximately $28 billion in federal funding to upgrade the state’s highways and bridges.
Not far behind, the state of Texas has announced $8 billion in Jobs Act spending across 260 projects this year. Again, bridges and roads have been awarded the majority, with roughly $5.3 billion assigned to the state’s 818 bridges and over 19,441 miles of highways in dire need of fresh capital.
“Given the size of the investment in infrastructure being made across the country and the timespan covered by the law, it will understandably take some time to get all the parts moving,” points out Nicolas Rubio, Americas CEO at Meridiam. “From what we have seen, the Biden administration is working hard to get information and funding out to states and other interested parties as soon as available.”
Rubio adds that the administration has specifically requested private sector input on best practices for certain programmes, for example the federal review process for environmental permits, helping to ensure that funding is used more effectively.
Upgrading internet quality is another area the government has identified, a subsector that has been popular with the private sector in recent years. The Biden administration says a quarter of Texans still lack access to affordable internet and has pledged $65 billion to improve the situation across the nation, aimed directly at making the US more technologically competitive.
“The Federal Communications Commission and the National Telecommunications and Information Administration have made major strides in getting information out to interested parties and also soliciting information from the people who will be using these funds,” says Rubio.
“Seen in action, eligible residents of Bloomington, Columbus and Shelbyville, Indiana, where Meridiam has agreements to build a ubiquitous fibre network, will be able to utilise the Infrastructure Investment and Jobs Act’s Affordable Connectivity Plan to attain access at no cost to them.”
But while Biden may have achieved political support from across the aisle for his Jobs Act, beyond a $7.5 billion pledge to accelerate electric vehicle charging, the bill gave scarce consideration to the energy transition or tackling climate change.
Less than a year on from the signing of that bill, and with the midterm elections fast approaching, that is all about to change. Approved in the Senate, and now ratified by Biden, the Inflation Reduction Act is a landmark piece of clean energy legislation that promises to plug some of the energy transition financing gap. Over the next decade, $485 billion will be funnelled into clean energy and climate resilience spending through a series of tax credits and incentives.
“It is a huge development,” says Keith Martin, co-head of projects, US, at global law firm Norton Rose Fulbright. “The closest analogy to this was in 2009, when Barack Obama took office and enacted an economic stimulus plan that had large subsidies to move to renewable energy.”
The American Clean Energy and Security Act, a bill aimed at tackling climate change and greenhouse gas emissions, was also approved by the House of Representatives in 2009, but with no hope of passing the Republican filibuster threat it was never brought before the Senate.
“The Republicans do not believe it is the government’s role to tackle climate change,” says Martin. “They think that should be left to the private market. They also do not think the US should penalise itself by slowing economic activity to address climate change, particularly if China is not doing so.”
Cashing in on the gas boom
US producers are enjoying a major windfall from soaring prices and a hungry European market
Natural gas exports from the US Gulf Coast have hit record levels this year as operators look to plug the energy supply gap left by sanctions on Russia. For private equity-backed gas producers, the demand dynamic and sky-high prices have created notable opportunities for production growth, particularly from the Haynesville dry gas play in western Louisiana, close to Gulf Coast export markets.
The entire play has been running at more than double its maintenance rig requirement, and private equity-backed producers are responding with growth. Benefiting from the elevated price environment, several large privates in the Haynesville play have already exited since the second half of 2021 and further consolidation is expected.
Unlike basins closer to East Coast markets that are struggling to offset midstream gridlock and offer little scope for capacity additions, Haynesville has a range of potential pipeline expansion projects at various stages of development. In July, private equity-backed Momentum Midstream shelled out $1.3 billion to acquire Midcoast Energy’s pipeline assets, including a stake in the eastern Texas side of the Haynesville basin, showcasing the attraction of the region.
Making a statement
Biden has since hailed the Inflation Reduction Act as “the largest investment ever in combatting the existential crisis of climate change… and strengthens our energy security, creating jobs, manufacturing solar panels, wind turbines and electric vehicles in America with American workers”.
Two-thirds of the bill’s climate spending has been earmarked for tax credits, which promote electricity generated from clean energy sources, ,while the bill also offers tax credits for electric vehicles and $27 billion for a greenhouse gas reduction fund.
The Democrats claim the bill will lower domestic carbon emissions by roughly 40 percent by 2030, while the American Clean Energy Association projects that it could stimulate the deployment of some 550GW of clean energy generation over the next 10 years.
While obviously still a major boon for climate financing, research from credit agency Moody’s puts the figure closer to 30 percent, lower than the original $555 billion in clean energy spending that Biden had assigned in the Build Back Better bill, which ultimately was spun out into the Inflation Reduction Act and last year’s Jobs Act.
“The Inflation Reduction Act is considerably smaller than prior versions touted by the Biden Administration, but nevertheless its impact will be significant for the still-evolving clean energy infrastructure sector,” stresses Ward.
“Interest rates are high compared with the last 10 years but not historically. I think people are cautious and cognisant, but that is not changing investment decisions just yet”
The Inflation Reduction Act also promises to bring clean energy manufacturing back to the US and spark a low-carbon employment boom. “[One] substantial aspect of the law is the Advanced Manufacturing Credit,” says James Cole, partner at global law firm Latham & Watkins. “This provides an incentive for components used in infrastructure projects if the components are manufactured within the US.”
Deflationary forces have seen the costs of goods and services fall in recent months. But energy consultancy Rystad Energy warns that the $60 billion set aside to accelerate domestic clean energy manufacturing will struggle to offset current inflation or even keep pace with projected growth, at least in the short term.
The real elephant in the room is Asian economic heavyweight China. If the country employs high expansionary fiscal policy – a real risk considering weakening global demand – Rystad estimates that this could increase energy prices by an additional 10 percent this year, which would only start falling in 2023.
Others point out that infrastructure projects operate over a wide timeframe and slowing economic growth is unlikely to have an immediate impact on project financing or progress from the Jobs Act.
“Anybody that is starting a project right now is not going to be putting metal in the ground until 2024 or 2025, and the forecast is a normalisation of the crisis and a lessening of inflation by then and beyond,” says Himanshu Saxena, CEO at Starwood Energy.
“Another point is that interest rates are high compared with the last 10 years but not historically. I think people are cautious and cognisant, but that is not changing investment decisions just yet.”
Keeping one eye on the past is one way for infrastructure investors to keep the present and future in perspective. The Inflation Reduction Act should dovetail with the Infrastructure Investment and Jobs Act to give US infrastructure an almighty boost, but of course sometimes only the Fates know what is around the corner.
Making carbon capture pay
New government legislation rewards brownfield operators for sequestering their emissions
The energy transition requires a step change from the industry and expanding renewables capacity alone is unlikely to get us there. From battery storage, bridging fuels and energy efficiency to carbon capture and storage, a whole range of technologies will be needed to overhaul the global economy and meet net-zero goals.
This reality was recently acknowledged in the Inflation Reduction Act, with tax credits for permanent carbon removal increased from $50 to $180 per tonne and the minimum CO2 removed from the atmosphere lowered from 100,000 tonnes to just 1,000 tonnes.
“Most people acknowledge that the best path forward for lowering carbon emissions comes from parallel tracks of capturing CO2, while simultaneously creating offsetting products that do not have a carbon footprint,” says Latham & Watkins partner James Cole.
“While companies that are claiming sequestration credits are not wholly incentivised to change their business model, the Inflation Reduction Act will facilitate a bridge for these companies to develop energy transition technologies, especially given the Inflation Reduction Act’s tax credits for clean fuel and hydrogen production.”