Energy dominates the conversation – again

With the Russia-Ukraine war in full force and winter around the corner, it’s unsurprising that energy-related issues dominated a good portion of our inaugural Investor Forum, held in London last week.

You might recall that energy security topped the agenda at our Global Summit in Berlin earlier this year. Six months later, the topic and its knock-on effects of higher inflation, higher interest rates, geopolitical tensions, and its impact on the energy transition, are issues the industry continues to grapple with.

“We’re living through unusual times,” Andrea Echberg, a partner at Pantheon Ventures, acknowledged during one panel discussion. “But actually, many of these things are quite positive for infrastructure.

“Inflation in most cases is positive for valuations [and] even with rising interest rates, which should be reducing valuations, we’ve seen broad portfolio valuations up around 5 percent in Q2, on a local currency basis,” Echberg said.

Compared with other asset classes, infrastructure so far “has defied gravity,” she added.

Gordon Bajnai, partner and global head of infrastructure at Campbell Lutyens, warned that “it’s dangerous to look at one item [in isolation as] it’s such a complex situation”. He was less bullish than Echberg on inflation, which he argued “is going to change everything”, posing the “first real test” for the asset class after nearly two decades of low inflation and low interest rates.

High inflation, of course, is in large part the result of the ongoing Russia-Ukraine war, so it didn’t take long for energy security and its impact on the energy transition to rear its head in discussions.

Marcus Ayre, partner and head of Europe at Igneo Infrastructure Partners, said that a lesson from the war is that “we cannot rely on any one single source of energy. And we also need to think much more regionally and domestically in terms of where we’re getting energy from as we transition to a low-carbon economy”, he said. “Because the more we’re relying on huge supply chains around the world, the more we’re exposing ourselves to geopolitical risk.”

In addition to diversifying energy suppliers and supply chains, Ayre also emphasised the need for diverse energy technologies.

“We need politicians to be thinking about… the next set of technologies, whether that is hydrogen, more battery storage technology… [essentially] the technologies that we know work but are very expensive. We know they can be scaled up in a better way, but it needs investment. That’s where governments should be focusing to create… the sort of regimes that I think take it out of… venture capital investing and bring it into the realms where we can actually get patient, stable capital, at affordable equity return rates into the sector, and use that capital to drive the innovation and drive down the costs of these technologies,” Ayre said.

He pointed to the subsidies and feed-in-tariffs governments provided and implemented to encourage investment in wind and solar projects, which have resulted in significant cost reductions over the past decade. Those supportive frameworks are once again needed for the next stage of the energy transition, he argued, especially now that energy security has set the world back with regards to net zero.

Ayre has a point, of course, but what he is proposing will take some time. Right now, “aggressive demand-side management” is needed, argued Michael Bonte-Friedheim, founding partner and chief executive at NextEnergy Capital. “Governments, companies, everyone has to aggressively and proactively look at the energy they’re using and reduce that amount.”

Sam Lissner, principal at Ridgewood Infrastructure, made a similar point, noting that managing demand and focusing on energy efficiency “is a big opportunity to have real, direct and immediate cost savings”. That translates into improved profitability for business, increased discretionary income for households and overall greenhouse gas emissions reduction. “That’s an area we find particularly interesting and somewhat overlooked,” he said.

We wrote in May that energy efficiency continues to be an afterthought for both the public and private sectors. Given the urgency of the energy crisis we now face, we sincerely hope it starts getting the attention it deserves.