Sector focus: Energy and power

Oil prices took a tumble and shook the foundations of the energy sector in 2020, but renewables continued to attract capital as energy transition themes strengthened.

If there was one sector where investors had to reassess their priorities and focus more than ever in 2020, it was energy. The sector witnessed the most volatile year among all, no thanks to oil prices oscillating to new lows and general market uncertainty. Covid-19 also impacted the production and distribution of hydrocarbons.

For most of 2020, oil prices wavered between $20 and $40 per barrel, down from the mid-$60s at the end of 2019. Midstream also suffered as it was clear that infrastructure plays within the sector were not insulated from commodity price swings.

Uncertainty in the oil market led to investment focus shifting towards natural gas assets. This was reflected by a transaction in June 2020, when Global Infrastructure Partners led a group of investors to purchase a 49 percent stake in 38 gas pipelines in the United Arab Emirates in a $10 billion deal, one of the year’s largest.

However, such large deals in the space were still rare. Market and energy price volatility and increased focus on environmental concerns led to more attention being placed on renewables.

Actis partner Lucy Heintz told Infrastructure Investor in a webcast that renewables are now “the lowest cost [of energy] in two-thirds of the world”.

Renewables definitely came out as a ‘winner’ sector in the pandemic year. Trends that boosted the sector include stable and future-proofed revenues with government-backed support set against a backdrop of a warmer planet; falling oil demand and prices; and increasing focus on sustainable investing.

Stories of the year

A renewed forward focus

April 2020
BlackRock closes its Global Energy and Power Infrastructure Fund III on $5.1bn

Abu Dhabi sells a $10bn stake in pipelines to a consortium led by GIP

Quinbrook plans end of year first close for new £500m fund

Brookfield closes second debt fund on $2.7bn

The sector was further aided by governments putting together recovery plans with green investment in the forefront – the European Commission’s overall €750 billion recovery plan being a case in point.

Fundraising for the sector also stayed buoyant. Before the end of the year, Copenhagen Infrastructure Partners raised €4 billion for its fourth flagship renewables fund, while Stonepeak Infrastructure Partners is expecting a $2 billion close on its debut renewables-focused fund in early 2021.

That said, renewables also face pressures moving forward. Although power prices recovered, they are expected to remain low for the foreseeable future, placing projects exposed to merchant power in difficult positions. It would be key to see how they manage a risk that existed before the pandemic but has become significantly more prevalent across the industry.

Aside from renewables, fund managers continued to diversify, looking at strategies like hydrogen, electric vehicle-charging infrastructure and grid-balancing assets.

Power purchase agreements also held strong despite a sharp fall in energy demand and power prices. According to Bloomberg New Energy Finance data, 8.9GW of clean energy was contracted under PPAs in the first half of 2020. Although weaker than earlier years, the trend was seen globally.  Whether these trends will withstand whatever 2021 has in store is to be seen, but fund managers expect overall economic recovery and a vaccine-led pandemic relief in the months ahead.