The Pipeline Global Summit Special: Day 4

The Infrastructure Investor Network is gathering this week at the Global Summit in Berlin and The Pipeline is covering the proceedings. Here's what we learned on Day 4, which featured specialist forums on Energy Transition and Infrastructure Debt.

Energy Transition Forum

Local roadblocks to energy transition
Our opening keynote panel saw members of the Infrastructure Investor Network hear about the challenges facing investors in the energy transition and how these can be overcome.

Michael Bonte-Friedheim, founding partner and group CEO of NextEnergy Group, argued that the biggest challenges to project delivery were coming from the local level, rather than a lack of coordination at the regional level.

“I’m not a believer in centralised decision-making that will suddenly free up local [permits] – we have to find an intermediate step where actions can be taken to free up capacity,” he said, before citing additional challenges in the availability of grid capacity as an example. “We have a project in the UK going through the permitting process and when talking to the grid operator about connection we said: ‘When can we do it?’ They said: 2036.”

Thus, Bonte-Friedheim argued, a very significant investment in grids is needed, along with the political will at the local level to facilitate projects to get off the ground.

Infrastructure Investor’s upcoming cover story will look at the topic of grid decarbonisation and modernisation in detail from a global perspective – so watch this space.

PPA changes
In a morning panel focused on the evolving power price market and what it means for energy investors, the subject of power purchase agreements was discussed at length.

Andrew Bujtor, managing director at Low Carbon, said that the PPA market was “actively evolving” with no established single structure currently prevailing.

“There are shorter tenors [and] a reluctance from certain areas of the market to enter into longer-term offtake agreements. Pricing is finger in the air and it varies from day to day – even in the corporate market which typically has a more fixed approach to pricing, that is changing on a weekly basis, which [makes it] very difficult then to form a project around that,” he said.

Bujtor added that his firm was also working in closer partnership with offtakers on its PPAs than before the current period of volatility.

“We’re talking to offtakers a lot more about the different project risks in a lot more detail. There’s a lot more to discuss and for us as investors to be across, and to become a lot more sophisticated in how we approach these things.”

What does the IRA have in store for storage?
The Inflation Reduction Act is not stingy when it comes to tax credits for standalone battery storage.

“The market has been growing 30-plus percent every year – without [the IRA]. Now in the most extreme case, you could get as a developer up to 70 percent tax benefits,” said Matthew Mendes, managing director and head of infrastructure at Investment Management Corporation of Ontario, in our storage-focused panel.

Sounds great, right? Someone else on stage didn’t think so. Laurent Segalen, managing partner at Megawatt-X, maintained that the tax credit gains promised to investors likely would not be reflected on their balance sheets.

“I was talking to a fund manager who invests in batteries,” he said, explaining the potential benefits to them. “He says: ‘I’m not seeing anything from it because my [contractor] has raised its price by 50 percent all of a sudden.’ And I say: ‘Why?’ They say: ‘The IRA – they want in on my piece of the action.’”

Mendes retorted: “It’s a market system.”

While that response garnered a laugh, it didn’t manage to close the debate. Only time will tell how much of the benefit investors ultimately see.

Grapevine

“We’ve entered the era of volatility. As an infrastructure investor, you embrace it or you die”

Gerard Reid, co-founder & partner, Alexa Capital, warns investors about the disruption that is swirling around energy markets

Infrastructure Debt Forum

Junior vs senior
The Infrastructure Debt Forum was in full swing on day four, with investors keen to hear about how the market is shifting in an inflationary environment where interest rates look set to remain higher for longer.

On a panel discussing the relative merits of senior secured debt versus junior mezzanine debt, Christopher Quayle, executive director of DC Advisory, was clear about where he felt the opportunities for investors were likely to be found: “As the cost of equity adjusts in this environment, we would expect there to be opportunities coming up in the traditional core sectors like transportation, utilities, etc.

“[This is] because ultimately, having come out of a long period of low rates, a lot of those assets have very heavily optimised senior debt structures. So the ability for those to be adjusted at the senior debt level is quite restricted when rates are higher now.

“As those refinancings come up in those strong core asset classes, it will continue to provide junior debt investment opportunities.”

Debt counterparty risk
A recurring theme across the four days we have been here in Berlin has been how far infrastructure asset owners will be able to go when it comes to passing on cost increases to customers or end users.

This came up again from a debt funding perspective, cited as a significant counterparty risk by Michela Bariletti, chief credit officer at UK-listed insurance company The Phoenix Group, in our on-stage LP interview, in response to a question about what issues were of most concern.

“[People say] that infrastructure is fairly isolated from inflation. I totally agree, but this is true as long as you can continue to pass on your costs to your ultimate customer,” she said. “At a certain point there might be a decoupling of your ability to pass on costs to customers [from your ability to] keep growing revenues at the same pace as your cost line.”

Bariletti specifically cited the UK, where The Phoenix Group is especially active, and its social housing sector, pointing out that the UK government has capped rent increases below inflation – meaning the operators of those assets may experience a shortfall. After all, costs will not be capped.

Referring to the wider audience, she said: “Credit risk is something we do for a living. But not it’s become even more of a consideration.” And the risk that borrowers come under increasing pressure if they are unable to increase revenue to service their increased financing costs is a real one.


Today’s letter was prepared by Daniel Kemp. Isabel O’Brien contributed.