COP 21, the historic climate change summit, is in full swing and regardless of how sceptical you are about the kind of agreement that will be reached by world leaders in Paris, one thing is certain: the march towards a low-carbon economy is now inexorable.
That’s not to say the kind of agreement that will be reached won’t matter. It will, especially if we are to have a fighting chance of keeping global temperatures from rising by more than 2 degrees celsius above the pre-industrial average, after which the planet will not be a very hospitable place to live in, according to an overwhelming majority of scientists. We just mean that, regardless of the strength of the agreement, the tide of public and private opinion has shifted decisively in favour of a green economy.
With infrastructure investors especially well positioned to capitalise on this enormous opportunity, here are three key factors they should watch out for.
1) Get with the programme
Do you have a clean energy strategy within your infrastructure business? Do you have the required skills and expertise to invest in low-carbon assets? If not, you should definitely start looking into it.
That’s not just good marketing timing, by the way. As our sister publication Low Carbon Energy Investor reported last week, a recent survey by sustainable asset manager Aquila Capital shows that LPs are wanting to increase their exposure to renewable energy. The latter, as is becoming the norm, regularly accounts for the majority of new energy infrastructure built every year.
That means fund managers will find themselves increasingly bumping up against clean energy infrastructure. Savvier traditional infrastructure GPs, like Meridiam and Ardian, have already recognised this and have moved to offer fund products targeting low carbon infrastructure. Those that haven't would do well to consider a similar move. In the not too distant future, not being able to offer a low carbon infrastructure product might become a real liability.
2) Stranded assets
Most traditional infrastructure investors probably think they are relatively immune from the stranded assets concerns that plague fossil fuel-focused energy investors. After all, if your business model isn’t mostly predicated on extracting fossil fuels you might not be able to burn soon, you don’t have much to worry about. Right? Well, not really.
It doesn’t take a huge leap of the imagination to see how traditional infrastructure assets might be affected by the transition to a low-carbon economy. Take toll roads. If you own a 99-year toll road concession, you might potentially have to deal with a scenario where electric vehicles (EVs), perhaps self-driving ones, are prevalent. How will that affect traffic and toll revenue on your asset? What about capex, perhaps to upgrade your lanes so they are able to charge said EVs, as is being tested in the UK right now?
Another example: maybe you own transmission infrastructure, built for an era of centralised electricity distribution and ripe to be disrupted by an abrupt drop in battery costs, which would dramatically accelerate distributed energy adoption. Or perhaps you have a nice portfolio of natural gas pipelines, but the regulator has now decided they leak too much methane and is forcing you to spend millions of dollars to fix that. We could go on, but you get the picture.
3) Green shoots
Lastly, are you making the most of the technological innovations brought about by attempts to mitigate climate change?
In our just published Future of Infrastructure supplement, Alinda’s Alex Black offers a compelling example of how the asset manager cut the lighting energy costs of car park business InterPark by 60 percent through the introduction of LED lighting. There are also plenty of opportunities in, say, pairing solar power with street lighting.
In addition to boosting revenues, ‘greening’ existing infrastructure assets is likely to be an increasingly important component of managers’ Environmental, Social and Governance (ESG) strategies, which LPs are increasingly demanding. And while it’s true ESG strategies go well beyond the environment, there’s certainly a reason why that ‘E’ comes first.