Infrastructure in the energy transition: change never felt so familiar

Introduction

Energy is critical to the functioning of our society—it has fueled technological advancement and human progress over the past two centuries. According to the US Energy Information Administration, global energy consumption has increased by at least 1% every year since 1966. Between 1990 and 2020, it jumped 60%, and by 2050 global energy consumption could rise by an additional 50%.

So far, most of the energy we‘ve used has come from fossil fuels. While cheap and abundant, they are also the largest contributor to carbon emissions. As a result, governments around the world are working to curb carbon emissions while also meeting the energy needs of society. The way we produce, distribute and consume energy needs to change, this is what the energy transition seeks to do.

This shift, however, cannot happen without infrastructure: It is the backbone that enables the technology, production, integration and storage of renewable resources and the transmission of clean energy.

The energy transition presents a significant opportunity for GPs, LPs and direct investors alike. Because of the global shortfall in public spending on infrastructure, governments and businesses are turning to private capital to fund, build and deliver transition projects at speed, quality and scale. Infrastructure GPs have recognized the opportunity, targeting more than $185 billion for energy transition funds between 2021 and 2023.1 And if estimates from the International Energy Agency (IEA) are correct, and nearly 20x more capital is needed to bring about the transition, this is just the beginning. LPs should be prepared to evaluate a broad range of opportunities from managers on this topic.

Though the terms are sometimes used synonymously, the energy transition is more than renewable energy; everything from hydrogen to battery storage and carbon capture falls within the broad remit of the energy transition. Within this remit lie opportunities outside the risk-return norms of infrastructure. “PE-like returns” may become a common refrain.

Because of the sheer breadth of this space, for the LPs contemplating an allocation to it, the diligence required may bring new challenges as their investment teams become comfortable with unfamiliar terminology, new technologies and emerging business models. Yet despite the seeming newness of these opportunities, they are still, well, infrastructure: fundamental assets that society needs to function. To that end, investors should expect the energy transition to offer the same potential as other “traditional” infrastructure assets: Diversification. Uncorrelated returns. Steady cash flows.

To prudently seize the opportunity and select the right GPs, we are working with LPs to help them up the learning curve. In this paper we explore the opportunity for private infra–structure capital to support the energy transition, and we illuminate various strategies that may help investors capitalize on this opportunity.

Bridging the gap to the future energy system

The energy transition will bring about a major structural change in how energy is supplied and consumed. To accommodate this change, the future energy system will require modern infrastructure that reliably and sustainably enables the production, storage, transportation and distribution of clean energy. This future energy system will be more decentralized, digitized and electrified. Energy will be more easily stored, markets nimbler and more easily re-formed. Ultimately the new energy system will be more resilient and integrated.

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