Inflation will drive up already high estimates of the trillions of dollars of capital spending needed across the power sector to hit net zero targets, says Nick Langley, managing director of global equity manager ClearBridge Investments.
In a panel discussion about the opportunities and pitfalls asset owners face in transitioning to net zero carbon emissions by 2050, Langley said estimates of capital expenditure by the International Atomic Energy Agency “were cut before our most recent inflation spike and hikes in commodity prices.”
“However, we need a lot of copper, we need a lot of steel, we need a lot of cement, it’s going to cost a bucket load more than two and a half trillion a year,” Langley said at Conexus Financial’s Fiduciary Investors Symposium held in June in the Blue Mountains.
Opportunities in infra
But opportunities abound for investors as traditional infrastructure and utility companies make the transition, he said. While in the past a “high-growth utility was growing its asset base at maybe four to five per cent per annum, today that’s like eight to ten per cent, and we’re going to continue increasing from there,” leading to “lots of opportunities obviously, but some risks along the line as well,” he said.
Langley pointed to a Princeton University study in the United States that found for the country to meet its net-zero targets, there will need to be a 60 per cent increase in the line length and capacity of its electricity transmission network by 2030, which will need to triple by 2050.
With increased sources of supply and increased demand, there will be enormous work done on citing environmental approvals before the first sod is turned on those projects, and public policy will be a great place to invest, he said.
“So if you think about it from a utility perspective, and taking a step back, governments make public policy, regulators are there to work with the companies to implement that public policy. And as an investor, you want to be investing with that public policy. So, it’s a great place to invest.”
Investing in electricity transmission projects in the US is the lowest risk way to gain exposure to the energy transmission and transition theme, as these projects are federally regulated and have attractive returns, he said.
And with the International Renewable Energy Agency expecting the vast majority of the spending across the global energy complex to be debt-funded or come from government grants, “that is, adding a whole pile of debt into the picture as well,” Langley said. “I don’t know if any of you have views on where bond yields go from here, but I think ‘up’ is the best guess.”
Rail is far more efficient than trucks and, especially, planes in shifting freight, Langley said, leading to a strong push towards rail and, more broadly, towards greener transport options.
And with gas usage through this decade set to remain stable as economies rely on gas while they transition to greener power sources, gas pipelines will remain useful and eventually will be repurposed to either transport green hydrogen or shift captured carbon to where it will be stored.
“So whether or not the actual pipes get reused – they can be re-sleeved – but it’s the easements that actually have the greatest amount of value on them,” Langley said. “The sighting and the environmental approval is going to continue to be more and more difficult over time, so those easements have got real value which we’re seeing being included in kind of the terminal values as we think about them from an investment perspective.”
Sonia Teitel, co-head of investment and development at Octopus Investments Australia said it is an exciting time to be in the renewables industry and she feels “like an astronomer when all of the planets are starting to align.”
There has been an obvious leap in energy prices, and part of the reason is Australia’s coal fired power stations are becoming less reliable with half of AGL’s fleet currently offline, Teitel said. “While this will be resolved promptly, high gas and coal prices won’t be resolved “for quite some time.”
And with half of the coal-fired power stations in NSW to shut over the next eight years, the state will need over $50 billion in investment across generation and transmission to replace this capacity.
Corporates are searching for ways to buy “green electrons” to achieve their net zero targets which is driving up near term demand for renewable energy and supporting new renewable projects. In the longer term the demand for electric vehicles will put further pressure on electricity prices. The challenge is to create enough renewable energy supply for electric vehicles so they can be charged at an affordable price, she said.
But after 10 to 15 years of project building, renewables technology is mature for solar, wind and storage.
“I believe we’re up for the challenge,” Teitel said. “We finally have state and government regulatory alignment. They’re committing real capital to build the transmission infrastructure that we need to roll out renewables.”
Growth in investors
Rebecca Mikula-Wright, chief executive at Investor Group on Climate Change (IGCC) and the Asia Investor Group on Climate Change (AIGC), said there has been a global explosion of net zero alliances across the entire financial sector, and a proliferation of net zero frameworks for implementation and target-setting protocols that investors are using.
Net zero asset managers is one of the fastest-growing areas, with 273 investors globally and over US$60 trillion in US assets under management committed to net zero, she said, noting 19 specifically are domestic Australian and New Zealand funds.
“I guess the difference between these very specific initiatives is the increasing accountability and transparency that these initiatives are asking of investors, and I think that’s been a cause for Australian investors to, I guess, take a slightly slower approach,” she said.
Of these global asset managers, 84 have specific targets and this has mostly happened in the last six to 12 months, she said. Australian asset managers can take confidence that “such a huge cohort of global asset managers are now making these commitments and working that through in their portfolios.”
But injecting a dose of hard reality, Julian Poulter, partner at Energy Transition Advisors, said his forecast is that it will be “very difficult indeed” to achieve net zero by 2050, and there “could be some pretty nasty macroeconomic and GDP implications in some of the fossil fuel dependent countries to even attempt it.”
“We simply can’t see a scenario where the policies are going to be in place in order to drive the returns to make it attractive for investors to provide the capital,” Poulter said.
“So these are all very real things but ultimately at the end of the day we think 1.5 [degrees Celsius above pre-industrial levels] won’t happen and we think a discussion is required pretty quickly to understand the implications of that, not just from a physical damages perspective because we’re pretty sure that governments will then try to claw back the overshoot but what’s the implications for investors?”