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Why green infrastructure investing looks increasingly attractive

I didn’t really know how a hydrogen cooker worked until a few weeks ago. But we may need to get used to it.

In fact, gas hobs – like petrol pumps and boilers – all look to become a cute relic of the past for the next generation, as governments plan their green power transition.

This really matters for investors. In the UK, we are looking at one of the largest multi-decade flows of capital we’ve seen outside war, with £350bn set to be invested in low-carbon technology over the next 30 years. 

Investors used to sneer at carbon capture and storage. But they are starting to be taken more seriously, as governments seek every opportunity to hit their 2050 zero-carbon targets

Globally, the trend is the same but the numbers are even larger, running to several trillion. US president Biden is talking of $2 trillion. 

We believe investors are set to respond by taking green infrastructure really seriously – viewing it as a means to match liabilities, rather than an act of faith.  

In effect, they will follow the money. 

Bonds and equities will still have their place in the asset allocation mix, of course, but diversified green opportunities will stake out more of the middle ground.

There is also a chance for governments and developers, to shape assets for their own purposes, to satisfy the aspirations of long-term asset-owners. 

No more than 30% of UK wind farms are owned by institutions at present. But the proportion is set to grow fast, to judge by current levels of interest we are seeing.

Long-term investors brought up to invest in real estate and equities could start to develop green assets which may not be mature but offer safer growth opportunities than shopping centres, these days.  

For those investors able to take the time to embrace the vision and understand the assets, we think the opportunities are multiplying. 

Lord Adair Turner echoed this view in comments recently to the Pensions and Lifetime Savings Association (PLSA) conference, describing a Net Zero transition as offering “attractive” returns for pension funds.

Wind farms seemed a futuristic asset just a decade ago but they have matured into a stable, dependable, cashflow. They offer stable, inflation-linked income with higher yields than bonds and global investors are keen to keep investing as further capacity comes on stream. 

I believe nuclear is also set to make somewhat of a comeback. The projects have a chequered history in different parts of the world but the use of a regulated asset base regime in the UK, which offers defined returns to investors, means the sector is likely to become much more investor-friendly as risks fall.  

Batteries could become a huge asset class in their own right given the sheer demand for electricity storage in a grid dominated by renewables. The technology is still maturing and revenue mechanisms need to be pinned down for investors to get comfortable but the success of huge giga-factory projects across Europe and Australia suggests other countries will want to step out. 

Investors used to sneer at carbon capture and storage. But they are starting to be taken more seriously, as governments seek every opportunity to hit their 2050 zero-carbon targets. These facilities might for example earn credits for the carbon they capture, which could be sold to carbon-producing companies as a revenue model.

The creation of a National Infrastructure Bank is a good step forward for the UK, as it will decrease execution risk by being a cornerstone investor giving projects greater execution certainty. Some of these ideas will remain uninvestable by private capital for years and the Infrastructure Bank has a role to play here. 

There are potential unintended consequences: crowding out of the huge private sector demand for assets, for example, or the risk that projects loading up excessively on subsidised debt. But the risk/reward calculation is probably balanced the right way.

Dan Mikulskis is a partner at LCP and lead investment advisor to large institutions

 

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