In many ways, the energy crisis was a catalyst for energy investing. So what do investors need to keep in mind?
“What we’ve seen as a result of the energy crisis though is that decarbonisation or the energy transition must happen in a socially responsible way. By that, I mean we must focus on the security of supply. That really has seen a fast tracking of not only renewable investment, but investment into transmission grids as well as the recognition of transition fuel such as gas."
Can you discuss the key drivers behind the energy crisis?
The Russian invasion of Ukraine saw an immediate disruption of Russian gas supplies amongst other commodities. And this saw an increase in energy prices, which flowed through to power prices, but also into general economic activity like inflation. We had economic impacts, but we also had social consequences of the energy crisis, which came through in affordability. These are aspects to the invasion that we are still trying to mitigate in today's environment.
What do you see as the short- and medium-term outlook for the energy sector?
Decarbonisation has been a long-term infrastructure thematic for many, many years, and that's gone nowhere. What we’ve seen as a result of the energy crisis though is that decarbonisation or the energy transition must happen in a socially responsible way.
By that, I mean we must focus on the security of supply. That really has seen a fast-tracking of not only renewable investment, but investment into transmission grids as well as the recognition of transition fuel such as gas. I think what we've come out of the energy crisis with is a greater commitment to decarbonisation, but to do so in a way that we see security supply and social obligations met.
What has the crisis meant for infrastructure and 4D’s portfolio?
We’ve always been investors in decarbonisation. The crisis has actually fast-tracked that for us.
We’ve seen increases in growth profiles for some of these assets that can capitalise on the energy transition and the security supply argument. If you look at the real short-term impacts, which were really largely 2022 impacts, we saw those power prices shoot up rapidly. That was an impact on merchant generators or those that had exposure to the merchant pool. We don't believe that meets the infrastructure definition, so we were immune to that.
By contrast, the regulated utilities have a regulated model, so they're largely insulated. In saying that, there were some social consequences last year with affordability and passing through power prices. The regulated utilities did their part there as well, as support from government caps to ensure that there was a smoothing of power prices. We clearly saw volume disruptions and many of the gas transportation players capitalised on that and the higher commodity prices to improve volumes.
The overarching outcome of the energy crisis has been an improved growth thematic within infrastructure and in ensuring the security of supply.
How are you positioning for opportunities and risks that you see from this?
We are still exposed to the regulated utilities across Europe because they are capitalising on this opportunity.
We look at that through the integrated, regulated players such as Iberdrola SA (BME: IBE) or Enel S.p.A. (BIT: ENEL) who are really ramping up their growth pipelines.
We're also seeing it across the US where they are looking at their security suppliers well and looking at names like NextEra Energy Inc (NASDAQ: NEE). It's not just the utility names.
We're seeing opportunities arise out of this through the transportation names. They must also decarbonize if we're going to see a net zero world, but they also actually can capitalise on the outcome of this in high inflation because they get an explicit pass through.
Again, it just lends to our overweight to those assets within our universe that have that explicit inflation pass-through yet can capitalise on the decarbonisation opportunity.
Can you discuss some of the investments you expect to benefit from this?
We're actually capitalising on the opportunity set across all sectors of the infrastructure spectrum.
We're definitely investing in the regulated utilities that are actually building out the new generation as well as strengthening the grids. We're invested in the gas transportation networks out of the US as that is a transition fuel as we move through this energy crisis. But we continue to invest in the transportation names that are capitalising out of the negative outcome of the energy crisis in terms of inflation. We're capitalising on the whole spectrum.
Some of the names we are invested in are Iberdrola and Enel out of Europe, we’ve got NextEra in the US, we've got the transportation names around the world where there's an explicit inflation hedge.
