Some of the key trends worth highlighting are as follows:
1. Continued renewables development
The economics of new build renewable energy has already become far more attractive than those of coal-fired power generation, leading us to anticipate further coal plant closures in 2020. Since 2010, 102 gigawatts of coal-generating capacity has been taken offline in the US. This is forecast to increase to 119 gigawatts by the end of 2025. Renewable energy is taking its place with solar and batteries expected to take the limelight in 2020. Now that solar has become the lowest cost solution in certain (sunny) parts of the world, we anticipate growth rates in solar deployment will outstrip those of wind power. As batteries continue their already impressive cost declines, they will help firm up the intermittency of renewables, further enhancing the virtuous circle of declining renewable costs.
2. Attention shifts to the transportation sector
With the decarbonisation of the power sector well underway, attention is turning to the transportation sector, now the largest source of carbon emissions. Governments around the world are starting to encourage the build out of electric vehicle (EV) charging infrastructure to enable the adoption of EVs by the public and work towards net zero carbon targets. Regulated utilities stand to benefit from this theme. More electrification will result in increased load growth. Further, they will typically earn an allowed return on the capital expenditure needed for EV charging infrastructure, and for the smarter grids that will need to be built to efficiently manage that load.
3. Sustainable Development Goals increase profile
The once ambivalent US financial market is now starting to recognise that the United Nations’ Sustainable Development Goals (and, more broadly, ESG) matter to investors. In 2020, we will continue to engage with the companies we invest in and cover, to encourage better disclosure of and accountability to the Sustainable Development Goals. We anticipate that this will further differentiate those companies that are taking their social licence to operate seriously, from those that are only just starting to think about these issues.
4. Private sector investment in infrastructure continues
As government debt continues to rise, we see an increasing role for private sector funding of infrastructure. We expect a robust pipeline of fresh investment opportunities through (1) equity issuance by companies seeking to fund new capital investments (2) corporate restructurings leading to the sale of non-core assets and (3) the privatisation of electric and gas utilities, toll roads, airports and water/wastewater utilities.
5. Political environment remains uncertain – to a certain extent
While political and legal risks remain the most significant risks to the infrastructure sector, politicians of every stripe can agree on the need to replace aged infrastructure. Decent infrastructure is needed for cities to function properly and for communities to prosper. And while climate change looks set to remain a divisive political issue, the economic case for replacing older, inefficient coal plants with renewables stands on its own two feet.
So as we move into 2020, we see a positive outlook for the sustainable listed infrastructure space driven by:
(1) continued growth in renewable generation at the expense of coal-fired power generation
(2) opportunities for the private sector to help fund unmet infrastructure needs, and
(3) investment in aged infrastructure to ensure safety and reliability for customers
We will continue our engagement efforts on behalf of our clients to ensure that the investor community receives more consistent disclosure, and that companies are held accountable to perform their duties in a sustainable way.
Rebecca Myatt, portfolio manager, First Sentier Global Listed Infrastructure Securities
