The energy transition offers abundant opportunities for infrastructure managers to deliver value, says Niall Mills, Managing Partner, Global Head of Igneo Infrastructure Partners
The energy transition is driving key opportunities in hydrogen, transportation, and carbon capture sectors. It’s changing how industries develop and operate.
One of our assets, enfinium, is an energy-from-waste operator aiming to commercialize carbon capture. Its pilot scheme, proposing to install carbon capture and storage technology, was recently designated by the UK government as a ‘Project Of National Significance’. This is how we invest in proven technologies through hard assets, where we can see the pathway to commercialization on a riskadjusted basis. It is fundamentally different from broader energy transition funds, which invest in new start-ups and technologies.
I think emerging economies present opportunities for greenfield renewable energy development. Just as some countries in Asia and Africa went to online banking via their mobile devices, bypassing traditional banks, developing economies can go straight to green energy and bypass transitioning away from legacy assets.
On a macro level, we expect that LPs will be watching out for inflation and changes in interest rates this year – the high levels of both have created a denominator effect in recent years, which has not subsided. As fixed-income money funds are earning good returns for almost no risk, demand for direct investments in renewables has softened in 2023 and 2024. We hope inflation will come down to a long-term norm, which attract more capital to the asset class.
In our experience, LPs are always looking for high-quality business platforms with multiple revenue streams and low future risks. In those respects, well-managed renewable energy infrastructure assets provide value. We manage a 50% stake in Terra-Gen, a renewable energy producer in the US that operates and generates revenue across more than 1.3 GW of wind, solar, and energy storage facilities. We also have a stake in Finerge, the second-largest renewable energy producer in Portugal, which operates 81 wind farms and 17 solar photovoltaic farms to deliver 1.9 GW of renewable energy. The business has a fully integrated platform with a 25-year track record and is supported by the government through subsidies. On that note, LPs will be seeking to avoid merchant risk, which occurs when governments withdraw such subsidies when the industry matures, and renewable energy developers are exposed to wholesale prices.
First, macroeconomic shocks can affect cash flow. Conflicts in Ukraine and the Middle East resulted in a marked slowdown in investment and transactions last year. However, we have already seen some recovery in the last three months and hope it continues through 2024.
A universal challenge around infrastructure funds is regulatory interference or lack of clarity on regulation, which can stall investment.
However, environmental, social and governance (ESG) regulation coming out of Europe has established standards and equal benchmarks, which will be influential in promoting infrastructure investment across the industry. In our view, good ESG regulation eliminates distraction, which has previously resulted from commercial providers selling ineffective benchmarks. It reduces risk, improves value, and supports investment teams. We are optimistic that it will improve the ‘investibility’ of the asset class and improve risk-adjusted returns.
About
Niall Mills is the Managing Partner and the Global Head of Igneo Infrastructure Partners based in London. He is a member of the EDIF I, II & III and GDIF Investment Committees. Niall is also a member of the executive leadership team of First Sentier Investors, Igneo’s parent company. He currently sits on the board of investee company Anglian Water Group. Prior to joining the team in 2008, Niall worked in industry holding senior roles at Southern Water, Honeywell, Bechtel, and United Utilities.
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This article originally appeared in APAC Q1 2024: Preqin Quarterly Update. The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and Igneo Infrastructure Partners accept no liability for any decisions taken in relation to the above.