The Energy Transition and the Search for Energy Security: Implications and Opportunities for Listed Infrastructure

Natural gas prices have surged in recent months. Acute supply concerns in Europe have predominantly driven the surge, which has been exacerbated by severe heat waves that have increased demand for power and reduced traditional power generation capacity.

The impacts of the European natural gas crunch have reverberated across the globe. In the U.S.—a net exporter of natural gas—domestic natural gas prices have more than doubled in 2022, as U.S. liquefied natural gas (LNG) production has been running at full capacity.

As the energy crisis has worsened, politicians have been scrambling to shield consumers and businesses from the impact of substantially higher gas and electric bills, and have been searching for ways to ensure adequate gas supply for critical functions such as home heating and hospital power.

Governments around the world are seeking more safe and secure sources of energy supplies and resilient and reliable energy sources, while trying to manage increasing costs and balance the need to push forward lower emissions and decarbonization.

We believe the efforts to address these concurrent complex challenges will have wide-reaching implications across global listed infrastructure, creating potential substantial opportunities for investors in globally listed infrastructure companies due to:

  • A heightened urgency to accelerate renewables adoption to not only combat climate change but also provide regional energy security
  • A recognition that substantial utility grid development is needed to connect demand centers with new sources of supply
  • A growing call on U.S. LNG to support renewables intermittency, displace coal and offset losses of Russian supply

Determining the necessary balance between decarbonization and security of supply will require cooperation between policymakers and the private sector—as well as management of consumer expectations. It is a delicate balance that will succeed only if the right regulatory constructs are designed and implemented to incentivize sizable investments from the private sector.

We believe that only the private sector will have the financial capacity to make the large investments that we project are necessary in the coming years. This is because government finances globally are under pressure amid the severe energy crisis and large public initiatives taken to protect consumers during the COVID-19 pandemic.

Listed infrastructure provides investors with numerous ways to participate in, and potentially benefit from, this evolving energy landscape. We see opportunities across renewables and sustainable infrastructure, global diversified utilities, and energy infrastructure. 

Opportunities in Well-Positioned Renewables and Sustainable Infrastructure Companies

Policy support for renewables generation is accelerating at the same time that renewable energy costs continue to decline and fossil fuel costs are soaring. Renewable power generation is now nearly 50% cheaper to run than natural gas power plants in the current environment.

We expect renewable capacity additions (e.g., deployment of new renewable energy plants) to meaningfully accelerate through the end of the decade, creating investment opportunities in well-positioned renewables and sustainable infrastructure companies.

Opportunities in Utilities Supporting the Energy Transition

We believe the utilities that own electricity transmission and distribution assets will play a key role in a successful energy transition, as they connect sources of renewable supply with power demand.

Traditional sources of power generation, such as gas plants and coal-fired plants, are often located close  to population centers; these power generation sources simply require proximity to rail lines or pipelines to supply fuel. Wind and solar farms, on the other hand, need to be located where environmental conditions support the deployment of these electricity generation technologies at scale: effectively, in areas with reliable wind speeds and adequate levels of sunshine.

These constraints mean renewable energy supply sources are generally located farther away from power consumers than traditional energy sources. As the energy transition progresses and is increasingly viewed as a way to create the foundation for secure energy supply, we expect substantial investment will be needed to build and upgrade transmission and distribution infrastructure so it can connect sources of renewable supply with power demand. This should support the capital investment and earnings growth outlook for related utilities. 

Opportunities in Energy Infrastructure Amid the Search for Energy Security and Related to the Energy Transition

We believe North American energy infrastructure provides an attractive way to gain exposure to the search for energy security, as natural gas is now all but certain to have a key role in the global energy mix for decades to come. North American energy infrastructure companies will be at the forefront, ensuring the flow of natural gas to demand centers in the EU and Asia, as the world seeks steady supply from predictable and reliable trading partners such as the U.S. and Canada.

There also are signs emerging that energy infrastructure companies will have a role to play in future energy transition initiatives, such as hydrogen transportation and storage, and carbon capture and storage.

We believe an active approach is key for capitalizing on these opportunities, with deep understanding and analysis of regulatory contracts, policy initiatives, and company-level risk/reward and cash flow potential critical to identifying potential winners and losers in the coming years. While uncertainty remains, skilled active managers can potentially help investors find value as the world seeks to transition to cleaner energy while achieving secure and diverse energy supply.

We recently published a white paper that discusses our views on this topic in more detail: The Energy Transition and the Search for Energy Security: Implications and Opportunities for Listed Infrastructure.

About the Authors: 
Tom Miller has 13 years of industry experience and is a Portfolio Manager on the Public Securities Group’s Infrastructure Securities team at Brookfield Asset Management. In this role he oversees and contributes to the portfolio construction process, including execution of buy/sell decisions. Before focusing on his portfolio manager duties, he was responsible for covering North American infrastructure securities focusing on MLPs and the Energy Infrastructure sector. Prior to joining the firm in 2013, he worked at FactSet. Tom holds the Chartered Financial Analyst designation and earned a Bachelor of Science degree from Indiana University. 
Joe Herman has 12 years of industry experience and is a Portfolio Manager on the Public Securities Group’s Energy Infrastructure Securities team at Brookfield Asset Management. In this role, he oversees and contributes to the portfolio construction process, including execution of buy/sell decisions and is also responsible for conducting energy infrastructure research and analysis.  Prior to joining the firm in 2014, he was an Equity Research Associate with Tudor, Pickering, Holt & Co., and an Investment Banking Analyst at UBS Investment Bank, focusing on midstream and MLPs. Joe earned a Bachelor of Business Administration degree with majors in Business Honors and Finance and a Bachelor of Arts degree with majors in Plan II Honors and History from The University of Texas at Austin.
Joseph Idaszak has 10 years of industry experience and is a Director on the Public Securities Group’s Infrastructure Securities team at Brookfield Asset Management. Joseph is a dedicated Portfolio Manager for the Global Renewables & Sustainable Infrastructure team. He is also responsible for covering North American and European infrastructure securities focusing on the Utilities, Renewables, Clean Technology and Social Infrastructure sectors. Prior to joining the firm in 2016, Joseph was an Investment Associate at Silverpath Capital Management where he focused on Renewables, Utilities and MLPs. Prior to that, he was an Investment Banking Analyst at Goldman, Sachs & Co. where he focused on Renewables, Clean Technology, Industrials and Healthcare. Joseph earned a Bachelor of Business Administration degree from the University of Notre Dame. 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Disclaimer: Brookfield Asset Management is an Associate Member of TEXPERS. The views and opinions contained herein are those of the author and do not necessarily represent the views of Brookfield or TEXPERS. These views are subject to change.
  

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