Over the past few years, there has been a growing availability of capital to support net-zero initiatives. The question is, are there enough quality assets to satisfy the demand for decarbonisation?
- A key focus of the COP26 global climate crisis summit in Glasgow is investment in new green infrastructure – great news for project financiers, debt and equity.
- However, many green schemes are not yet shovel-ready, as they used to say after the global financial crisis.
- Eager to capitalise on infrastructure as a new asset class, several investors are piling into transition schemes such as LNG.
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A new report from Refinitiv analyzes the issues surrounding COP26 and includes climate data, with proprietary charts from Refinitiv Datastream and Fathom Consulting.
This article was originally published in PFI, 2 November 2021.
Just before COP26 began, the host UK government set out its credentials with a 368-page “Net Zero Strategy: Build Back Greener” document providing guidance on how the country can get to net zero by 2050.
One answer is by spending £60bn plus a year over the next 10 years, with decarbonisation of electricity by 2035 alone due to cost between £285bn and £400bn. But how? The money could be there, let us see, but certainly for the time being the projects are not – not on that scale at least.
In a paper analysing the document, Darryl Murphy, head of infrastructure at Aviva, one of the largest UK investors, said: “A big plus for the government is the growing amount of domestic and international capital available to support net-zero initiatives… The big question is whether there will be enough quality assets to satisfy demand.”
Offshore wind leading the way
The net zero document identifies only one net zero sector that is currently capital markets ready – offshore wind. Long-term storage, energy efficiency and EV are moving in that direction, while hydrogen, advanced nuclear and carbon capture and storage (CCS) are in the R&D and prototype stages.
As a result, “much of the additional investment is required in sectors that involve early-stage technology or in markets where there is no defined demand. This will require financial investors to work collectively with industrial sponsors and the government to transform these markets from early-stage to mature technologies,” said Murphy.
As we have said before, investing and investment is one thing, paying for decarbonisation either via taxation or from consumer bills is another. But blending public and private finance is a further COP26 goal.
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Developed nations pledge to invest in decarbonisation in emerging markets
Japan said last week it would commit an extra US$10bn over the next five years to help meet the US$100bn pa target of developed nations investing in emerging markets decarbonisation projects by 2020, now a 2023 target.
US climate envoy John Kerry said the commitment “has the ability to leverage and to produce from the World Bank and other sources about another US$8bn”, ie US$10bn pa. That is some public/private leverage ratio – but then again in response to China’s Belt & Road initiative, Japan has become a leading overseas financier from state and commercial funds.
There are plenty of new project ideas and solutions – nearly all requiring public finance kick-starts. Market-led solutions are therefore exciting.
Air Products, as a global leader in the production of gray (not English Earl Grey) hydrogen, is probably not everyone’s cup of ESG tea but it is spending big on green and blue hydrogen solutions – US$7bn in Saudi Arabia and US$4.5bn in Louisiana. Its projects are not waiting to be structured, waiting for a grant or a subsidy, but are shovel-ready.
Hydrogen projects tracked in Infrastructure 360
The green Saudi scheme could see the start of construction early next year while the final investment decision (FID) has already been taken on the blue Louisiana scheme. Will the market be there by the time these projects come online in 2025/26? The Saudi scheme will rely on new transport markets, the Louisiana one on substituting gray for blue.
Infrastructure investors are seeking ways to pile into the energy sector
It seems an age ago when BG, before it was bought by Shell, started talking about selling the infrastructure assets associated with its Queensland LNG development. As a smaller global gas player, it needed to recycle its capital.
Now the approach has become the norm – allowing on the one hand investors to deploy large amounts of infrastructure capital quickly and on the other hand, allowing the energy companies to recycle capital quicker to invest in new projects or in new sectors such as renewables. EIG and GIP are currently looking to invest US$5bn in Australian LNG deals.
The idea has taken off in the Gulf. BlackRock was early into the game when it bought a 40% stake in ADNOC’s oil pipeline for US$4bn along with KKR, in 2019. Investors including GIC, Ontario Teachers’ Pension Plan Board and NH Investment & Securities bought 47% of ADNOC’s gas pipelines for US$10bn, while EIG paid US$12.4bn for a stake in Aramco’s oil pipelines. GIP? Apparently, it will not bid for the next deal, the Aramco gas pipelines, but says it sees investment opportunities exist in oil infrastructure, gas and LNG assets in Qatar, Kuwait and Oman. Plenty of cash, ready to go.
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