Infrastructure is once again a buzzword, as the US Senate is on the verge of authorizing $1 trillion in new infrastructure expenditure. We have long included funds that invest in infrastructure-related companies — utilities, transportation, communications, and energy transmission — in many client portfolios because, as essential service providers with limited competition, they tend to have relatively stable earnings and income streams.
According to conversations we've had with infrastructure asset managers, the biggest short-term beneficiaries of the current Senate bill are likely to be government contractors (construction companies, consultants, etc.), because most traditional infrastructure assets (roads, bridges, public transit) are owned by federal or state entities. Longer term, the worldwide shift toward renewable energy/decarbonization, driven by increased demand for electricity and data connectivity, represents a significant potential in infrastructure.
Renewable energy is becoming more popular for two reasons: Renewable energy – wind and solar – is carbon-free, and it is now the world's cheapest source of energy, with production costs falling dramatically over the last decade. Renewables no longer require public subsidies to compete with traditional sources (oil, gas, hydro, nuclear). As a result, renewable energy is predicted to generate 60% of the world's electricity by 2050, up from only 9% currently.
Currently, non-carbon sources account for around 38% of electricity production in the United States. Nuclear accounts for 20%, solar/wind/biomass accounts for 11%, and hydroelectric accounts for 7%. If decarbonized power is to reach the goal of 80 percent of total US generation, which is roughly double the current output, there will need to be at least a 5X increase in solar/wind/biomass output because the other two clean energy sources, nuclear and hydroelectric, are both environmentally concerned. Over a 10-year timeframe (assuming quick deployment), a 5X increase would equate to 17.5 percent yearly growth in renewables consumption with no increased electricity demand.
Simultaneously, the electrical system — from power generation to distribution and storage — is developing to meet rising demand and will necessitate significant investment. The International Renewable Energy Agency forecasts that worldwide grid expenditures of up to $100 trillion will be required over the next three decades.
$73 billion is allotted to US electricity and electronic grid enhancements in the $1 trillion infrastructure package now being debated in the US Senate. This is a minor step given the huge strain on power distribution caused by the rising reliance on electricity by vehicles and trucks, buildings, and industrial gear. Much more investment will be required, particularly for new facilities capable of storing and deploying renewable energy, which is not always available (lack of wind, sun).
According to our interactions with asset managers, publicly traded electric utilities provide some of the strongest long-term possibilities in infrastructure. Utilities are currently among the largest emitters of carbon dioxide and other greenhouse gases, but this might alter dramatically in the coming decade. The rationale for this is that if a utility gradually decommissions its coal facilities and increases its reliance on low-cost renewables, it may significantly reduce its operating costs and improve its operating profit.
One manager mentioned Xcel, which is investing in renewable energy while retiring ageing thermal units. Because these are regulated businesses, Xcel can charge customers for the hidden costs of coal-burning plant closures as well as the cost of investing in renewable energy sources.
Although utilities will be forced to pass on renewable energy cost savings to customers, their bottom lines will benefit as well. We are entering an era in which switching to renewable energy may be beneficial to both the environment and the businesses who make the switch.