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If the world is going to meet its net-zero targets, investments in clean energy assets will need to increase to US$4.5 trillion per year by 20301. Without that kind of capital infusion, there will be a significant infrastructure spending gap estimated at US$15 trillion2 by 2040. This could hamper everything from modernizing the electrical grid to creating carbon capture solutions and more.
To better understand the energy transition’s infrastructure needs, and the opportunities for investment, we spoke to Jessica Kennedy, a Toronto-based Managing Director of Infrastructure with Northleaf Capital Partners and Olivier Laganière, who leads Northleaf’s infrastructure investment activities in the North American energy transition and renewable energy sectors.
A maturing market
At current spending levels, only US$79 trillion of the estimated US$94 trillion needed for transition-related infrastructure spending by 2040 is in place1. As a result, there is a significant opportunity for Canadians who are interested in investing in private infrastructure.
The challenge for investors is that the infrastructure sector is incredibly vast, which can make it difficult to find profitable projects to buy into and identify opportunities that can provide lasting impact. Infrastructure investments range from small local projects to multi-billion-dollar national projects, and vary in risk and return metrics. “The energy transition is massive,” says Kennedy. “A lot of it is still risky, but we are starting to see the maturation and development of certain asset types, such as within energy storage and decarbonization.”
Laganière adds that when it comes to the evolution of transition-focused infrastructure, the investments required aren’t keeping pace with the demand for renewables, carbon capture, energy grid upgrades and more. “There continues to be more capital coming into the space, but as that’s happening, the need continues to expand and outpace the capital coming in.”
Focus on decarbonization
A lot must happen within the infrastructure space for North America, and indeed the world, to reach net zero, notes Laganière. He thinks of transition-related infrastructure as anything related to decarbonization. Within that definition, there are specific areas that need investor attention: “electrons, molecules and everything that’s needed to connect the two,” he says.
The former relates to power generation, the shift toward more electrification and, ultimately, solutions that prevent more carbon dioxide from entering our atmosphere. One of the biggest opportunities in this category is around modernizing the grid, which is facing enormous pressure on multiple fronts, from the increase in electric vehicles and charging infrastructure to more renewable power sources coming online.
The insatiable need for power-hungry data centres required to run artificial intelligence solutions, cloud computing platforms and Internet of Things technologies will put even more pressure on the grid. “The demands are going to be pretty extreme, and the grid has already fallen behind,” he notes.
Solar power developments are helping to bridge this demand gap with a ”green” solution, but the intermittency of the resource means the power is not always available on an as-needed basis. That can be a problem as there aren’t enough transmission or battery storage solutions needed to retain — and later redeploy — the excess energy. To meet increasing energy demand, more natural gas plants will have to come online, too, Laganière explains.
The search for attractive assets
More generally, private infrastructure investing is becoming more attractive to the retail market because such assets as bridges, roads, airports and, increasingly, energy transition-focused assets offer investors an opportunity to gain exposure to assets whose returns are uncorrelated with broader markets and often generate yield.
Northleaf manages a private infrastructure fund that Mackenzie invests in for its Mackenzie Northleaf Private Infrastructure Fund. Northleaf also manages other private equity and credit funds focused on the mid-market, which encompasses companies with an enterprise value below $1 billion, versus large-scale projects. “There are only so many large assets. That’s why we find more relative value and a wider opportunity set by staying small,” says Kennedy.
Typically, attractive infrastructure investments provide stable, ongoing revenues and have long-term contracts in place so that assets can continue to be profitable for years to come. Laganière and Kennedy are looking for these kinds of assets — both within the traditional infrastructure space and the energy transition segment.
For instance, when they first entered this space in 2012, they invested in a UK-based rooftop solar company, which benefited from a government utility program that offered a 20-year fixed-rate contract to pay for all of the power generated. This gave them more certainty around their expected potential long-term returns. They later invested in a wind farm in Ontario, where, again, the utility signed a 20-year fixed-price power purchase agreement, and a 500 MW solar installation in Spain which was — upon completion — the largest standalone operating solar project in Western Europe.
More recently, Northleaf took a controlling stake in EVPassport, a Los Angeles-based infrastructure-as-a-service (IaaS) company that builds and deploys EV chargers. It doesn’t take the typical “build it and they will come” approach, which involves selling chargers to a buyer with a markup or putting a charger in a parking garage with the hopes of people paying for access and usage. Rather, the company enters into contracts with property owners, such as residential complexes, retail locations and office towers, where the property owner sees chargers installed on a turnkey basis in exchange for an ongoing monthly fee.
“The company knew that they would have a lot of customers who would like to have chargers installed at their locations if they didn't have to pay upfront and didn’t have to take on all the installation effort,” says Laganière. Because of the subscription model, “even in the worst-case scenario, the company still gets an acceptable return, which is why we can be comfortable with the underlying risks.”
Energy transition has evolved since Northleaf started investing in the sector, with returns for government fixed-price contracts coming down, which has made finding good opportunities more challenging. Northleaf has looked for other opportunities within the sector, such as EVPassport, to invest in energy transition investments that still have a focus on contracted cashflows. “The biggest shift has been trying to find those quality revenues in a much more crowded space,” says Laganière.
For Laganière and Kennedy, those opportunities are there — and they’re expanding. “The entire infrastructure landscape, including within the energy transition space, continues to grow and develop and change, and that’s positive for investors,” says Kennedy. “There’s a lot to do.”
Find out more about the Mackenzie Northleaf Private Infrastructure Fund here >
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