built on a merchant basis, which can be quite volatile, but there are other ways to play the energy transition. For example, utilities are about 50% of the listed benchmark. They used to be viewed as stale and boring with no growth, but they are a huge beneficiary of the energy transition because to connect renewables, you need to build up the grid. The grid traditionally was built around a centralised energy infrastructure, where you had a huge coal or nuclear power plant supplying power directly to the end user. Now, there is a need to build connections for renewable energy to flow into the system.
Also, at the user level, distribution networks need to be built to support, for example, electric vehicle charging in the home, which requires a lot more power.
My point is, you can invest in this transition without taking merchant risk because utilities have regulated frameworks in place to remunerate them on that capex. If you look, for exam- ple, at US utilities, they are growing their earnings per share by 6% to 7% on the back of all the investments that are needed to make the energy transition happen.
It is important to have a broad view of how you can play these trends without necessarily taking a lot of merchant risk. Ebner: In principle, I agree with you. In detail, I don’t. There are utilities which are not performing under the current scenario. German utility Uniper and other utilities, especially munici- pality-owned, are suffering. Translated into more general words, you do not always get infrastructure-linked, highly regulated exposure when you invest in listed or unlisted infrastructure assets. Taj: You are right because not all listed assets in this space are worth investing in. Uniper buys gas from Russia to sell it on. In this environment, that’s a terrible business model. It is the same with Vestas and other sustainable energy-focused manufacturers who are in quite a weak position against the big renewable developers.
In an environment where liquidity is becoming more important, having listed infrastructure complement private is a great option to play in that space without some of the drawbacks that we see on
the private side. Florence Taj, MFS Investment Management
The key in the listed space is to find companies that have regu- lated assets and long-term power purchase agreements. In Germany, probably the closest to that would be RWE, which is transitioning to that model. You have to do a proper analysis to make sure that you do not end up with a stranded asset. Lloyd: In addition to those issues, investors prefer operating assets. Not as much capital is willing to invest in new builds, which is holding back the expansion of renewable energy. Investors want yield so greenfield does not work for them. Obviously, the more greenfield exposure you have in your port- folio, the longer it takes for yield to come through and the deeper your J curve. That deters quite a few investors.
With rising inflation and the invasion of Ukraine putting con- cerns over energy security in the headlines, is anyone seeing a change in attitudes towards renewable energy? Vanstone: From my perspective, there is quite a lot of capital flowing into greenfield renewables. We are seeing more parties in the operational renewables space, making it a highly com- petitive market and some investors are looking at adjacent are-
14 December – January 2023 portfolio institutional roundtable: Infrastructure
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