Speaker 1The energy transition is remaking the global economy. From France to the Philippines, from Sweden to Soweto, renewable energy is becoming cheaper and more reliable with every passing year. Wind and solar power are being deployed rapidly and on a huge scale, while a growing range of green industries are rising up to take advantage of clean power. Around the world, the energy transition is being shaped by geopolitics, but is also shaping new geopolitical realities as nations rush to become leaders in the green industries of the future. In this special episode, sponsored by Euratio and Actis, we'll discuss the key worldwide trends shaping the landscape for energy transition investing. From Paris, we're joined by Laurent Chatelin, partner in the infrastructure investment team at Euratio, and Euratio's partner in the infrastructure investment team at Euratio. Thank you for joining us. I'm an infrastructure manager that focuses on the European market. And from London, we welcome James Mittell, a director for energy infrastructure at global sustainable infrastructure investor Actis. Chatelin and Mittell will talk about the global trade-offs between energy security and affordability as managers grapple with the immense opportunities, but never-ending complexities of investing in the megatrend of our era. I'm James Mittell, and I'll see you in the next episode of Euratio.
Speaker 2Transition in Europe is threefold. First, we see general development of businesses beyond production of low-carbon energy in all sectors of infrastructure, such as transport, such as circular economy, and that is driving a lot of capital into those emerging businesses which are operating in this low-carbon environment. Second, as we are in Europe, there's also a strong push from a regulatory standpoint. EU is quite strong at driving regulation to support this transition and also to ensure that sectors which are not already economically viable are also supported by regulation. And I give as an example, the push that EU did a decade ago in the renewable space that now continues on the fringe of renewables, such as renewable energy, which is very important for green hydrogen or biogas. And last but not least, the third driving force is coming from the users of essential services that are also looking to use services that operate in this low-carbon space.
Speaker 1Meanwhile, James Mittell says that in the vast emerging markets of the world, growing transition investment reflects pressures in the global energy system.
Speaker 3If I strip it back to what's driving energy transition globally, something I like to think about is this energy trilemma, right? You know, that's sustainability, security, and affordability of energy. And, you know, on the sustainability side, it's about globally, I think, you know, what's driving the transition is something which, thankfully, is kind of common knowledge now, I think, in most places, at least, around the fact that we need to decarbonize our world for future generations, or we're all kind of screwed. On the security side, you know, I think this is something that changes geographically, and unfortunately, on a global basis, we're in an interesting time, you know, where kind of European-Russian complications and things like this have driven an increased focus on energy security, and especially on a national basis. And then, of course, affordability, you know, industrialization and consumers, people need to be able to afford their electricity and energy to get around, to power their TVs and lights, to be productive, to do their daily lives, right? You know, these drivers, I think, globally, I think, what is amazing as to where we are today is, you know, last year, there was 1.8% trillion dollars invested into energy transition space. You know, that's a massive growth from where we were before. In 2019, that was $500 million. If you go back another five years, you know, it's kind of a tiny little block on the bar chart. So I think that that's really
Speaker 1interesting. Despite the rapid rise of renewable energy, investment has been unevenly spread. Africa, for instance, possesses much of the world's best solar energy resources, but receives only around 2% of annual clean energy. According to the International Renewable Energy Agency, Mattel believes, however, that emerging markets can drive the next wave of growth in the energy
Speaker 3transition. And if I think about emerging markets, you know, how we think about emerging markets, having invested for two decades, but also before that, you know, long 70 plus year heritage in these markets, we view them as growth markets. Obviously, they were different, but for us, it's 75% of the world population. And we view them as kind of rest of the world, or actually most of the world. So this is, you know, this is most of the world that we're talking about. And it's the largest carbon emitting part of the world. But yet at the same time, if we think about that trilemma, it's not fair in terms of the access that the people have in those countries to energy today, whether it's any electricity at all, or whether it's just sufficient electricity or energy access to be fair with, you know, the rest of the world. So that's driving investment in emerging markets. And you need to balance all of these things.
Speaker 1He tells us that investors can reap huge rewards when they explore the potential of emerging markets.
Speaker 3What we see alongside that is a fantastic opportunity today, because the fact is, in a lot of these kind of global self growth markets is they're windier than they are than Germany, they're sunnier than UK, and they've got access to land. Today, you can produce solar and wind electricity in these markets cheaper than you can from a fossil fuel alternative, cheaper than coal. So that's really driving investment in that space and energy transition. So we see that affordability combined with access increase, combined with decarbonisation driving that. And then really, it's about balancing those things going forward.
Speaker 1Meanwhile, in Europe, infrastructure investors have expanded their scope well beyond renewable energy generation. Chatelain sees several technologies developing that he believes can eventually offer infrastructure. I guess when you look
Speaker 2at energy transition, you need to consider all avenues that will allow to get out of fossil fuels. Today in Europe, same as for developing countries, renewable electricity is the most affordable source of energy. Solar and wind are cheaper than whatever fossil and even nuclear, which is a low carbon source of energy. And what's interesting is beyond that, there's also a need to push to the edge of energy production. I'm thinking about biogas, I'm thinking about biofuel, I'm thinking about green hydrogen. And depending on the kind of offtake contract you can enter into, and on your ability to structure those projects, they become more or less, they become more
Speaker 1investable. Aviation and heavy goods transport are among the hardest to abate sectors. Chatelain is optimistic that solutions could be at hand as green fuels become more commercially viable. However, he cautions that the devil is in the details, and those details need to be worked out before new technologies become investable.
Speaker 2I would say e-kerosene or SAF, sustainable aviation fuel, is a space which is quite promising. It's a molecule that is readily used in aviation, and there's a strong push to develop projects to enable producing SAF from sustainable sources with green hydrogen and biogenic carbon. We're not there yet, but it's definitely a space that we have on our radar. We have all the bricks that are coming together to make an interesting investable space. Green hydrogen is still in development. I believe it's still lacking support schemes so that green hydrogen can be produced at a cost which is more or less in line with black hydrogen. It's not yet the case, but Europe is thinking about schemes to green hydrogen. And beyond that, biogas is something that is quite developed in some countries and increasingly developing in other countries. Again, it boils down to the off-take agreements and overall the economics of each project.
Speaker 1Of course, some infrastructure managers are uncomfortable at any hint of technology risk in the asset class. Chatelain says, however, that risk is often less in the technology itself and more in how the technology can be scaled.
Speaker 2If I move from energy transition to digital, in 2015, when there were the first big fiber projects being financed and invested by infra funds, banks were looking at that as quite high technology risk, while in effect, fiber had been used for the past 10 years in telecom networks. Fast forward today, many managers deploy capital in that space and there's no more perceived technology risk.
Speaker 1He notes that similar dynamics are at play with the energy transition,
Speaker 2Hydrolyzers have been around for quite some time. the question is not really about the technology but how do you scale this technology same for your battery storage batteries have been around for quite some time the question is now how do you scale the use of battery to store electricity and more and more managers are investing into best the risk profile of those assets are becoming clearer and clearer which should also attract more capital more financing the technology risk has not really changed it's about the perception of it and the understanding of this technology risk we're not in the business of taking technology risk we're more in the business of scaling technology and ensure that these new ways of providing essential services being energy being transports being secure economy can be scaled and ultimately profitable in
Speaker 1emerging markets investors typically have to deal with very different questions around risk although the perceived risks in certain markets make some investors cautious mattel insists that these risks can be managed when investing in the energy transition
Speaker 3we've put in place over the last two decades tools that allow us to assess and ensure that we can mitigate that risk and manage it especially in the markets where we we operate which are perceived i'm doing some inverted commas here as more risky than developed markets perhaps yeah and i think that's a good point i think that's a good point i think that's a good point markets perhaps we talk about technology risk but it's not just technology risk it's working in infrastructure also got customer and revenue risk so historically in these markets we've sold to government they've got government credit and then we've been very careful to ensure those contracts have been gold-plated in terms of being honored by these governments the project finances are very much non-recourse around that and we put political risk insurance they're well bank mega type schemes along that and in the end we'd have a 20-year dollar contract with you know aaa credit rating effect essentially we'd have a 20-year dollar contract with you know aaa credit rating essentially behind that and it was very attractive from a risk return
Speaker 1perspective and mittel argues that commercial and industrial renewable projects in emerging markets can be extremely attractive from a risk and return perspective opportunities for investors in this space are immense he says
Speaker 3we started moving into the cni space as well because looking at these commercial industrial customers it makes a lot of sense for them to go renewable if i think about middle east there's a lot of commercial industrial activities predominantly this those markets are fossil fueled markets today if you put a solar panel on your factory roof it's going to be cheaper than your alternative from the grid it's carbon free and then in some markets like south africa you might not get any electricity from the grid so it's also more reliable so it's kind of a no-brainer from a commercial perspective and it's about structuring those contracts and that credit assessment in a way that we feel comfortable with and over time we got comfortable that now we're investing in cni so as we look forward we're now doing that with clean molecules of which hydrogen green hydrogen low carbon hydrogen is kind of the precursor to
Speaker 1that the favorable economics behind renewable energy in many emerging market countries are set to remake the world's economic map china and other asian countries have already become global manufacturing powerhouses mittel believes that with clean energy other emerging market economies could become leaders in industries such as steel making and other forms of mineral processing there's a very energy
Speaker 3intensive industries and for them to compete on a global basis you know they need to again be carbon free if you want to sell to europe you're going to have cbam you're going to have carbon pricing in in europe and so forth which is i think is a great thing then you're going to need the lowest cost energy you can get and if you can produce solar or wind at two us dollar cents three us dollar cents per kilowatt hour without subsidies in these markets and that's you know in the case of green hydrogen for example 70 of your cost of production it's kind of yeah it's a no-brainer and then it's actually around the complexities of delivering that practically on the ground
Speaker 1he points out that green industrialization in parts of asia and the middle east is already becoming a reality
Speaker 3and this stuff's happening there's a green dri plant that's in construction in oman now um you know the product will be compliant with red 3 and rfmbo regulations and there's going to be a lot of demand from european car makers for example for that green steel or green iron to be part of their process you know we're seeing these things happen green fertilizer port infrastructure is being built in india now right so they will export fertilizer or ammonia for that purpose so you're starting to see stuff being
Speaker 1built now where then does this trend leave heavy industries in europe many traditional industries have been struggling with soaring energy costs since the russian invasion of ukraine but chatelin is convinced the continent can still compete with india in the next few years so i think it's really important that people compete in an era of green energy heavy
Speaker 2industries need energy so at the end of the day it's the cost of low carbon energy that will prevail to ensure that those heavy industries are competitive the good news is that sun shines globally on the surface of the earth so if you put a panel south of europe you can have low cost solar energy and your benefits from a very good grid because once you have produced energy then you need to transport it and transport also of energy in the form of green hydrogen for example raises an issue because you may have low cost of electricity that allow you to manufacture low-cost green hydrogen but then you need to transport this green hydrogen on the place where you effectively use it and hydrogen is a very tiny molecule it's the tiniest molecule you can imagine it's h2 so all your pipelines of methane cannot transport massively green hydrogen and transporting on both is also
Speaker 1something challenging the key point he says is that industries tend to be more competitive when located close to power sources
Speaker 2because green electricity green molecules are produced locally they do not rely on imported fossil fuels which is a way to ensure and enhance and increase energy sovereignty in europe and just for that energy transition is quite appealing for europe so much so since the start of the war in ukraine where russian gas was feeding europe's energy mix and that has stopped now it has shifted to the us so now we're importing gas from the us oil is the same i mean europe is not a massive producer of oil and oil is imported into europe so you know transition of transport from fossil to electricity allows to increase energy security but also reduce cost of imports and on a net basis create a lot of value for european customers in
Speaker 1fact chatalin believes europe will keep looking to secure more investment in the manufacturing of energy transition components such as solar panels and electric vehicle batteries despite global competition to attract these industries
Speaker 2there is a push in europe to be industrialized and have the capacity to manufacture solar panels i mean currently most if not all of the solar panels are manufactured in china 300 gigawatt per annum because of sovereignty reasons security reasons weight is being put on ensuring that europe also has a capacity to manufacture solar panels same goes with batteries with the transition from ice to electric cars there's a strong push also on battery plants that are being developed across europe and if i bring back your geopolitics the us is also issuing a lot of legislation ria to compete with europe to provide the right environment and tax incentives for those battery plants to be developed in the us and same goes with china so this transition is all about where the politics meet the economics and meets also with the law of physics because renewable energy is manufactured locally below the cost of fossil fuel and then the question is what do you do with energy and that's where infrastructure stands i mean i always say infrastructure is all about energy is using energy to deliver an essential service so it's a battle for energy or carbon
Speaker 1energy as well as using green energy to fire up heavy industries mittel believes emerging markets can play a bigger role in exporting green energy directly to centers of demand in developed markets in terms of
Speaker 3actually exporting physical molecules or electron from these markets we will there's going to be very nuanced right so north africa is obviously quite close to europe so you have morocco chinesia egypt in particular i think we will see electrons you know eventually and it's been promised a long time from morocco but eventually travel from those jurisdictions into europe and that's because you know on the spreadsheet it makes eminent sense effectively a way to access low-cost almost base load power that's completely renewable and you know diversifies the kind of supply mix for those european countries versus importing fossil fuels from the us or elsewhere obviously the complication with that is to put a wire under the sea from north africa into europe is both expensive and very complicated from a political and development perspective but we are seeing those things advance now and it's something that we are looking at in the future um and it might do at some point so i think that will happen because it makes sense and in a zero carbon world it should be part of the
Speaker 1system mittel agrees that exporting green molecules will be challenging but says it will be done once developers find the right form in which to export these molecules you know i
Speaker 3think as laurent said shipping hydrogen hydrogen around the world doesn't make sense and you know it's a bit of a shame how much hype there has been it's almost been a stab in the own back or whatever you want to call it in terms of progressing that market sensibly but nonetheless there's a very significant opportunity to produce green molecules whether it's ammonia or pipes from europe into from from north africa into europe or importantly i think actually an alternative high value derivative whether it's iron that's been processed to some degree fertilizer for example you'll see a lot of export from these growth markets into europe and other places for that because it makes commercial fundamental sense and again it's really then more about the timing of that and the costs of that versus the alternative so gray fertilizer in europe might be cheaper than green fertilizer that's produced in a growth market today but that's because you haven't priced properly the carbon externality to go along with that so that will change over time
Speaker 1chatelin also agrees that integrating energy systems will be important though he says this is happening primarily within europe as well as between europe and north africa the
Speaker 2fundamental question is who will benefit from this interconnector country a or country b and what's again basically the business model for this interconnector there are a number of projects that are being developed to connect europe to uk there's a fundamental need from an energy standpoint for those interconnectors so these will will happen politics needs to align so that projects come to life and when you look at a bit further away effectively considering northern africa you have a lot of natural resource and gas that can be exchanged for energy so that's a big question and i think it's a big question with europe there are a number of pipes between italy and the dpr for example
Speaker 1the european union and national governments in europe have received much credit for helping stimulate investment in renewable energy over the past 15 years looking to the future however chatelin believes that europe could do more with less when it comes to regulation europe is
Speaker 2really leading the way when it comes to fighting climate change and providing legal framework for the transition to a low-carbon economy they've developed a taxonomy they've developed classification of financial instrument article six eight and nine the higher it is the greener it is but to answer your question i would say it's now to a point where it's quite complex to navigate in this regulation nonetheless because energy transition makes a lot of economic sense this is what is fueling the transition and that's when you look at the u.s also what is happening right now the u.s in some states is banning the use of esg when you you market the fund but because manufacturing low-carbon energy is cheaper than fossil texas is today the largest producer of renewable energy wind and solar and i can tell you they took those decisions to develop those solar and wind plants because it makes economic sense not because of climate regulation so in europe eu and local regulations are not the same as in the u.s so they're not the same as in the u.s so they're not the same as in the u.s so they're not the same as in the u.s so they're not the same as in the u.s so they're not the same as in the u.s so they're not the same as in the is supporting this transition but what we make it sustainable is the fact that it's a sound investment to invest in that space because you make a profitable
Speaker 1return emerging market governments are looking at positive examples from europe and the united states as they seek to stimulate green infrastructure investment while also deploying measures tailored to their local markets mittel highlights india as a success story in developing supportive policies so i
Speaker 3think what india has done really successfully is that it's been able to develop a lot of investment that's been able to deliver on a very sound technical economic kind of roadmap for renewable implementation but also other things like clean fuels that is giving investors the confidence to come and invest and through you know they have a target of 500 gigawatts of renewables by 2030 and if you look at where they've come from you know over the last 10 years it's astounding how much they're installing on an annual basis to go alongside that and we've built three businesses now and five plus gigawatts of wind and solar over the last decade doing that and we're still doing that and we're still doing that and we're still doing that and we're still doing that and we're still doing that and we're still doing that and we're still doing that and we've built three businesses now and five plus gigawatts of wind and solar over the last decade doing that and there's almost too much opportunity actually to go after and why does that make sense because the wind and solar they're producing is cheaper than the alternative you know india is dependent on importing lng or it's burning coal right and coal is as dirty as it gets
Speaker 1in africa by contrast metal explains the different dynamics are at play what we
Speaker 3don't have in places like africa the ability to subsidize significantly or provide carbon pricing so it needs to make technical commercial sense and really it's about therefore just providing as much clarity to an investor from a policy perspective that they're welcome in the country to come and participate and provide fdi and operates there you know i think we see more of that happening
Speaker 1another challenge investors face is political controversy surrounding the energy transition while the rise of esg has helped wet lp appetite for green investing the notion that investors should be taking environmental social and governance factors into account has come under attack and especially in the united states chatalin however is convinced that energy transition investors can rise above the political fray again
Speaker 2for me making sustainable investments is just a sound business decision you want to ensure that in particular when you invest in infrastructure which are very long-term assets that those assets along the way will not become stranded and for operate those assets. And when I look at ESG, I think in particular about carbon and to ensure that you invest in an asset that will operate in a low carbon economy in the future. Where it gets a bit more difficult, and I guess that's where the US is coming from, is when you impose too much restriction using ESG framework. US is really business driven, so they want to ensure that you maximize return, which is what we do day in, day out when we manage our portfolio.
Speaker 1And he insists that political controversies will not delay the transition.
Speaker 2For me, there's no turning back. We're not turning back to fossil. We have to decarbonize. And we are at a very interesting moment where actually it makes business sense to effectively invest in low carbon infrastructure.
Speaker 1Mittal echoes these thoughts, insisting politically motivated arguments that the US is not going to be able to do that. cannot be allowed to interfere with sound investment strategies around energy transition infrastructure.
Speaker 3Actually, what we're talking about, what we're investing in is in our markets, especially as a secular mega trend, right? And our LPs and investors see that it's not about ESG necessarily, you know, that's kind of comes along with it. But it's the scale of the need for the infrastructure in these markets is so huge. It's essential for these markets. And you know, this critical infrastructure for the transition, in these markets is what gets them comfortable and, you know, provides development characteristics for LPs anyway.
Speaker 1Infrastructure investors certainly face busy times ahead, as the energy transition continues to accelerate. And let's remember, this transition is both a local and a global phenomenon. Global in that it's helping to reshape the global economy, and even the global balance of power. But local in that it's providing new pathways, for businesses and households, to break free from dependence on fossil fuels, and take advantage of new opportunities. Thanks again to Lauren Shatterlin from Euratio, and James Mattel from Actis for joining us. If you want to hear more episodes, you can subscribe to the podcast wherever you like to listen, or head to infrastructureinvestor.com. There you can also get all the news and analysis you need. On the institutions, the funds and the transactions shaping private infrastructure investment. Our producer on this episode was Evie Russman. And our audio editor is Eric Fish. For Infrastructure Investor, I'm Ben Paton. Thanks for listening.
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