This article is sponsored by Antin Infrastructure Partners, CIM Group, Fengate Asset Management and Fiera Infrastructure
As the US presidential election draws closer, concerns that Donald Trump could upend the $369 billion Inflation Reduction Act should he gain power are growing. Few believe that the legislation will be repealed in its entirety, but ITCs and PTCs, as well as regulation designed to support the electric vehicle industry, are deemed by many to be at risk.
George Theodoropoulos, managing partner at Fengate Asset Management, is sanguine about the future of America’s energy transition industry, however. “Renewable power is big business in the US and most of that business is taking place in small town, rural America, in other words Republican strongholds.
“At the same time, many states now have laws requiring utilities to procure a given percentage of power from renewable sources. Those laws will still exist if the IRA is repealed. Finally, corporate America, and big tech companies in particular, are huge users
of electricity and they are prioritising the greening of their operations,” he says.
“Those three factors alone mean we don’t see the renewable energy industry being significantly impacted should the IRA be repealed. That ship has sailed. Renewable power is here to stay.”
Kevin Genieser, managing partner at Antin Infrastructure Partners agrees, adding that the cost competitiveness of both solar and wind is also a factor in renewables’ favour. “Economics is still a primary driver of power purchasing decisions,” he explains. “While ITCs and PTCs were important for getting wind and solar off the ground, significant reductions in cost, together with improvements in storage, have made renewable energy the more attractive choice today, regardless of what may happen under any potential new administration.”
Transmission bottlenecks
For many infrastructure investors, transmission bottlenecks are a bigger concern than political risk, particularly with the imminent explosion of AI. “Grid operators have grown accustomed to working in a stable environment, but the advent of AI is heralding a spike in demand for power,” says Jennifer Gandin, principal, investments, at CIM Group.
“The ISOs are still largely in denial. Some are even saying that demand on the grid is going to go down because of rooftop solar, which is laughable. We need to see major institutional change when it comes to how ISOs plan for growing load and I think that is going to take a long time.”
“There is a disconnect between the renewable energy that is required to meet the 2050 net-zero target and the transmission capacity required to take those energy supplies to market,” agrees Jamie Crotin, managing director at Fiera Infrastructure.
Despite a clear need for enhanced transmission capacity, transmission is not a sector that most infrastructure players view as an attractive investment opportunity, however. “Returns on transmission are low and development timelines are long,” says Crotin. “Those types of projects are not suitable for mid-market funds like ours that also require near-term yield.”
“Grid operators have grown accustomed to working in a stable environment, but the advent of AI is heralding a spike in demand for power”
Jennifer Gandin,
CIM Group
“Transmission is tough,” adds Theodoropoulos. “It takes years to develop a transmission line. We are under pressure to put capital in the ground today. The way we are addressing the transmission and intermittency challenges that states like California and Texas are facing, therefore, is through investment in battery storage. You can get battery storage projects permitted quickly. It takes a year to develop and then a year to build – so, around two years in total before you are generating cashflow.”
Genieser says that transmission challenges are creating opportunities in terms of onsite generation and demand response. “There are opportunities to invest close to the customer base, dealing with the demand side, rather than focusing on getting power from one place to another via new transmission lines, which always require a huge number of approvals and take a very long time to come to fruition.”
Gandin, meanwhile, adds that there are opportunities to invest in transmission outside of the ISO markets, by working on smaller-scale transmission projects in partnership with local utilities.
Hydrogen hype
Green hydrogen is another sector that many infrastructure investors are still struggling to get their heads around. Furthermore, while long awaited clarity on tax credits is to be welcomed, the industry has been largely disappointed by the guidance that was delivered earlier this year.
“The guidance has made green hydrogen projects quite complex, with the requirements to match clean energy supply with hydrogen production, and we have seen a falloff in discussions regarding those types of projects,” says Crotin.
“Renewable power is big business in the US and most of that business is taking place in small town, rural America, in other words Republican strongholds”
George Theodoropoulos,
Fengate Asset Management
Genieser adds that Antin has chosen to play in the picks and shovels around the green hydrogen goldrush, rather than in hydrogen production itself. “We have focused on investment in hydrogen storage systems – effectively mid-stream services, regardless of the colour of the hydrogen.
“While green hydrogen production remains a nascent and still challenging sector, we do think that hydrogen will have a role to play in industrial applications. Indeed, we are already starting to see that taking shape in Europe. I think that is one trend that is going to travel this way across the Atlantic.”
Theodoropoulos, however, says that the dynamics in Europe are very different to the US. “North America is sitting on an ocean of cheap, natural gas. That isn’t the case for Europe, which has to import its gas from Russia. I don’t think these newer technologies such as green hydrogen are for infrastructure investors. We are not pioneers.”
IRA wins
Despite disappointments when it comes to particular aspects of the IRA, such as hydrogen tax credits, infrastructure investors are overwhelmingly positive in their appraisal of the package overall and would certainly lament its unravelling.
For Gandin, the separation of the investment tax credit that tied batteries to solar and wind has been a highlight. “Being able to apply credits to batteries themselves has led to the dramatic expansion of the battery systems installed in power markets.”
“The ability to sell tax credits under the IRA has also increased liquidity in the tax equity market,” adds Crotin.
For Genieser, it has been the ability to take a long-term view on credits that has proved most helpful. “Prior to the IRA, ITCs and PTCs were only ever renewed for a year or two. It is difficult to operate in the power development business with such short windows. Having a 10-year extension has been a huge benefit.”
Meanwhile, Canada has also implemented its own $80 billion version of the IRA. But this has yet to produce many meaningful opportunities. Theodoropoulos says this is because in much of Canada there is no bilateral, merchant market. “The only province in Canada that has a true merchant market is Alberta. We are seeing activity there, but it is limited in scale.”
Genieser agrees: “We like Canada, but the way the power markets operate there is fundamentally different. It is tough to see exactly where to play, but we do continue to look at opportunities.”
Digital developments
Outside of the energy transition, it is digital infrastructure, and data centres in particular, that are dominating the industry discourse. But the data centre world is primarily populated by large-cap players today, leaving limited entry opportunities for mid-cap managers.
“If you are not already invested in data centres, it is very hard to get in right now,” says Theodoropoulos. “We are fortunate to have made a small investment in a Canadian start-up data centre business, eStruxture, five years ago. eStruxture is now the largest Canadian data centre platform.”
eStruxture was initially a colocation data centre business but is now moving into hyperscale territory. “We are signing long-term contracts with the big tech companies,” he explains. “Canada is a great location because it is cold, and electricity generation is largely green. It is also deemed a safe place to store your data.”
“We are big believers in the continued transition of truck to rail based on both economics and environmental footprint”
Kevin Genieser,
Antin Infrastructure Partners
CIM Group has taken a similar approach, investing in a data centre company several years ago. “The way that business is differentiated is that it was one of the first platforms to adopt waterless cooling, because water is so scarce in the geographies where it operates,” Gandin says. “Data centre users are coming under increasing pressure to reduce water consumption so that business has attracted a lot of interest from the hyperscalers.”
Crotin, meanwhile, says that the data centre business is a “big boys” game today, requiring a lot of capital. “The way we are playing that trend is by providing fibre connectivity,” he says. “Our fibre platform, Conterra Networks, has developed good relationships with the hyperscalers who are locating new data centres near large power supplies, which tend to be away from population centres. They therefore need fibre to be deployed to connect those data centres.”
Genieser, however, highlights a number of challenges in the data centre space. “A lot of the market expansion we are seeing involves services more than infrastructure. I also think there is a lot of churn in the colocation space, while I question how some of the big players are going to exit. Options will be limited. That has given us pause for thought as well.”
The data centre industry is not the only corner of digital infrastructure to be experiencing difficulties. Spiralling costs and overbuild pressures mean the North American fibre sector has faced its fair share of challenges, as well. Infrastructure investors are still finding opportunities in less competitive markets, however.
“More infrastructure funds are investing in fibre and incumbents are getting smarter about attracting customers, so the market is becoming more competitive,” says Crotin.
“In anticipation of this development, Conterra Networks, which we acquired back in 2021, targets commercial customers in less competitive smaller cities and towns, leveraging its existing network in those areas, building density and bringing down costs. In that way, we have been able to mitigate competitive pressures and have shown strong growth over the past few years.”
“More infrastructure funds are investing in fibre and incumbents are getting smarter about attracting customers, so the market is becoming more competitive”
Jamie Crotin,
Fiera Infrastructure
Antin has pursued a similar strategy with its North American fibre investments. “We have an enterprise fibre business which targets second and third tier cities, where there are not as many players,” says Genieser.
“We also have a fibre-to-the-home platform which operates in areas where there is limited competition. There is real demand for residential fibre given work from home trends. Overall, we still like the dynamics of the fibre market, where it is possible to sign long-term contracts with high quality counterparties.”
The future of transport
The North American transport sector is also producing some interesting opportunities, driven in part by the move towards onshoring, according to Gandin. “We are seeing opportunities in short line rail, small ports and intermodal, all driven by the emergence of new manufacturing hubs.”
Crotin agrees. “We are not seeing many traditional road assets, large ports or airports. Transport has become more of a niche strategy focused on smaller, more local assets and transport-related services businesses.”
“Short line rail is definitely going to be a major theme. We are big believers in the continued transition of truck to rail based on both economics and environmental footprint,” explains Genieser.
Theodoropoulos, meanwhile, is eyeing opportunities in airports. “We are seeing a lot of flow, particularly in cargo, aircraft storage and terminal projects,” he says.
“Traffic volumes are up on pre-pandemic levels and unlike most other first world countries, the US population is continuing to grow. That all bodes well for the airport sector.”
Meet the panel
Jennifer Gandin
Principal, investments, CIM GroupJennifer Gandin joined CIM Group in 2003 and serves on the firm’s investment committee. She represents CIM on the boards of SkyPower Global, Bolder Industries and IENTC Telecomunicaciones.
Jamie Crotin
Managing director, Fiera InfrastructureJamie Crotin heads the development and execution of new investment opportunities at Fiera Infrastructure. He previously worked at RBC Capital Markets, JPMorgan and Fieldstone.
George Theodoropoulos
Managing partner, Fengate Asset ManagementGeorge Theodoropoulos is responsible for the strategy, investment and asset management of Fengate’s infrastructure funds. Prior to joining Fengate in 2009, he was head of RBC Capital Markets’ Canadian Infrastructure Advisory Group.
Kevin Genieser
Managing partner, Antin Infrastructure PartnersKevin Genieser joined Antin in 2017 and is a member of the investment committee. He previously spent 20 years with Morgan Stanley, and also worked at Credit Suisse First Boston.