Infrastructure: Greening the Grey

The future is electric

Indeed, decarbonisation is the order of the next few decades. Weaning the global economy of a debilitating carbon addiction is vital to avert an outright climate disaster. The good news is there are viable energy alternatives. In a net-zero future, renewable energy technologies like solar and wind will be critical for power generation while carbon-free electricity will likely become the main energy carrier of choice.

The International Energy Agency (IEA) projects electricity to account for about 50% of all final energy use in 2050, up from a paltry 20% in 2020 (Chart 1). Meanwhile, the agency also expects the global economy to shift well away from fossil fuels by 2050, with renewables accounting for nearly 90% of electricity generation (Chart 2).

Chart 1: The share of electricity in final energy use is expected to jump from 20% in 2020 to 50% in 2050, in the path to net zero.

_{Source: International Energy Agency (2021), Net Zero by 2050, IEA, Paris. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realised. *Carbon Capture, Usage and Storage. ** Photovoltaic.}

Chart 2: Renewables are expected to account for the bulk of electricity generation by 2050.

Fuel shares in total energy use in electricity generation in the path to net zero

^{Source: International Energy Agency (2021), Net Zero by 2050, IEA, Paris. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realised.}

Hey big spender

Already, governments around the world have pushed ahead, with varying degrees of success, the electrification of public transport systems, incentivising electric vehicle (EVs) adoption and modernising power grids. However, public spending alone may not be enough to achieve net zero outcomes by 2050.

After all, going green is not cheap, and the IEA expects spending on electricity systems – electricity generation, storage and distribution, and public EV charging – to near triple by 2030 if the world is to be on track to achieve net zero carbon emissions by 2050.

Such spending entails heavy investments in a more comprehensive network of EV charging stations and upgrading electric transmission and distribution grids to be more flexible to cope with the rising share of renewables such as wind and solar in electricity generation. In turn, power generating companies will have to ramp up wind and solar capacities by upgrading existing infrastructure or building new ones.

Moreover, the broad-based adoption of end-user carbon-efficient goods may sprout new sources of demand for support infrastructure which may itself spark a virtuous cycle of necessary investments.

Take EVs as an example. As the penetration of EVs improve with greater awareness, better incentives for substitution and more accessible charging networks, demand for electricity will likewise increase. This necessitates further spending to build out renewables, transmission networks and storage capacity so as to keep pace with the rise in demand for electricity and to ensure essential services remain uninterrupted in spite of greater usage. Better support infrastructure improves the convenience of using EVs which further encourages adoption and demand. In turn, this may stoke even more spending on infrastructure to support the increase in adoption and EV usage.

As can be gleaned from Chart 3, electrification is a massive undertaking, one in which governments cannot take on alone. The urgency to secure net zero emissions sooner rather than later also translates to an acceleration of spending in the next decade.

Chart 3: Going electric is not cheap, according to the IEA. Significant investments will be necessary in the next few decades.

You have to spend money to make money

Given the enormity of the task, the private sector is key to ease pressure on public finance. Infrastructure companies such as electric utilities and toll roads will play a pivotal role in mobilising private capital to invest in a greener future. Governments will likely work in partnership with these companies to execute various green infrastructure projects, be it modernising power grids, building and/or extending electric transmission lines or expanding EV charging networks.

These infrastructure companies typically hold long-term contracts with governments that define an allowed rate of return on their asset bases. Spending on infrastructure upgrades and/or new infrastructure builds will expand asset bases and in so doing, boost earnings, cash flows and dividends.

As the arc of public policy bends increasingly towards decarbonisation, green infrastructure projects will be plenty and their scale, significant. This will be a key tailwind for infrastructure companies that are well-positioned to undertake these generation changing projects and therefore expand their asset bases.

Given that we’re only in the nascent stages of a multi-decade transition towards a net-zero global economy, the runway for growth is long and attractive. As it stands, major decarbonisation initiatives are already being discussed and debated in the world’s largest economies, setting the stage for a potential deluge of infrastructure projects.

Select for success

Like most sectors, some companies are better positioned than others to benefit from the acceleration of investments to decarbonise global infrastructure. Stock selection matters and active management will be key to sift the long-term winners from the losers.

Shane Hurst

Managing Director, Portfolio Manager

ClearBridge Investments

ClearBridge Investments is a Franklin Templeton Specialist Investment Manager.

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