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Embracing sector challenges in volatile environments

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After several enjoyable days of fantastic seminars and meeting with industry leaders from across the globe last month, I wanted to share my reflections on the Berlin Infrastructure Conference. 

The market environment    

Let’s start with the backdrop and acknowledge that the geo-political, macroeconomic and power market environments have been incredibly volatile. For example, whilst we were all enjoying the conference, the UK announced its latest inflation rate of 10.4%i and the US announced a further 25 basis point increase in it the Fed interest rate to 4.75%ii

In a high inflation environment and with rising rates, this can clearly cause headwinds for an investor’s portfolio. With infrastructure providing a strong element of inflation linkage to a portfolio, and well-hedged, lowly-geared portfolios providing some protection against rising rates, it’s no surprise that there has been a continued strong desire to deploy capital into the sector. Infrastructure has seen $162bn of capital raised in 2022 alone with 55% of this being in the renewable energy sectoriii. Despite this increased demand for renewables, we were also reminded of the serious challenge ahead with c. 80% of the world’s electrons still coming from fossil fuelsiv and so the need for further investment remains as urgent as ever!  

The key challenge? 

A key question posed was: How do we embrace this challenge against the volatile macroeconomic and power market backdrop? 

Whilst in Berlin, three principal themes emerged as a response to the challenge:  

Trend 1: The importance of the value chain

First, the importance of in-house expertise across all aspects of the value chain, starting from development, through to construction and operational management excellence was a key theme raised in Berlin. This both creates additional value by generating quality home grown asset pipelines but also helps mitigate against risks such as construction cost inflation. Incremental value can be added at each part of the value chain which enhances financial returns.  

Trend 2: The need for in-house operations

Second, the value of in-house operations teams to optimise the performance of assets, minimise downtime and focus on value creating opportunities such as capital works enhancements and repowering programs was also highlighted at the summit. It is clear that being a pure financial player will no longer be sufficient in this new world.  

Trend 3: Necessity for active power market management

Third, with increasing renewable energy penetration, there was an emerging consensus that power-price volatility is here to stay. Vital to succeeding in this environment is to have a strong strategic focus on the active management of power contracts together with investment strategies such as battery storage that provide the optionality of capturing some of the upside that a volatile power market provides.  

Summary

Overall, I left the Infrastructure Investor Global Summit in Berlin acutely aware of the size of the challenge ahead but also very optimistic that with the right investment strategies, operational toolkit and experience, and a mindset to accept and even embrace the potential ongoing volatility, it’s a challenge that can be met. There is after all no other choice!  


i Office for National Statistics, 22 March 2023 (https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/february2023)

ii Board of Governors of the Federal Reserve System, 22 March 2023 (https://www.federalreserve.gov/newsevents/pressreleases/monetary20230322a.htm)

iii Infrastructure Investor, January 2023 (https://www.infrastructureinvestor.com/download-2022-sets-post-pandemic-fundraising-record/)

iv Environmental and Energy Study Institute, 2021 (https://www.eesi.org/topics/fossil-fuels/description#:~:text=Fossil%20fuels%E2%80%94including%20coal%2C%20oil,percent%20of%20the%20world’s%20energy.)


DISCLAIMER

Baiju Devani is Investment Director at Bluefield Partners LLP which is part of the Bluefield Group. Bluefield Partners LLP are authorised and regulated in the United Kingdom by the Financial Conduct Authority.

This Article is provided for educational and informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy, any securities or financial products in any jurisdiction. This Article is not directed at, or intended for distribution to or use by, any person or entity that is a citizen or resident or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or would require any registration or licensing within such jurisdiction. The information contained in this Article is not intended to be, and should not be construed as, investment, financial, legal, tax or other advice, and is not a recommendation, endorsement or representation as to the suitability of any investment or financial product. This Article is based on publicly available information and internally developed data, but no representation or warranty, express or implied, is made as to the accuracy, completeness or reliability of such information.

Bluefield Partners LLP’s are limited liability partnership incorporated in England Wales (number:OC348071) with a registered office address of 40 Queen Anne Street, London, UK, W1G 9EL.

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