Utilities are no longer ‘simple defensive’ plays
The energy transition will require “huge amounts of capital”, and there will be “winners and losers along the way”, Jean-Hugues de Lamaze, the manager of the Ecofin Global Utilities and Infrastructure Trust, told Morning Wire
Ecofin is a specialist investment trust that focuses on the global utilities sector. It’s currently positioned for what it believes will be a once-in-a-generation opportunity.
The green energy transition is upending the way the world does business. Nowhere is that more apparent than in the utility sector. Lamaze has said that today’s utilities can no longer be considered “simple defensive plays.” In many cases, the companies are now growth investments, although this will require additional capital from investors.
National Grid’s recent £7bn equity issuance has laid out the framework for the new normal. Lamaze said the capital raising sets “a fresh start for the equity story.” It has resolved the company’s “balance sheet debate” and given the group the funding to “present a fully funded £60bn five-year capex plan which is almost double the £33bn deployed over the last five years.”
National Grid’s peer, SSE, has also laid out plans to boost capital investment. “The company expects to deliver more than 5GW of net renewables capacity additions (more than doubling its existing renewables capacity) and a 14 per cent regulated asset base growth rate per year” over its 2023 to 2027 growth plan.
Despite the opportunities here in the UK, Lamaze was keen to point out the opportunities overseas as well.
Ecofin Global Utilities and Infrastructure does not constrain itself to one market. “It pays for investors to have a wide geographic lens”, the fund manager said, as different countries are moving at different paces. “The energy transition is advanced in Europe…while still at a relatively early stage in the US. China is the global leader in both renewables and coal generation capacity additions,” the fund manager said.
“Demand drivers can be meaningfully different by region too – witness the current AI/datacentre/electricity demand upswing in several regions of the US setting alight utilities which are set to respond with baseload power and capex investments,” he added.
While there are growing opportunities, there are growing regulatory challenges as well. “Regulatory risk is a function of local services which often operate in quasi-monopolistic positions,” Lamaze said.
However, with 90 per cent of the world’s GDP committed to decarbonisation by 2050, “Politicians and regulators are likely to incentivise investments rather than penalise them, so that private operators spend the money, thereby lightening the burden on public finances.”