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Five key infrastructure opportunities from North America’s energy transition

By Joseph Titmus
Portfolio Manager/Analyst, Global Listed Infrastructure Sydney, Australia

A little over 120 years ago, a well hit oil at the Spindletop in Texas sending ‘Texas tea’ 150 feet in the air. It spilled 100,000 barrels of oil that day, ushering in the Gusher Age.

The oil discovery changed the course of human history, with the global economy rebuilt around access to cheap petroleum.

Today in parts of West Texas you’re as likely to see windmills as oil derricks, and a new age of infrastructure energy and investment is dawning as the transition from fossil fuels to zero-carbon renewables gathers pace. Infrastructure investors need to understand the supply and demand drivers of this transition, as well as the policy background, if they are to successfully navigate this historic change.

Government policies in the US, including federal tax credits and state government renewable energy targets, have given renewables a foothold. As technologies mature, renewables are becoming increasingly competitive with traditionally cheaper fossil fuels.

Transport is the largest energy consumer in the US and the most reliant on fossil fuels and therefore increasingly a focus of policymakers to achieve decarbonization targets. Currently, just two million of the 360 million vehicles in North America are electric but numbers are growing rapidly.

One of the key catalysts to widespread adoption of electric vehicles (EVs) will be price parity with petrol and diesel cars, which remains a few years away yet. This means government policies will likely continue to be an important driver of demand.

AMP Capital’s global listed infrastructure team sees five main opportunities for the infrastructure sector from the energy transition happening in North America:

1. Oil and gas pipelines becoming increasingly strategic

Notwithstanding expected growth of renewable sources of energy, fossil fuels will likely still be a meaningful source of energy supply for many decades to come and therefore the pipelines connecting supply with demand will continue to play an important role.

Given the difficulty in getting new pipeline infrastructure approved, certain assets already in the ground will likely become much more valuable.

2. Repurposing existing infrastructure

Certain infrastructure assets could be repurposed for use by new technologies like hydrogen, and carbon transport and storage development. Pipelines and storage assets in particular could be ideally suited, subject to relevant conversion costs.

For example, a number of projects in Canada have used depleted oilfields and saline aquifers to store carbon emitted from refineries, industrial processes and power plants. The related transportation infrastructure is also proving to be a growth area.

3. Electricity transmission for renewables

Investments in transmission lines for renewable electricity is a large growth driver partly because offshore and onshore wind and solar are often located well away from centres of demand.
This creates the need for the extension of transmission networks to connect them to the grid, with considerable opportunities in this space expected to continue for many years.

4. Electric vehicle charging and electricity distribution networks

The growth of EVs is requiring an entirely new infrastructure of charging points. Estimates in the US suggest only 4% of the chargers needed to support growth to 2040 are operational today.

However, there is no consensus yet on who should pay for charging stations between governments, energy utilities and private enterprise. There is also no standard for chargers across the country, meaning EV drivers need to find a charging station compatible with their vehicle.

As a result, range anxiety remains a serious headwind to increased EV market share and increasingly becoming a focus for policymakers

5. The future of gas distribution networks

Gas remains the cheapest source of supply for heating in the US and is much cleaner than some of the existing alternatives like oil.

However, electric heating from renewable sources is cleaner still and led to some cities banning new gas connections putting a question mark over the growth of the industry.

In response renewable natural gas – gas manufactured from renewable sources –hydrogen is likely to increasingly complement natural gas in the pipe.

And in the meantime, gas networks continue to repair aged and leaking pipes, improve safety and reduce methane emissions.

Since the Gusher Age, energy infrastructure has undergone considerable change over the past 120 years. But arguably, nothing like the change the industry faces today.

No energy transition is possible without the infrastructure connecting supply and demand and this presents an ongoing opportunity for investors in infrastructure assets.

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Joseph Titmus, Portfolio Manager, Global Listed Infrastructure
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While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.

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