Infrastructure Predictions for 2019
To kick off 2019, Infrastructure Ideas offers ten predictions for global infrastructure trends and markets, reprising our kick-off to 2018 (Infrastructure Predictions for 2018, and 2018 in Review).
1. Wind and solar power keep growing and getting cheaper… and lagging aspirations. Wind and solar continued to dominate the new power market in 2018, and global infrastructure investment, accounting for close to 2/3 of all new power capacity additions worldwide. Global investment in these renewables exceeded $200 billion in 2018, and now is over $3 trillion since 2004. This is good news for consumers and for renewable energy advocates, even more so that wind and solar are now chosen by utilities and governments as much for their favorable economics as for emissions policies. While we have yet to see offers of electricity at under 2 cents a kilowatt-hour, and the march of “world-record pricing” slowed down in 2018, we are seeing more and more countries installing new renewable capacity at between 2.5 and 5 cents a kilowatt-hour – compared to the cost of new coal-based electricity at about 8 cents. Cheaper renewable energy has gone from unheard of to exceptional to becoming the “new normal.” Expect more of this in 2019. But also expect increased concern that “it’s not enough.” In spite of these trends, the decline in worldwide greenhouse gas emissions continue to look far off what is needed to slow global warming, and emissions in the US are widely reported to have increased substantially in 2018. The problem? New capacity is too small compared to overall electricity production – even if 100% of new capacity were to be wind and solar. So along with continued growth of solar and wind installation, expect the underlying pressure to “do more” (read, accelerate the retirement of existing fossil-fuel fired electricity plants) to continue to build.
2. New records in energy storage. The easiest of all 2019 predictions. Energy storage technology is at a similar stage of development to where solar power generation was five years ago: prices falling off the cliff, and the scale of demand jumping monthly. Already in late December 2018 we saw awards of what would be the second largest solar-plus-storage development in the world, Hawaii Electricity Company’s procurement of 262 MW of solar with 1,048 Megawatt hours of storage (at a price 42% below the previous year’s procurement). Wood Mackenzie projects revenues in the US storage market to top $1 billion for the first time in 2019. Look for numerous solar-plus-storage projects across the world to beat the cost of greenfield coal power (about $0.08/ kilowatt-hour), and overall energy storage capacity growth between 50-100% over 2018.
3. Hydropower starts to take on water. There have been mixed perceptions of hydropower as a source of energy in recent years. Large-scale hydropower developments continue to attract widespread opposition from civil society, while smaller-scale run-of-the-river projects typically enjoy broader support, including from many concerned with climate change. Expect in 2019, and onwards, to see more governments, sponsors and financiers walk away from hydropower, especially large-scale projects. Driving this change will be not so much historic environmental and social concerns, but rather declining relative competitiveness. The declining competitiveness is in turn driven by both higher relative costs (as costs of wind and solar alternative technologies continue to drop, while construction costs of dams do not), and by rising risk perceptions. The travails of Chile’s 500 MW and now $3 billion Alto Maipo project, beset by major cost overruns and delays, are the latest example of large-scale, apparently well-managed and designed projects, which encounter bad outcomes. The one area of hydropower likely to see growth? Pumped water storage: China State Grid just announced investment plans for $5B of new pumped storage hydro plants.
4. Intensified pressure on coal-fired plants. In spite of a favorable US Administration, 2018 saw a record number of coal-fired generation plant closures in the US, mainly as a result of economics (as opposed to emissions concerns), with nearly 12 GW of coal plants retired. Economics of lower-efficiency aged plants will not get any better, as renewables-plus-storage costs continue to decline. And continued bad news on global emissions and climate concerns will certainly increase political pressure in many states and countries to increase the proportion of energy sourced from renewables. 2019 is probably early to see climate change funding being directed towards acceleration of fossil-fuel plant retirements, but one can expect to see the issue begin to be debated, and likely to become a reality within a 5-year horizon.
5. The year of climate lawsuits. Lawsuits related to climate change have been around for several years, with a mostly low profile. Look for this to change in 2019. On January 8, the US Supreme Court declined to hear an appeal from ExxonMobil of a lower court judgment forcing the company to turn over internal documents to the Massachusetts Attorney General. This opens the way to lawsuits against Exxon on the grounds of working against climate change regulations while knowing of the likely impacts of climate change. A similar suit is proceeding in New York State. Much like the game-changing billion-dollar verdicts which eventually came, and eventually bankrupted the centuries-old tobacco industry, these suits may be on the verge of going from minor nuisances to existential threats for many fossil fuel companies. And don’t expect these to be aimed only at producers – utilities also face uncertain legal issues here. Current rumors of potential imminent bankruptcy filing by one of the US’ largest utilities, PG&E, have driven its stock down 20% in days. The issue? Legal liability, estimated at around $30B, for having been a factor in California’s recent wildfires. Expect legal risks to become a much bigger issue in the energy sector.
Cities, Transport and other
6. Urban infrastructure keeps center stage. Overall infrastructure investment disappointed in 2018. The much-touted trillion-dollar US infrastructure plan went nowhere, Europe remained fiscally constrained, the occasionally large markets in the Emerging World (Turkey, Brazil, Argentina) were largely closed due to domestic economy issues, and potentially large markets (Indonesia, Nigeria, South Africa, India beyond power) remained potentially, not actually, large. China kept investing major amounts, though almost all of it Chinese capital. But one place where capital flowed in rapidly growing sums was cities. Venture Capital investments in urban technology have outstripped those in pharmaceuticals and Artificial Intelligence, a pair of “hot” fields, the last three years. Money is going primarily to new mobility technologies, as covered previously by Infrastructure Ideas. And increasingly cities are also spending more capital on infrastructure: to deal with new mobility technologies, to fill the gaps left by declining sovereign-level infrastructure financing, and to address continued population growth. Look in 2019 for these trends to continue, and for some landmark city financings in the US and elsewhere.
7. Charging infrastructure starts to mature. The number of electric vehicles on the roads continues to grow exponentially. 2018 saw, for the first time since hybrid vehicles similar to the Toyota Prius were introduced, US sales of electric cars catch up with sales of hybrids. Cost advantages for EVs over combustion-engine vehicles will continue to grow, and continue to fuel (pun intended) rapid growth in EV sales. Demand for vehicle charging infrastructure is being driven by a combination of consumer demand and, in many places, city emissions-related policies. Look in 2019 for the charging business to begin to shake out, with today’s many small providers gradually being replaced by a handful of dominant players. Regulators in US states (Michigan, California and New York) are pushing for the infrastructure to be built by companies other than utilities, opening an interesting new infrastructure space for investors.
8. Buses outdraw subways. People continue to move into the world’s cities by the millions. Getting them around is increasingly on the mind of policy-makers, particularly in the largest and fastest-growing cities, all in the developing world: getting them to where there are jobs to reduce political and other risks tied to unemployment, and getting them out of the traffic jams which get more spectacular by the year. Over 2/3 of the world’s new mass transportation projects – under construction or under development — are in emerging market cities. Subways and light rail have had their vogue, but are more and more encountering problems analogous to those of large hydropower dams: large cost overrun and delay risks, while costs of alternatives are going down. In this case the alternatives being bus rapid transit (BRT) systems. The combination of improved design experience, as more and more and cities develop new systems, and new technologies – electronic money and security management, along with rapidly falling costs of electric buses – is making BRTs more and more attractive to urban policy-makers. Look in the 2019 for the abandonment of flagship subway projects in several countries.
9. New technology comes to water. The energy and transportation sectors have been heavily disrupted by new technology over the last decade. Look for the water sector to be impacted next. The combination of nanotechnology and drones will make possible a massive improvement in the ability of water utilities to find and fix leaky pipes in their hundreds of miles of underground pipes – both finding the location of problems and (in many cases) fixing them will become dramatically faster and cheaper. This will have a big impact on the costs of water utilities, while the cost of the nana-drones are already fairly low, and dropping. Look for a rush from utilities to invest in this technology.
10. A lot of talk will stay talk, not action. On several fronts, we can expect 2019 to bring… not much. Most of these involve government action, either of individual governments or involving multigovernmental accords. Don’t expect a US infrastructure plan. Don’t expect talk to turn to action for major infrastructure policy reforms in large Emerging Markets such as Argentina, Indonesia, Nigeria, or South Africa. Don’t expect a major international accord on climate change regulation (though maybe by 2020…). And don’t expect emerging market infrastructure to become a far more attractive asset class (though maybe by 2022-2025).
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