Asia’s Energy Transformation: Vietnam

June 2021

As the climate keeps warming, many in the United States and Europe are taking a long list of actions and arguing for more.  How hot the earth gets, however, more than anyplace else, hinges on the actions taken – or not taken – in Asia.  Asia has the world’s largest population, the world’s fastest growing economy, and – for climate, more important than anything else – close to 80% of the world’s coal-fired generation.  The path Asia takes – and takes in this decade – will do more to determine the path of climate change the rest of the century.  The path Asia takes, in turn, depends on the path that its own large economies take.  Infrastructure Ideas has previously examined the dynamics of the energy transformation, especially whether countries will or will not add yet more coal-burning electricity capacity, in India, Pakistan, Bangladesh, and Indonesia.  Today we’ll look at another of the region’s critical economies: Vietnam.

Vietnam’s population of 97 million ranks 15th in the world, and its energy consumption growth of over 10% a year the last several decades has been one of the 5 highest in the world.  As population and incomes continue to rise, the demand for electricity in the country is expected to more than double by 2030.  Generation capacity is expected likewise to more than double, from the current 55 gigawatts to 130 GW, at an estimated cost of US$150 billion – and then to more than double again by 2045, to 277 GW.  Coal-fired generation is the largest source of power in Vietnam, accounting for about 53% of demand. Aside from coal, hydropower accounts for about ¼ of capacity, according to the IEA.  Natural gas makes up some 16% of demand, and non-hydro renewables about 7%.

Coal in Vietnam is not only the largest source of power in the country, it has also been the fastest growing, with capacity having increasing by nearly 15 times since 2005, to about 25 GW in 2019.  As the ability to build more large dams along the Mekong River basin has become very constrained, the government increasingly has turned to new coal plants instead of hydropower.  With the expected strong growth in future electricity demand, Vietnam’s earlier power sector plans called for building more than another 45 GW of new coal-fired generation capacity by 2030, which would nearly triple the country’s existing coal fleet.  According to Bloomberg New Energy Finance, Vietnam’s coal-fired pipeline is the 4th largest in the world today, with some 17 GW under construction and another 29 GW in advanced planning stages.  This comes to about 15% of the total planned new coal capacity worldwide, excluding China, and if built, these plants would contribute to adding annual emissions of some 500 metric tons a year of CO2.  Enough to make the world significantly hotter.

Mong Duong coal plant, Vietnam

Energy policy in Vietnam, fortunately, is in transition.  The country continues to envisage rapid further growth in electricity consumption as it develops, but where that added electricity is to come from is changing fast.  In the past two years, Vietnam has gone from almost entirely fossil-fuel and hydropower-based to a solar and wind powerhouse.  With a different sequence than most of the world, Vietnam moved first to aggressively adopt solar generation, especially rooftop solar.  From less than 2 GW of capacity in 2016, solar generation capacity now exceeds 11 GW – 5 GW of which was installed just in 2020.  Vietnam even showed the third-biggest growth in rooftop solar installations globally in 2020.  Yet the biggest energy headlines for Vietnam are now elsewhere – in offshore wind.  Onshore wind plants in Vietnam have begun to appear, but sites are constrained by the lack of available land.  The country has turned its eyes offshore, as the offshore wind sector has begun to mature worldwide (see Infrastructure IdeasOffshore Wind – the Next Big Thing).  In 2021, Vietnam is forecast to install 1 GW of wind capacity, triple its existing capacity and surpassing Thailand—at present Southeast Asia’s front-runner in installed wind capacity.  And in July 2020, the Vietnamese government approved the assessment of the area off the cape of Kê Gà in south Vietnam to build the world’s largest offshore wind farm with a capacity of 3,400 MW – larger than any existing generating facility in the country.

With – at last – renewables coming to Vietnam, the country’s planners are rethinking Vietnam’s large-scale plans for future coal-fired generation.  Several factors are coming into play: (a) the government has seen that investors and banks will finance new wind and solar generation, and that this source of power is cheaper than it had expected; (b) internal demand is geographically uneven, with both demand and growth highest in the south of the country – where offshore wind potential is the greatest; (c) the communist government is also ill-at-ease with both recent demonstrations against coal-fired power station projects, and with the risk of electricity shortages – with fossil-fueled capacity taking much longer to bring online than wind and solar; (d) sources of external capital to finance new coal plants are getting harder to come by; and (e) Vietnam itself stands to be heavily impacted by sea-level rise, with its extensive low-lying urban and agricultural areas along the Mekong Delta.

The government’s evolving thinking has begun to take shape in the draft form of “PDP-8,” its eighth multi-year Power Development Plan.  Released in February 2021, the draft calls for both wind and solar generation capacity to rise to about 20 GW each by 2030, with their share of generation jumping from about 7% today to 30% by 2045.  Coal, as a share of the country’s generation mix, is projected to be cut in half, to about 27%.    The National Steering Committee for Power Development has recommended eliminating about 15 gigawatts of planned new coal plants by 2025, according to the state-controlled news website VietnamPlus.  The draft PDP-8 proposes no new coal-fired power plants except those already under construction or planned for completion by 2025 or sooner.  This would still, however, leave almost 20 GW of new coal capacity to come online this decade.  And the battle for how to meet yet another doubling of demand in the following decade has not been joined.

PDP 8 — IHS Markit

As the planners deliberate, the environment around Vietnam keeps changing as well.  For one, financing for coal plants continues to get more complicated.  Japan has been a big financier of the sector in Vietnam, but Mitsubishi – one of Japan’s largest players in coal — announced in February it would no longer support one 2 GW and $2B flagship coal project, Vinh Tan 3.  Conversely, financiers are eager to finance renewable generation: two wind power plants, Phu Lac 2 and Loi Hai 2, just this month closed a financial package from the IFC.  For another, Vietnam has not really seen yet how cheap wind and solar power have become around the world.  A late-comer to renewables procurement, Vietnam still offers a feed-in tariff mechanism to project developers, at 8.5 cents per kilowatt-hour – more than triple what it costs to procure new wind power capacity in the United States.  As it moves this year to more efficient auction mechanisms for new capacity, and assuming it improves its PPA framework, Vietnam should start seeing renewable prices far lower than what it has been paying to date.  And thirdly, Vietnam has yet to dip its toes into energy storage.  As costs continue to plunge and availability expand, battery storage could help Vietnam meet its growing electricity demand with significantly less future expansion of new generation capacity.

Vietnam completed its five-year general elections for the National Assembly in May.  By the end of June, the government is expected to release the final version of PDP-8.  In a largely state-controlled economy such as Vietnam’s, formal government plans rule the roost, and PDP-8 will determine whether Vietnam sticks to earlier plans to move full steam ahead with building large-volume and high-emission new coal generation, or whether it will continue to cut back on new coal plans and switch even more strongly in the direction of renewable energy.  A great deal – of emissions and climate change – hinges on the decision, and on Vietnam’s continued energy transition. 

Previous Infrastructure Ideas Posts on Energy: Index

Ransomware and the Pipeline

May 2021

In the last week, one of the largest fuel pipelines in the United States has been shut down as it deals with a ransomware attack.  This is the highest-profile infrastructure cyber-attack on the energy system in the US, and a reminder that this “new” problem is getting much worse – and will continue to do so.  Today we’ll take a look at some implications of this latest attack, and of cyber-risk trends for infrastructure.

The Colonial Pipeline System

Infrastructure Ideas has been writing about infrastructure cyber-risks for some time, and one of our Ten Infrastructure Predictions for 2021 was that these risks would grow for utilities.  Unfortunately, we were right.  The attack on the Colonial Pipeline, which operates the largest fuel pipeline between Texas and New York, has disrupted availability of gasoline and jet fuel for a week – with long lines at gas stations in some areas, and a state of emergency declared by the Governor of Virginia.  The 5,500 mile pipeline carries nearly one-half of the motor and aviation fuels consumed in the Northeast and much of the South (see “What We Know about the Colonial Pipeline Attack,” from the New York Times).  Colonial, the pipeline operator, reported that hackers had infiltrated corporate data, not control of the pipeline itself, but that Colonial had shut down operation of the pipeline to prevent further damage and contain risks.  The FBI has attributed the hack to a Russia-based criminal group known as “Darkside,” which specializes in ransomware attacks against English-language targets.  As of this writing pipeline operations have yet to return to normal.

A customer help pumping gas at Costco, as other wait in line, on Tuesday, May 11, 2021, in Charlotte, N.C. Colonial Pipeline, which delivers about 45% of the fuel consumed on the East Coast, halted operations last week after revealing a cyberattack that it said had affected some of its systems. (AP Photo/Chris Carlson)

The Colonial Pipeline ransomware attack is far from the only headline regarding cyber-attacks on infrastructure in the first months of 2021.  A report in February from the industrial cybersecurity firm Dragos named four separate hacker groups with ties to Russian intelligence services as having targeted industrial control systems in the United States.  One group, named “Kamacite,” reportedly works in cooperation with the GRU, Russia’s largest foreign intelligence agency and has targeted US electricity and oil and gas firms, and is said to have gained network access to firms on several occasions.  Another February report, this one from IBM, found the energy sector to be the third most frequently targeted in 2020 (after finance and manufacturing), up six places from 2019.  Aside from energy, other attacks have targeted the water sector.  An as-yet-unknown hacker gained access to the controls of a water treatment facility in Oldmar, Florida, and attempted (unsuccessfully) to introduce large amounts of lye into the city’s water.  In February, an ex-employee of a water company near Little Rock, Arkansas, was indicted for accessing and attempting to disrupt the company’s systems after being let go.  In 2020, a likely Iranian hacker was found offering to sell network access to a water treatment plant in Florida over the messaging app Telegram.  A recent study profiled in Wired (Water Supply Hacks Are a Serious Threat – and Only Getting Worse) found dozens of hacking incidents at US water installations, with a continued rise over the last decade.  Water utilities turn out to be far more vulnerable to cyber-risks, in spite of the focus of most headlines on electric utilities, as so many water utilities are small and lack the administrative capacity and resources to protect themselves against rapidly evolving attack risks.

The underlying dynamics indicate that infrastructure cyber-risks are, unfortunately, getting much worse.  For one, the growing use of digital controls to manage electricity and other energy installations opens new entry points for hackers to exploit.  Second,  the sheer number of actors involved or with the potential to be involved cyber-attacks is growing rapidly: barriers to entry are low, and the trend towards ransomware attracts criminal groups across the  board.  As one cyber-expert cited in the Dragos report puts it, “A lot of groups are appearing, and there are not a lot going away.”  One element of this week’s Colonial Pipeline attack highlights the issue: the group apparently responsible, dubbed “Darkside”, operates on a business model whereby it develops hacking tools and then sells, rents or leases them to other parties.  It does not require much imagination to see how this will accelerate the availability of hacking tools.  Third, with the multiplication of actors comes a multiplication of targets.  One group Dragos has dubbed “Stibnite” has targeted Azerbaijani electric utilities and wind farms using phishing websites and malicious email attachments: if firms in Azerbaijan are becoming targets, firms in places such as Jordan, Indonesia, Mexico and elsewhere cannot be far behind.  Utilities in lower-income countries, lacking in managerial and financial resources to adequately defend themselves, utilities in areas of internal or external conflict, attractive targets for political or ideological reasons, and utilities in high-crime countries with already diversified and sophisticated criminal groups, are all going to be at particularly high risk in coming years.  Fourth, the types of infrastructure cyber-risks are also expanding.  Ransomware attacks are the flavor of the day, and with the proliferation of hacking tools among criminal networks will doubtlessly expand.  These are expensive and disruptive, but the damage to date from these attacks has been limited in scope and in time.  Yet more aggressive and destructive attacks are unlikely to be far away.  As an alarming new book by Nicole Perloth, This is How They Tell Me the World Ends: the Cyberweapons Arms Race (for a short version, see the excellent review by Sue Halpern in the New York Review of Books, “Weaponizing the Web”) points out, an important feature of cyber-weapons is that they are very cheap compared to traditional “hard” weaponry.  Perloth tells the story of seeing a young Iranian at a hacking conference in Miami demonstrate how to break into the power grid in five seconds: “With his access to the grid, he told us, he could do just about anything he wanted: sabotage data, turn off the lights, blow up a pipeline or chemical plant by manipulating its pressure and temperature gauges.  He casually described each step as if he were telling us how to install a spare tire, instead of a world-ending cyberkinetic attack that officials feared imminent.”  Hacking tools can give intruders access to even critical infrastructure such as nuclear facilities, the power grid, and air traffic control.  But they are relatively cheap compared with other weapons of mass destruction, and for sale in a market that is robust, largely out of sight, and welcoming to anyone with piles of cash at their disposal, whatever their motivation. 

Disruptive technologies continue to change the face of infrastructure.  In many cases, this is bringing lower costs, better services, more convenience and reduced emissions.  Technology, though, is agnostic: the Colonial Pipeline cyberattack is a reminder that disruption can be negative as well as positive.  For infrastructure operators and investors today, there is a clear message from these attacks.  Cyber-risks are not going away, and are going to get worse.  Investments in cyber-security (the FBI, after the Colonial Pipeline breach, has issued a useful “tip sheet” to key US infrastructure providers), insurance, and the ability to re-launch systems after an attack are all going to be increasingly important.  The worst situation will be to be unprepared. 

Previous Infrastructure Ideas columns on Disruptive technologies

Not Just Another $2.5 Trillion Infrastructure Plan

April 2021

Earlier this month, the Biden administration announced a much-anticipated infrastructure plan for the United States.  Named “the American Jobs Plan,” the proposal would invest $2.5 trillion (or $2.3T, $3T, or $4T, depending on who is doing the math).  Outside of China, this is the largest national infrastructure plan ever put forward.  The bill is … complicated: we won’t attempt to summarize it, and instead will highlight some of its more interesting aspects.

1) Size.  The first and most obvious feature of the Biden proposal is its estimated cost.  $2.5 trillion is… a lot of money.  It’s pretty close to estimates of annual global spending on infrastructure altogether – which ranges from about $2T to $4T, depending who is estimating and what is being counted as infrastructure.  In comparison, what is usually thought of as the US’ previously largest infrastructure plan, Eisenhower’s development of the interstate highway system in the late 1950s, had a price tag of… $25 billion, or 1% of the price tag of Biden’s plan (yes, we’ll leave inflation aside for now, just making a general comparison).  The next biggest infrastructure proposal that’s been out there is the Modi plan for India from 2019, which clocked in at $1.3T.  But let’s look at the size of this proposal a bit more closely. 

Now, the Biden proposal looks very large compared to global infrastructure spending, and some – for example those focused on trying to find capital for infrastructure in developing countries – have expressed concern that very high US infrastructure spending might “crowd out” access to capital elsewhere.  As we noted, $2.5T is a lot of money.  The Biden plan, however, talks not about spending this in 2021, or even 2022, but over 15 years.  That’s smart, of course; it’s good to match financing with actual expenditures, and many infrastructure projects take long years to properly design and build.  It also changes the way one looks at the size of the plan.  For those doing their math, $2.5T divided evenly over 15 years comes to $167 billion a year – which looks a bit less impressive.  $167B a year is, well, less than half what the US spends annually on infrastructure today, and comes to less than 1% the size of the US economy.  China’s estimated annual spend on infrastructure?  $2.5 trillion. 

So it is a bit hard at this stage to tell how impressive the scale of this plan.  Ambitious by recent US standards, definitely.  Ambitious by global standards, and enough to “fix” the country’s infrastructure problems?  This we’ll only be able to see as details, timing, and implementation of the Biden infrastructure plan become clearer.

2) Is it infrastructure?  Immediate Republican criticism of the Biden plan claims that the proposal is not infrastructure, and rather a mislabeled left-leaning social welfare push (Senator Roy Blunt claimed on Fox News “even if you stretch the definition of infrastructure some, it’s about 30 percent of the $2.25 trillion they’re talking about spending”).  It can be difficult to tell substance from rhetoric in most pronouncements from today’s Republican party, yet the Biden plan does rely on an extremely broad definition of infrastructure.  Child care, retrofitting of buildings, and school modernization are rarely seen in most economists’ definitions of infrastructure.  This is not necessarily good or bad: infrastructure is notoriously difficult to define precisely; it does however mean that the bill’s proposed spending on “hard infrastructure,” or what fits in narrow definitions of infrastructure, will be less than the headline numbers might suggest.  Then again technology has so transformed the economies of today, and continues to do so, that maybe it calls for a wholly different approach to how countries think about infrastructure.

3) Politics are unavoidableInfrastructure Ideas has written often about how politics can impede infrastructure investments.  The US is a clear example of this; though the Republican party now seems disposed to support at least some scale-up of federal infrastructure investment, the narrow Democratic legislative majorities and Republican criticism render uncertain the passage of Biden’s bill.  It is interesting to note two big planks of the administration’s strategy on this.  First, note that the infrastructure plan is not named “the infrastructure plan.”  Rather, it is called the “American jobs plan,” a label which makes attacking the bill politically trickier, and is aimed squarely at the block-collar electorate which has been switching away from democrats.  Second, the bill contains several provisions aimed at the “left behind” segments of the electorate which have become increasingly Republican, most notably $100 billion targeted at high-speed broadband networks throughout the country, aiming to make broadband access universal and to drive down the costs for internet.  The coming months will show whether the strategy proves successful.

4) A changing view on transport.  American infrastructure plans have typically talked about roads and bridges.  The Biden proposal does allocate money – some $115B — for roads, but this is accompanied by large provisions for promoting electric vehicles, mass transit, and to a lesser extent rail transport.  $174 billion, or about 28% of the transportation portion of the bill, would go for electric vehicles alone. That includes a network of 500,000 electric vehicle stations, using electric vehicles in bus fleets, and replacing the federal government’s fleet of diesel transit vehicles with electric vehicles. It would also offer tax incentives and rebates for electric cars.  The plan would also allocate $85B to public transit, and some $80B to railroads, for a growing backlog of Amtrak repairs as well as improvements and route expansion.

5) Is this the Biden climate plan?  A good column in The Atlantic calls this “the one thing to understand about Biden’s infrastructure plan.”  The piece claims “there is only one serious vehicle to pass climate policy through Congress during the Biden administration—and it’s this infrastructure plan. If recent history is any guide, the bill is the country’s one shot to pass meaningful climate legislation in the next few years, if not in the next few decades.  In short: If you want the United States to act at a national level to fight climate change, this bill is it. This is the climate bill.”  This is a perceptive analysis: the proposed bill has several climate-related provisions, notably funds for decarbonization technologies in several industries, for the creation of a “civilian climate corps”, modeled on the depression-era Civilian Conservation Corps which contributed greatly to infrastructure building in the 1930s and 1940s, and for some $16 million to plug oil and gas wells and reclaim abandoned mines.  Yet this past week’s White House Climate Summit indicates something much more ambitious is on the way from the administration on climate change.  The politics on such a separate climate bill, though it would be surely needed to meet the administration’s stated climate ambitions, will be orders of magnitude more complicated than for the infrastructure bill.

6) A big role for states and cities.  Most national infrastructure plans create a detailed agenda of projects to be implemented by national agencies, and discussions about US infrastructure in the press in recent years have taken the same tone – often harkening back to the development of the US interstate highway system.  But in the US, a majority of infrastructure investment takes place at the sub-sovereign level, through states and cities.  The Biden plan usefully focuses on using federal spending to leverage and incentivize, not replace, local infrastructure investment.  Thanks for this surely go at least in part to Transportation Secretary Pete Buttigieg, a former a mayor.

7) Know-how, not just money.  It is often difficult to find the funding for infrastructure, but it is always easy to mis-spend money when it’s found.  Mis-spending money comes from many directions: from selecting projects to build which have much less of an impact than others might have (the famous and regrettably plentiful “bridge to nowhere” tales); from poor project design or procurement; from corruption and fraud; and just from plain re-invention of the wheel, which is always more expensive.  Understanding what has worked well and has not worked in other places is one of the most effective tools against mis-spending.  Project development agencies have regularly been highlighted by the World Bank Group and the G-7 as one of the most useful, and cost-effective, means of getting infrastructure plans implemented in emerging markets.  Virginia’s Office of Public-Private Partnerships is a good example of such an agency in the US.   The Biden proposal at least moves in this direction, though details remain to be spelled out.  The proposal says it will “focus on knowledge, best practices, to modernize faster, speed adoption of new technologies, and increase efficiency of sub-national infra planning and effectiveness.”  The White House Fact Sheet goes on to say that “When Congress enacts the American Jobs Plan, the President will bring the best practices from the Recovery Act and models from around the world to break down barriers and drive implementation of infrastructure investments across all levels of government to realize the President’s vision of safe, reliable, and resilient infrastructure. Critically, in order to achieve the best outcomes on cost and performance for the American people, the Administration will support the state, local, and tribal governments delivering these projects through world-class training, technical assistance, and procurement best practices. In addition, the President’s plan will use smart, coordinated infrastructure permitting to expedite federal decisions while prioritizing stakeholder engagement, community consultation, and maximizing equity, health, and environmental benefits.”  A big step forward from previous plans.

8) Some notable absences.  There are a few things which might have been expected to be part of the Biden infrastructure plan which aren’t there.  For one, there is no list of projects, as one finds in so many national plans.  That’s probably good, since as noted above states and cities in the US have a better sense of what individual projects are needed locally, but it has implications, on which we’ll expand below.  There is also no “infrastructure bank.  Infrastructure banks have become an increasingly popular tool in many countries, and more recently in some US states and cities, like the Washington DC Green Bank.  A typical role envisaged for these banks is to help projects leverage public money with private capital.  A recent column in Forbes made a big plug in this direction.  Infrastructure Ideas believes these types of entities can be useful, though less for their fund-raising role, and more for their expertise-sharing capability.  Given the acknowledgement of the importance of know-how outlined above, and the absence of specifics on how this would be done, we may yet see some version of an “infrastructure bank” emerge.  And there is less than what one would have expected for cyber-security, a growing concern for infrastructure of many kinds.

9) The big unknown: how much will happen?  The Biden administration’s plan could make a major difference in the quality of US infrastructure.  But a plan needs to become passed legislation, then become concrete investment projects, and then those investments need to be executed.  Will it happen ?  How much and how fast?  These remain hard to answer questions.  As noted above, the headline ticket cost is very large relative to recent US and global infrastructure spending, yet if spread over 10-15 years the amounts are less extraordinary.  Relative to GDP, many countries publish larger infrastructure plans – though not many of these come to pass as announced: the Biden plan is also accompanied by a fairly clear funding strategy, which is often not the case.  Spreading expenditures over time does increase political risk, as elections may change control of different government branches, and at the moment no one would describe US politics as stable. 

It may also take quite some time to translate the plan into a list of concrete projects.  Demand for funding is likely to vastly exceed funds available, and there will be a lot of competition for the attention of administration members who are seen as making decisions on allocating funds.  This is normal in infrastructure, but it does not always go well.  Diseconomies of scale exist, and the more decisions need to be made by more people, the more chances there are for things to go awry and/or get bogged down.  Having an entity with a mandate to both ensure know-how is passed along (as noted in #7 above), and to ensure that the program as a whole move forward (possibly within Transportation or other departments), would go a long way to turning more of the plan into reality.

One thing we can say safely: these are exciting times for infrastructure in the US.  And no one has been able to say that in a long time.

Where did all the Chinese money go?

March 2021

It seems like just yesterday that Chinese financing was the future of emerging market infrastructure.  Chinese banks, awash with liquidity, and state-owned companies were everywhere, buying assets and announcing new multi-million-dollar energy and transport projects.  By about 2011 Chinese infrastructure financing exceeded infrastructure financing from the World Bank and other multilateral institutions, and in 2013 new President Xi Jing, in two major policy speeches, announced the largest infrastructure financing ever – the Belt and Road Initiative.  The future appeared to be one of endlessly increasing financial flows from Beijing, and a Chinese-enabled jump in infrastructure investment across the developing world.

Instead, it turns out that the 2013 announcement of the Belt and Road Initiative (BRI) coincided with the high-water mark in Chinese infrastructure financing.  From some $40+ billion per year at its peak, Chinese financing to emerging markets has fallen to less than a quarter of this level.  According to data collected by Boston University, Chinese energy-related financing, accounting for roughly one-half of these flows over the past two decades, fell to below $5 billion in 2020 – and it was not just COVID: the trend has been steadily downwards:

Source: Boston University

In a report earlier this month, the Financial Times said that Chinese overseas energy finance collapsed to its lowest level since 2008 in 2020.  More than half of the low figure of overseas energy lending was accounted for by a single project (the Ajaokuta-Kaduna-Kano gas pipeline in Nigeria, funded by China Exim).  One widely-watched and reported area, Chinese bank lending to energy in Latin America, in 2020 was… zero. 

Where did it all go?

Before taking a stab at this question, let’s have a quick look at where the BRI has been.  Total funding has been on the order of $50-100 billion per year, 2/3 of which going to energy and transport.  Most of the loans have come on terms that are more generous than developing countries can get from private investors, but much more costly than funds from Western donors or the concessional windows of the multilateral development banks.  In energy along, according to the Boston University database, Chinese banks have provided some $245 billion since 2000 – roughly half of this for power generation.  $127 billion, slightly more than half, has gone to coal or oil-related projects.  Funds have been spread widely: some $76B to Europe and Central Asia, some $68B to Asia, some $46B to Latin America, and $53B to Africa.

The aggregate numbers have been very large – far larger than the capital flows coming to emerging market infrastructure from the international development community over this period.  All this during a period of recurrent calls for prioritizing funds to help developing countries improve their infrastructure, as a high-priority element of poverty reduction.  Yet in spite of bringing large numbers to an area of need, the BRI has come in for plenty of criticism, centered on a few areas:

  • Lack of attention to environmental and social effects
  • Financing of investment projects that are low priority and/or that won’t deliver
  • Driving up the debt burden of countries to unsustainable levels

1)         At a project level, Chinese funding’s lesser bureaucracy and requirements, relative to those of international donor financing, has been to some degree an attractive feature for recipient countries.  At a strategic level, Chinese appetite for financing coal-fired power generation has also been attractive to countries with big energy deficits and undeveloped indigenous coal reserves, like Pakistan.  Over $50 billion of Chinese overseas financing has gone to support coal.  Both these advantages have drawn criticism, and this criticism is increasingly in conflict with President Xi Jiping’s stated objective of China’s being seen as a leader on environment and climate issues (see Infrastructure Ideas’ previous comment on this conflict, as well as that from this month’s World Economic Forum). 

2)         There have been repeated headlines about “white elephants” being funded by the BRI, ahead of infrastructure projects with arguably higher development impact.  One poster child of this type has been the Hambatota Port project in Sri Lanka, held up as something that suits Chinese interests far more than those of the host country.  The Overseas Development Institute tracks BRI projects which run into trouble, and points to some 15 in difficulties, worth over $2 billion.  More recently, there have been headlines around the cancellation of several planned coal power investments in the BRI pipeline, including the $8-10 billion Hamrawein plant in Egypt (which would have been the second largest coal-fired plant in the world).  Both Bangladesh and Pakistan, traditionally short of electricity, are seeing growing concerns about potential overcapacity, which has analysts pointing to poor sector planning related to the BRI-backed projects.  And one major study of over 2,500 Chinese-backed projects, led by Aid Data, concluded that BRI “economic benefits accrue disproportionately to politically-privileged regions:” 164% more projects took place in a political leader’s home province when in power.  

3)         Concerns about a “debt trap” brewing for countries who borrow heavily from Chinese institutions have grown significantly with the COVID-19 induced recession across many developing countries.  These concerns dovetail with those about poor project selection.  In the case of Sri Lanka, Foreign Policy drew a link between the large borrowing for Hambantota and the fact that the port was in the then-President’s home district.

The impact of the BRI lies somewhere between the positives of large flows to infrastructure and the criticisms of the initiative.  Certainly from a climate perspective, extensive Chinese backing for coal-fired generation is a big problem, and it may increasingly be a problem at a sector level for some recipient countries.  The data on project-level environmental issues is more inconclusive.  The massive Aid Data study already cited found no clear links to poor environmental outcomes.  And the same study, comparing BRI and World Bank Group projects, concluded that the outcomes of the Chinese-backed projects are not inferior in terms of impact on growth; data from the OECD DAC produces similar results. The ODI numbers of 15 projects in trouble, worth about $2.4 billion, translates to around 1-3% of projects supported by China.  While difficulty knowing when projects underperform imply these numbers are likely understated, problem project rates of 1-3% would be warmly welcomed by any infrastructure investors or lenders.  Meanwhile another study, by the Center for Global Development, was muted in its views of the impact of the BRI on debt sustainability in recipient countries. 

It is also of interest to note that the bulk of the reduced Chinese capital for infrastructure in 2020 flowed, actually, to the region that needs help the most – Sub-Saharan Africa – even though the BRI geography is not obvious.  Aside from Nigeria, Chinese lending in 2020 also funded hydropower projects in Ivory Coast (US$286 million) and Rwanda (US$214 million), as well as a solar project in Lesotho (US$70 million). 

So why the big decline since 2015?

For the driving forces, look to macroeconomics, credit concerns, and a change of instruments.

1)         For the Chinese government, the past decade has been a favorable period for lending to developing countries globally, with low global interest rates and excess domestic reserves in China.  The combination of repeated calls by the donor community for more infrastructure financing and the failure of donors, the US, or international agencies to respond with substantial increases in financing also opened an important strategic door for the BRI.  As growth in emerging markets levelled off – well before the COVID recession – this led both to credit risks and to reputational issues.  From a policy perspective, large-scale flows to emerging market infrastructure is aimed at producing impressive economic results, for which China can then take credit.  The lack of emerging market growth, after two decades of ramped up lending and seven years of the BRI, dims the attraction of the strategy.

2)         As the Center for Global Development’s Scott Morris has pointed out, the massive scale up in lending by China always carried risks, and – concerns about debt repayments have grown.  China’s largest overseas exposure is to Venezuela, a country unlikely to make good on its debts.  Growing calls for debt relief surely are a significant factor in the major retrenchment in China’s overseas lending.  The same sovereign credit risks are likely to have an impact on the balance sheets of the Chinese government’s large external lenders. Large scale write offs may become inevitable, limiting the lending capacity of these institutions. 

3)         The large numbers in flows from China over the past two decades have come almost entirely from loans.  Loans have the advantage of creating large, publicity-friendly headline numbers.  Loans have the disadvantage that at times they fail to adequately recognize and price risks.  Arguably this dynamic has become more visible for China with the BRI, and China’s state-owned banks have gone through a similar cycle with domestic lending.   One important development which has been not so visible in recent years has been the turn towards the use of Chinese-backed equity financing for overseas infrastructure.  In Latin America, for example, where 2020 Chinese lending fell to zero, Chinese-led equity funds had a busy year, highlighted by China Three Gorges’ acquisition of Peruvian utility Luz del Sur, backed by the Chinese-Latin America Industrial Cooperation Investment Fund (CLAI).  CLAI, along with the China-LAC Cooperation Fund, are examples of emerging new approaches to infrastructure by the Government of China.  They will generate fewer headlines, smaller numbers, but may yet achieve more strategic objectives going forward than large-scale BRI lending.  Time will tell.

Chinese financing has become one of the big stories in emerging markets infrastructure.  The eye-grabbing numbers of capital flows of 2010-2015 may become a thing of the past, and it may be that this financing does not take emerging markets infrastructure to a whole new level, as many thought and some hoped it would.  The BRI will not be the magic wand that solves this development problem once and for all.  But, Chinese financing is adapting, as the greater recognition of credit risks and turn to equity show.  More adaptations will likely follow. 

Undoubtedly, the Chinese National People’s Congress taking place this week, the vehicle for setting five-year national strategies in many areas, will have this on the agenda.  Look for the BRI to be reaffirmed, for headline capital flow number objectives to be tempered, for a “greening” of the BRI, and for China to continue to be a large factor in this area for years to come.

Lessons from the Texas Grid Failure

February 2021

Everything is big in Texas – even the crises.

Over the past weekend, a blast of winter cold and snow spread from Canada, bringing sub-freezing temperatures and heavy snow to the center of the continent as far south as Mexico.  Northern states managed; Texas did not.  As Texans huddled inside and turned up thermostats, the grid failed.  Over four million Texans lost heat and power, more than forty have died, and tens of millions are under boil water advisory.  Long lines of people assembled in the cold, seeking propane, firewood, or help.  Five days later, many still have no power.

What happened, and what can we learn?

Stripping out the political rhetoric (to which we’ll return), there were four interlocking causes to Texas’ grid failure: high demand, supply failures, Texas’ peculiar regulatory environment, and lack of preparation.  The last of these is arguably least the fault of Texas’ utilities, yet also arguably the most important factor from which to draw lessons.  Cutting across all four of these causes is something larger – climate change.  Let’s take each of these in their turn.

High demand.  When the unexpected cold arrived over the weekend of February 13-14, demand for power and heating surged.  It’s not that Texans turned up the thermostats, but it was taking a lot more electricity – or natural gas, depending on the household – to keep the inside temperature warm.  Texans consume an average of roughly 50 gigawatts (GW) of electricity at a time, and the state has a generating capacity of about 85GW.  By February 15, demand had hit 71 GW.  In the best of cases, this would have caused generators and grid operator to scramble to meet demand, without much room to maneuver.  It was not the best of cases. 

Supply failures.  This is where most of the headlines have landed.  The state’s grid operator said that on February 15 about 34 gigawatts of power were offline.  That’s almost half of the peak power demand which hit the grid.  Wind turbines were the focus of the blame from Texas’ fossil-fuel fraternity, including Governor Greg Abbott.  In practice, inoperative wind turbines accounted for… 4 GW of lost supply.  30 GW, the vast bulk of lost supply, came from natural gas, and to a lesser extent coal and nuclear.  Frozen gauges and instruments at natural gas, coal and nuclear plants cut into operations.  Natural gas-fired plants also had to deal with low gas pressure in their supply lines, as demand for gas from pipelines feeding home heating also surged while gas producers dealt with frozen pipes and difficulties at cold well-heads.  Freezing also forced one of the state’s nuclear power plants offline. The Texas grid, with demand exceeding 70 GW, could only muster 51 GW of supply.  Grid operators, faced with the choice between a “managed” failure of rolling and hopefully temporary blackouts and an unmanaged grid meltdown, went with the blackouts. 

Texas’ peculiar regulatory environment.  Every grid has its own distinct regulatory environment, whether across the different parts of the United States, Europe, or across 200-plus of the rest of the world’s countries.  But some are more distinctive than others, and this is the case of Texas.  The two key characteristics of the Texas system are deregulation and independence – neither unique, but pushed farther in Texas than in most places.  In terms of deregulation, the Texas market encourages constant competition between providers of energy.  This is a good thing in terms of creating incentives for utilities to provide power to customers as cheaply as possible, and a great many other energy markets now do the same thing.  Yet the Texas market is unusual in lacking an accompanying regulatory feature which is common in most other competitive power markets – coupling payments for electricity delivered with capacity payments – payments that create incentives for generators to keep their plants available to deliver power, and not avoid the costs of maintenance (or, say, winterizing).  Most grids have kept this – Texas has not.  It is not just opponents of renewables who are taking the opportunity to politicize the current crisis: proponents of old-styled fully regulated and vertically-integrated monopoly utilities now claim – incorrectly – that any kind of deregulation and competition is bad.  What one should aim for is both cheap (from competition) and reliable (from capacity reserves) electricity.  Texan “independence” has also been a factor.  Texas has far fewer cross-state border electrical connections relative to size than other states, partly because this serves to make the state less subject to federal rules than would otherwise be the case, and partly because Texas is Texas.  This week it has meant that a tool available to many other grid operators – buying surplus power from neighboring grids – was not available to deal with Texas’ crisis. 

Lack of preparation.  This is in some ways the most interesting factor in the crisis.  After all, weekend temperatures were far worse elsewhere than in Texas.  The Southwest Power Pool (SPP), a 14-state system stretching from North Texas to the Canadian border, had limited and rapidly solved problems.  Same with the Midcontinent Independent System Operator (MISO), a 15-state system going from Louisiana to Manitoba.  Yet it was in “relatively warm” Texas that the grid failed from the cold.  ERCOT, the main Texan grid, did to some extent plan for winter troubles. But not enough: ERCOT predicted winter storm-driven demand would peak at about 67 GW (not 71), and that outages from coal and natural gas plants would be limited to about 14 GW (not 39).  Texas had most importantly not asked generators to prepare for cold – insulation and heaters helped keep SPP and MISO electricity coming into the system when Texan turbine blades and gas-fired boilers just froze.  Not exactly rocket science from a technical point of view – though costs that have to be paid for, in a regulatory environment that does not compensate maintaining availability.

Here are four key lessons we can take away from Texas’ tragic week.

  1. Climate change will further stress our power grids
  2. Grids need more investment.
  3. The regulatory environment for electricity transmission needs to catch up with climate change.
  4. Politics is a big part of the infrastructure problem

Lesson # 1.       Climate change will further stress power grids

Texas’ crisis started when it got cold – very cold, and unusually cold.  “Climate change” is often mis-translated into “Global Warming.”  The world is definitely warming – a lot.  But climate change effects include extreme weather events of all sorts, even more cold snaps like the one the southern US is experiencing.  The likely culprit here is warming in the Arctic, which has loosened the mechanism that usually keeps the jet stream far north, locking Arctic air away.  This week the jet stream has bent far south, bringing cold air with it.  The huge winter storms that plunged large parts of the central and southern United States into an energy crisis this week, sounded an alarm for power systems throughout the country.  Electricity systems are designed to handle spikes in demand, but the wild and unpredictable weather linked to global warming is making those spikes much bigger.   As climate change accelerates, many electric grids will face extreme weather events that go far beyond the historical conditions those systems were designed for (see “A Glimpse of America’s Future: Climate Change Means Trouble for Power Grids”). As the NYT also points out, “blackouts in Texas and California have revealed that power plants can be strained and knocked offline by the kind of extreme cold and hot weather that climate scientists have said will become more common as greenhouse gases build up in the atmosphere.”  The common theme in the two states is that many power plants are much more sensitive to temperature changes than the utility industry has acknowledged, said Jay Apt, co-director of the Carnegie Mellon Electricity Industry Center: “coal plants and gas plants have problems in both heat and cold.” Last August, several power plants fired by natural gas stopped generating electricity as Californians were cranking up air-conditioners because equipment at the plants malfunctioned in the hot weather.   Pedro Pizarro, CEO of Edison International, the parent company of California’s second-largest investor-owned utility, said no utility in Texas or California had anticipated the kinds of extreme weather that hit the two states: “both the Texas event and the California event are really good examples that we are all living with climate change.  Electric grid systems need to be able to deal with the new normal.”

In turn, the process of adjustment itself to climate change will create still yet more stress on power grids.  As ever-increasing amounts of intermittent power generation are built, accounting for greater share of generation, and more energy storage is connected both in homes (back of the meter storage) and grids (front of the meter storage) – both good things for emission reduction and for cheap electricity – yet further investments will be needed in grids to adjust to this, too.

Lesson # 2.       Grids need more investment.

Even without the effects of extreme climate events, investment in electricity transmission has lagged behind needs for many years.  Investments in new generating facilities – particularly in renewables – have captured the vast bulk of the sector’s financing in recent decades.  Clean and cheap power is good, but it does require transmission facilities to keep up.  The intermittent nature of wind and solar power can cause grid instability: ten years ago it was thought that intermittent generation of as little as 15-20% could cause major instability; now Denmark, other European countries and grid operators have shown that with sufficient investments in technical resiliency, systems can tolerate having at least 50% of their capacity from intermittent sources.  But a great many middle and lower-income countries have yet to make such investments in technical resiliency.  Wind and solar power, while increasingly the cheapest alternative for new electricity, also changes the geography of generation, requiring new and enlarged transmission lines to take advantage of the cheap power.  More transmission lines would help cheap wind power from the Great Plains, including north Texas, come to markets in the west and east of the US – or, as we saw this week, help an overloaded grid more quickly resolve its problems.  This issue has bedeviled systems across the world, and will only do so more as the energy transition continues.  Unfortunately, growing cyber-security risks to utilities also now require more investment for hardening controls, as Infrastructure Ideas has previously commented.  This week’s crisis was accompanied by at least one faked news story purporting to be from a Texas utility – it could have been much worse if hackers had been targeting the state.  Intelligence agencies warn that the United States’ power grids are increasingly vulnerable to attacks from hackers sponsored by foreign adversaries. Hardening the nation’s electrical supply against cyberwarfare is also needed.

Infrastructure Ideas had predicted that 2020 would be the year that policy-makers woke up to the problem and began catching up – then the pandemic intervened.  2021 may be the year.

Note that if you’re an emerging market, the events in Texas should be even more of a wake-up call.  Antiquated, underinvested electricity transmission grids are a problem that’s going to get a lot worse.  Use available public funding – and World Bank and other external funding where available – to strengthen transmission.  Don’t use those scarce public funds – especially after the COVID pandemic and its fiscal impacts — for Chinese-offered coal-fired generating plants: the debt which may be offered to fund them will have to be paid back before long, their electricity is more expensive than renewables, and their raw material supply will become increasingly problematic.  And don’t use scarce public funds for new wind and solar generating capacity – the world is awash in private capital willing to finance that. 

Lesson # 3.       The regulatory environment for electricity transmission needs to catch up with climate change.

As noted above, generating plants failed in Texas in part because they were not hardened to withstand the sort of severe weather that struck the state this week. This was avoidable. Texas had a similar freeze in 2011, after which the need for system upgrades and better planning was obvious.  Yet none of this happened.  Again as summarized by the NYT, grids can be engineered to handle a wide range of severe conditions.   Wind turbines can be equipped with heaters and other devices so that they can operate in icy conditions — as is often done in the upper Midwest, where cold weather is more common. Gas plants can be built to store oil on-site and switch over to burning the fuel if needed, as is often done in the Northeast, where natural gas shortages are common. Grid regulators can design markets that pay extra to keep a larger fleet of backup power plants in reserve in case of emergencies, as is done in the Mid-Atlantic.  Energy storage can make a big difference, especially as longer-term storage technologies start to emerge.  But these solutions all cost money, and grid operators are often wary of forcing consumers to pay extra for safeguards.  “Building in resilience often comes at a cost, and there’s a risk of both underpaying but also of overpaying,” said Daniel Cohan, an associate professor of civil and environmental engineering at Rice University. “It’s a difficult balancing act.” 

As extreme weather events become more common – without becoming more predictable – a regulatory environment which recognizes these risks, and forces and/or creates incentives for utilities to make these kinds of precautionary investments becomes more important.  Cross-border regulations and cooperation, which encourage investment in transmission lines that can both transfer cheap energy when it is generated and when one system has a failure, also take on a new importance.

Lesson # 4.       Politics is a big part of our infrastructure problem

The Texas crisis shows us that money and change are both needed to improve the infrastructure needed to keep millions from freezing unnecessarily.  Yet infrastructure is easily politicized – and that’s a big problem. 

Building long-term infrastructure is a complex and risky undertaking.  Countries, states and cities that have done so successfully – at least for a time – have benefitted from a good degree of popular consensus as to needs and (at least in general) solutions.  Without that consensus, it is much harder for the public sector to build long-term infrastructure across electoral cycles, much harder to do things differently than before, and much harder to complement public finances with private capital.  This week in Texas illustrates how easy it is to undermine popular consensus.  Under a Republican Governor, Rick Perry – also a former Republican Secretary of Energy, no less – fossil-fueled Texas had achieved a remarkable popular consensus on the value of wind power.  Drive across the north of the state and it seems like a forest of turbines, stretching for dozens of miles: even hotel rooms feature photographs of turbines.  Yet the first thing current Republican Governor Greg Abbott blamed for the crisis was wind energy.  It was surely much easier than blaming one’s own lack of preparedness.  And it illustrates how much harder the next phase of the energy transition will be in Texas.

Modernizing the electrical grid to make it more resilient, more efficient and more secure is the worst kind of challenge: complex, expensive and easy to ignore.  Local companies see overall demand for electricity leveling out, thanks to more efficient homes and businesses, which means a future without growth for their bottom lines.  They lack motivation and capital to build a stronger grid on their own.  Solving the problem will take political will, yet as the past has shown us, once heat and light are restored and the press has stopped covering the crisis in Texas, elected officials and policymakers will tend to quickly move on as well.  

Let’s see how Texas, and the new Biden administration, rise to the challenge.  Communicating clearly to voters what the problem really is and what is needed – and countering false claims about what the problem is not – will be an important part of the challenge.

In closing, this paragraph from today’s Washington Post captures the issue:

The grid is responsible for modern civilization, yet its failure can imperil life itself. It’s a 20th-century antique that, when foiled by 21st-century factors, can send us back to the 19th century, when Thomas Edison’s company built coal-fired dynamos on Pearl Street to illuminate Lower Manhattan.

The Demise of Loon

February 2021

Disruptive technologies have been reshaping the face of infrastructure as never before.  From wind turbines, to solar cells, smart meters, distributed generation, and now battery storage, new technologies have almost completely displaced traditional fossil-fuel sources in electricity supply.  Electric vehicles, automation, and mass-data-enabled business models like Uber and Lyft are similarly turning transportation infrastructure upside down – with Tesla now worth far more than General Motors. Hardly anyone remembers rotary phones, let alone land lines.  Yet not all promising technology breakthroughs survive to become the “next normal,” even with the deepest pockets behind them.

Meet Loon.

It was only a year ago that Loon balloons were being touted as the next big thing in telecommunications, especially in remote or disaster-hit areas.  Owned by no less than Google itself (through Google’s parent company, Alphabet), Loon’s high-flying balloons were, well, high fliers.  Enabled by artificial intelligence, Loon’s helium-filled polyethylene balloons were able to hover in one place for extended periods, serving as air-borne cellular towers in areas where such towers either didn’t exist or had been knocked out.  AI helped predict wind speed and direction at various heights, then use that information to raise and lower the balloon accordingly.  Loon’s balloons work by beaming Internet connectivity from ground stations to a balloon 20 kilometers overhead. The signal is then sent across multiple balloons, creating a network of floating cell sites that deliver connectivity directly to a user’s phone or computer router.

A Loon Balloon in action

Each Internet-enabled balloon covers a large area—roughly 30 times greater than a ground-based system—Loon can provide service to traditionally hard-to-reach or underserved regions.  Loon’s earliest markets were, not surprisingly, exactly these kinds of places: outlying areas of Brazil, Indonesia, New Zealand, Peru, Puerto Rico, and Sri Lanka, and disaster zones.  The first big commercial contract came in Kenya, where a 2018 agreement with Telkom Kenya to support internet access for the 70% of Kenyans who did not have it was followed by emergency grants of balloons to help the Kenyan government deliver health care messaging during the early months of the COVID pandemic.  For Google, all this was great public relations, as well as part of a strategic approach to diversify into other cutting-edge technologies.  The company touted Loon’s ability to bring the internet to the “bottom of the pyramid,” or “the bottom billion.”  A $125 million investment from partner Softbank in 2019 made the future seem promising.

Then in late January, 2021, came the news from Google headquarters: it was pulling the plug on Loon.  In a blog post, Google said “the road to commercial viability has proven much longer and riskier than hoped. So we’ve made the difficult decision to close down Loon.”  For all its promise and disruptive technology, Loon ran out of money. 

What happened?  A mix of good and bad news.  On the positive side, Loon’s technology worked.  The underserved and disaster-hit were able to get cellular and internet service.  At the same time, on the positive side for the under-served “bottom of the pyramid,” but bad news for Loon, other existing technologies were at work narrowing the innovation’s market window.  When Loon was started a decade ago, the share of the world’s population without internet availability was 25% — nearly 2 billion people.  Today it is about 7%, a bit more than half a billion, only a quarter of the market opportunity it was before.  The bad news for Loon is that is that its model is more expensive than more traditional existing technologies, and that the remaining population without service is the most expensive to reach, and the least likely to be able to afford the prices that would keep Loon airborne – not to mention the problem of administering payment of bills.  Potential commercial success had gone from “around the bend” to out of sight.

Google and Alphabet will go on.  New technologies will continue to appear.  But as always, spreading the benefits to the least well-off is the hardest part.  For now, the remaining poor unserved will continue to fall behind the rest of the world.  Yet Loon’s failure is a failure to be applauded.  Perhaps a foundation will partner with international funding agencies to continue stationing floating cellular towers to reach the poor – on a fully subsidized basis – if connectivity is deemed an important enough developmental goal.  A lot of rooftop solar has been built this way in low-income countries, and product development costs – possibly as much as half a billion dollars – have already been absorbed by one of the few companies which could afford it.  Time will tell.

And in the meantime, this tale illustrates that technological disruption in infrastructure continues to broaden – and that the early winners become the likeliest to have the money to kickstart more innovation.  Loon’s balloons may or may not live another life; that there will be more tales such as Loon’s is certain.

Previous Posts on Disruptive Technologies

Ten Infrastructure Predictions for 2021

January 2021

As for the past several years, we start the new year by looking into our crystal ball and seeing what these twelve months are likely to bring for infrastructure operators, investors and policy-makers (see here for Infrastructure Ideas2018, 2019 and 2020 predictions, and here for how well the predictions tracked for 2018, 2019 and 2020).  Here are ten infrastructure predictions for 2021.

  1. A post-COVID boom for new renewable capacity.  The ongoing COVID pandemic and its ensuing disruptions was the obvious big infrastructure story for 2020, but there were a few segments of outperformance.  Renewable energy managed to hold its own, and now after a few years of generally flat levels of activity globally, is poised to return to significant growth.  Global investment in new renewable energy capacity inched up 2% in 2020 to $304B, according to Bloomberg New Energy Finance, but this level has been essentially flat since 2015.  Underneath the aggregate numbers, patterns are more positive than they’ve been in some time for growth: 2020 was underpinned by new renewables investments in Europe, which is likely to continue to be the case under the EC’s “green recovery” plans; meanwhile investment fell in the two largest individual markets, China and the US, to $84B and $49B respectively.  In both China and the US, we can expect the combination of a return of demand growth (China’s economic growth rate is forecast to be the highest in years), the cost advantages of renewables, and the return of pro-renewable policy under the Biden administration, to underpin a jump in new wind and solar investments in both these markets.  In China in particular, we expect prices of new solar capacity to drop significantly, as the country continues its transition away from its older Feed-in-Tariff procurement mechanism for domestic solar generation towards competitive auctions.  Look for a record-breaking year in total investment and in Gigawatts of new solar capacity added worldwide, and another record for renewables as a share of net new generating capacity added worldwide, at over 70%.
  2. The energy storage market gets back on track.  Prices of energy storage have been tumbling, while the size of utility-installed batteries has been soaring.  The cost of a four-hour storage addition to new generation capacity has fallen from over $80/megawatt-hour in 2010 to less than $10 today.  Nonetheless new installed energy storage capacity has fallen by 15-20% each of the last two years, down to $3.6 billion in 2020, largely due to regulatory uncertainties.  2021 will see a completely different story.  With solar-plus-storage costs for new generation capacity beginning to match the costs of new gas-fired plants, more and more utilities are switching new projects from gas to renewables plus storage.  And with the Biden administration in the US focused on getting a favorable regulatory environment in place, we can expect a surge in new capacity additions in the US.  The last few months have already seen this emerging: according to the Energy Storage Association, fourth-quarter 2020 deployments of energy storage in the US more than doubled those of any previous quarter on record.  The EIA expects a record 4.3 GW of new battery power to be added worldwide in 2021, and we agree – that should imply about $5 billion in investment — and we also expect grid-scale capacity to exceed not only 2 GW for the first time, but to reach between 2.5 and 3 GW.
  3. More airline bankruptcies.  The Fallout of COVID for all sorts of transport infrastructure for moving people has already been horrendous – whether airlines, mass transit, or taxis.  The flow of red ink is far from over.  Infrastructure Ideas reviewed the situation of airlines back in mid-2020 (The Airline Shakeout Starts Up), and by year-end over 40 carriers had declared bankruptcy.  Today many others have fragile Balance Sheets from hemorrhaging cash all year, and there is little sign of any turn around in air traffic demand in the next few months.  IATA says airlines lost over $80 billion in 2020, and projects the industry to lose $5-6 billion a month in the coming year.  Watch for more carriers to fall by the wayside in 2021 (for more see Over 40 airlines have failed in 2020 so far and more are set to come).
  4. Rethinking mass transit.  COVID has also been a disaster for mass transit infrastructure everywhere.  Ridership across US metropolitan systems fell by 65-90%.  Revenue shortfalls have forced transit authorities to cut routes and frequencies, and delay expansion and maintenance.  These measures will unfortunately create a negative feedback loop: transit systems which run fewer, slower routes, less reliably, will attract fewer riders, even when pandemic concerns eventually recede.  The $20 billion for mass transit in the Biden Administration’s “Rescue America” plan will reduce the damage to an extent, but we can expect the financial wreckage to last several years.  Infrastructure Ideas expects several consequences: (a) further reductions and delays in planned expansions of mass transit systems worldwide; (b) a sharp falloff in interest in new subway plans, including across Emerging Markets, and their replacement by cheaper Bus Rapid-Transit plan; (c) new partnerships between municipal mass transit systems and “shared mobility” players (bicycle, scooter, and car-sharing companies). 
  5. Cyber risks grow for Utilities.  Regrettably, this has become a “safe” annual prediction.  2020 saw a worldwide increase in the frequency and scope of cyberattacks on a wide range of targets, including infrastructure.  Aside from the much-publicized Solar Winds hack which, along with breaching several parts of the US government, exposed several infrastructure systems in the US, 2020 also saw several other known, and no doubt more unknown, attacks.  In February, a US natural gas compressor unit was closed for two days after dealing with one incident.  In April, a pair of cyberattacks were reported on electric utilities in Brazil.  In June, Ethiopia reported it had thwarted a cyberattack from an Egyptian group aimed at creating pressure against the filling of the Grand Ethiopian Renaissance Dam on the Nile.  Concerns run across geographies, including Africa.  A recent McKinsey analysis found three characteristics that make the energy sector especially vulnerable to contemporary cyberthreats:  an increased number of threats and actors targeting utilities, including nation-state actors and cybercriminals; utilities’ expansive and increasing attack surface; the electric-power and gas sector’s unique interdependencies between physical and cyber infrastructure.  Look for the headlines to get worse in 2021.
  6. Joint action on climate… finally.  With the exit of the Trump administration, the stage is reset for multilateral progress on climate change.  2020 was either tied or in second place for the hottest year on record, and that’s with the pandemic-induced slowdown in economic activity and emissions.  Most analysis now show the world on track for at least 3 degrees if not significantly more of warming (see McKinsey’s analysis of the world being on a 3.5 degree track), and the damage from heat waves, storms and flooding continues to increase.  Joe Biden already on his first day in office committed the US to return to the Paris Climate Accords, and China has become more aggressive in its emission reduction undertakings.  Look for new substance at the November climate summit in Glasgow, COP26.  In particular, look for (a) announcements of further reductions beyond those undertaken by countries in the Paris Accords, and (b) the emergence of a clearer tracking system to “grade” countries on how their actions are matching their commitments – a key missing element in the global frameworks to date.  The first baby steps beyond “voluntary” action.
  7. Cash for clunkers makes headway.  Coal-fired plant closures have brought constant positive emissions-related headlines over the past few years.  Last week came the announcement of the upcoming closure of a large Florida coal plant – 18 years early.  As a good piece by Justin Guay in Green Tech Media put it “Nearly every day, articles appear announcing new record lows in coal generationcoal retirements and the generalized economic train wreck that is the coal industry.”  Yet these headlines are not yet enough to bring the world back to a 2-degree warming scenario – and probably not enough to keep it even to a 3-degree scenario.  To be on track to meet the Paris Agreement goals, every coal fired-plant in the OECD would have to be offline by 2030, and every coal-fired plant in the rest of the world would have to be by 2040.  In OECD countries, almost half the existing coal-fired generation plants are not earmarked for retirement before 2030, so a lot of work will be needed there.  The biggest rich-country coal users – Japan, the US, Germany and Australia – are in the best of cases a decade off schedule.  Yet this dwarfs the complications of the rest of the world, especially Asia.  China has 1,000 gigawatts of young coal plants – almost half the world’s total coal-generation capacity, and is still building new ones.  India and the rest of Asia have about 400 gigawatts of coal-fired generation, need much more electricity, and are still locked in internal debates as to how much of their future energy needs are to be with coal (see Infrastructure Ideas’ series on Asia’s Energy Transformation: Pakistan, Bangladesh, India, and Indonesia).  The technical lives of many of these plants will stretch long past when they would need to be shuttered to meet the Paris accords, and many of them are insulated from the declining economics of coal by quasi-monopolies and/or long-term contracts.  According to Carbon Tracker, the US and the EU will, by next year, be paying coal plants over $5 billion to stay in operation, through contracted capacity payments.  It would be much better to use these funds to buy the plants out and close them, in effect a “cash-for-clunkers” program as Justin Guay labels it.  As an earlier Infrastructure Ideas piece puts it, “Money is Coming for Coal.”  The funds would be needed to buy out legacy operators, and to support affected workers and communities.  This will be controversial, and complex to design and implement.  But with emissions likely rebounding again and a more favorable political environment, look for paying coal to go away to get on the table in 2021.
  8. The US gets its trillion-dollar infrastructure plan.  There were plenty of promises in 2016 about a trillion-dollar infrastructure plan for the US to fix many of its problems, but this never materialized.  Now with a new administration, and democratic control of both houses of Congress, there will surely be such a plan put in place in 2021, with roll-out getting underway.  The nomination of Pete Buttigieg as Secretary of Transport indicates that urban infrastructure will be a priority, and that municipal authorities will get much more say going forward on how funding helps address cities’ infrastructure needs.  Buttigieg had his own trillion-dollar plan as a candidate (see “Inside Buttigieg’s $1 Trillion Infrastructure Plan”) in the primaries, and stated “as a former mayor, I know that priority-based budgets made locally are better than budget-based priorities set in Washington.”  This will be in sharp contrast to the previous four years, when whatever federal funding trickled out was aimed almost entirely at the rural areas which were the base of Donald Trump’s support.  Climate adaptation and road rebuilding were high on both Buttigieg and Joe Biden’s campaign pronouncements, so look for major spending in these areas in 2021.  President Biden apparently also plans to re-create a version of the depression-era Civilian Conservation Corps to work on climate adaptation projects.
  9. The BRI gets a facelift.  In September, Chinese President Xi Jinping pledged to make China carbon neutral by 2060, and to “bring forward” an earlier pledge to start reducing GHG emissions by 2030.  The announcement was widely welcomed, but it will be a hard slog to turn into reality: with economic pressures, 2020 saw a sharp increase in the number of permits for new coal-fired plants issued in China.  China’s emissions progress will likely stay in the limelight as international climate discussions get more serious in 2021, thanks to the re-engagement of the US (see above).  At the same time, China’s flagship international initiative, the Belt and Road Initiative (BRI), is seeing increased criticism of its environmental and climate impacts.  Coal-fired generation plants have been big recipients of support under the BRI, particularly in South Asia.  Announcing some sort of “greening” of the BRI going forward would be low hanging fruit for Xi Jinping to avoid focus on the BRI’s environmental negatives at a time China wants to be seen as a leader of the international agenda.  Look for this to come to pass later in 2021.
  10. This is (not) the time for the Emerging Markets infrastructure boom.  There is one coming – really!  For years policy-makers, analysts and investors have looked at Emerging Markets as the great future of infrastructure.  Large infrastructure deficits, growing wealth and demand for services among the population, higher returns than in wealthy markets, coupled with a “wall of money” from institutional investors looking to get some yield on their excess liquidity.  In 2021 it … will not happen.  The demand pull will stay largely theoretical.  Of the ten or so larger economies that make up 80% of collective GDP of Emerging Markets, four of the biggest – Brazil, Mexico, South Africa and Turkey – will at best remain hamstrung from a combination of COVID and internal politics, and at worse turn their back on private investment.  The “push” from investors will be going elsewhere.  Between a big push for new infrastructure in the US, and the European “Green Recovery” plan, investors and infrastructure companies will be looking for their opportunities in developed markets.  And between the Trump tax cuts and forthcoming public spending increases, look for interest rates to start inching up, further reducing the push from institutional investors.  At some point continued internal pressures, and limited public spending options, will lead to a wave of Emerging Market reforms.  Just don’t look for it in 2021.

2020 in Review

January 2021

In January 2020, Infrastructure Ideas made our annual 10 predictions for 2020.  With the year closed, it’s time to take a look at how things unfolded, and as we all know, 2020 proved to be a crazy year all over the place!  A pandemic, a major recession, unprecedented political events in the US, among other things – most people would like to put 2020 as far as possible in the rear-view mirror.  Nonetheless, our 2020 forecast was not dramatically off the mark: of Infrastructure Ideas’ 10 predictions for 2020, six still were on target, while the other four remain… debatable.  This compares to our 7 for 10 outcome for both our 2018 and 2019 predictions.

Here were six predictions which managed to be on the mark for turbulent 2020:

Offshore wind is the new big thing

Pandemic?  What pandemic?  Offshore wind, a stepchild until the last 2-3 years, had a remarkable 2020.  Bloomberg New Energy Finance had reported that 2019 was already well above expectations, with worldwide new financings for offshore wind at a record $29.9 billion; 2020 broke that record… in the first six months.  BNEF reported $35 billion of new financings for 28 offshore wind projects through June 2020, with the still to be determined year-end number likely to come in at least at $50B.  Offshore wind will have accounted for over a quarter of all new renewable power investments, which is remarkable.  Even more remarkable?  Leading offshore wind developer Ørsted has a higher market capitalization than BP ($75 billion versus $55 billion).   Success has been driven by falling costs, from around $0.15-0.20 a kilowatt-hour in 2015 to $0.05-$0.07/KwH in 2020, and increasing geographic acceptance.  After the technology’s early adoption in the EU and China, the US East Coast has jumped into offshore wind in a big way, and markets from Vietnam to Poland are planning large investments.  Falling costs are being driven by improved technology, and by increasing scale.  Two newly announced mega-turbine models, GE’s Haliade-X and Siemens’ Gamesa newest turbine, can provide 12 and 14 megawatts of power – for each turbine.  (see more in Infrastructure Ideas’ February 2020 review of offshore wind).

Challenges mount for power grids and utilities

Grid operators saw a ramp-up of challenges associated with the energy transition in 2020.  Before the pandemic, these challenges already included continued switching to lower-cost intermittent generation sources, transmission, integrating storage, and integrating growing numbers of electric vehicles.  We expected to see in 2020 larger transmission investments in developed markets, and increasing concern in Emerging Markets – particularly those with state-owned grids – about how to modernize grids.  Developed markets were given some breathing room by the pandemic and the ensuing decline in electricity demand, but we can observe growing calls for such larger investments for the post-pandemic period (see “alliance calls for $50B in federal spending for grid modernization,” and “renewables and resiliency drive transmission upgrades.”)  The economic shock associated with COVID-19 has limited the ability of many emerging markets to address these issues, and last week’s country-wide blackout from a grid failure in Pakistan was a reminder of the growing urgency of the issue.

Non-lithium batteries get serious

We expected non-lithium batteries to make bigger headlines in 2020, and this was certainly the case.  Overall investments in battery storage through the first three quarters of 2020 were up $2B over FY2019, in spite of the economic effects of the pandemic.  And this year a much greater slice of this investment went into technologies other than Lithium-Ion.  The biggest splash was made by Latham, New York-based Plug Power, which raised over $1 billion – not once, but twice.  Then the list goes on, and on.  Eos Energy Storage, which produces zinc aqueous hybrid cathode battery storage systems, listed on Nasdaq in November.  Form Energy, with its aqueous air battery, raised $76m in 2020, double their 2019 funding.  Highview Power raised over $50m, while smaller amounts were raised by Quidnet Energy (a long-duration storage start-up), e-Zn (developer of Zinc-ion batteries), Invinity Energy Systems (vanadium flow batteries), Natron (sodium-ion batteries), and Enervenue (nickel-hydrogen batteries).  Aerospace and defense giant Lockheed Martin also made headlines in deploying its GridStar Flow long-duration energy storage technology in October, using a coordination chemistry flow battery.

Lockheed Martin battery

Green House Gas emissions: alarm keeps climbing, but no global agreements yet

We called this one of our safest predictions for 2020, and so it was.  In spite of a pandemic-driven pause in GHG emissions growth, temperature records continued to be broken in 2020, and extreme weather events – both storms and wildfires, set new records.  And 2020 certainly saw no coordinated global action on the front, with the Trump administration formally pulling out of the Paris accords. Two glimmers of hope for better news: the change of administration coming in the US, and China’s unilateral announcement that it would seek “carbon neutrality” earlier than it had claimed before.

Delivery vehicles become the new EV focus

We expected electric delivery vans to get plenty of attention in 2020, and this was without a hint of what COVID would do to the transport market.  Logistics became the fastest growing infrastructure segment around, with consumers everywhere shifting from on-site shopping to delivery.  Demand for delivery vans went through the roof, and electric vehicles were big beneficiaries.  Amazon’s EV van partner Rivian raised $2.5 billion in July 2020 to expand and accelerate production, with its first 10,000 all-electric vans expected on the roads by 2022.  Also in 2020 Ford, General Motors and Mercedes-Benz all unveiled electric van plans.  Ford is investing $100 million in a plant in Missouri, and breaking ground on a new manufacturing facility in Dearborn, Michigan, for mass production of its new electric van.

Concerns grow over hacking of infrastructure

Unfortunately, correct.  No need to say much about this prediction.  One has only to look at the still continuing fallout of the massive Solarwinds hack to see that this issue continues to get worse.  Even Standard & Poor’s has issued a warning about the related vulnerabilities of utilities.

Here are our four other infrastructure predictions for 2020 that were either thrown off by events or were premature.

Wind and solar keep growing. 

After two years of fairly flat investment levels, we expected global renewable energy investment to resume strong growth in 2020. The picture looks decidedly mixed.  While year-end numbers are still awaited from industry analysts, it looks as though 2020 will again have seen flat investment levels.  Bloomberg New Energy Finance did see a small increase in the first half of 2020 in renewable investment, compared to the same period of 2019, but the first half of 2019 had been particularly slow.  China, the world’s largest renewables market which had seen a significant decline in 2019, did bounce back, with a 42% increase shown at mid-year, largely thanks to large offshore wind investments.  Onshore wind investments worldwide on the other hand were particularly hard hit by supply chain disruptions, and renewable installations in the US were significantly off from their 2019 levels.  The IEA is forecasting that electricity generation from renewable energy sources will have grown by almost 7% in 2020.  We will see what year-end numbers bring.

Emissions-free city zones multiply

In a “normal” environment, we would have expected many more cities to declare “emission free zones,” as we’ve seen in Spain and other parts of Europe.  The pandemic and ensuing recession have drawn the attention of urban policy-makers elsewhere.  This said, a new phenomenon which greatly expanded in 2020 was the closing of certain areas to vehicle traffic – allowing for more walking or bicycle riding — in many cities.  Initially a response to the pandemic and the need for social distancing, these closures could well both become permanent and draw more replication.  Even Bogota joined the bandwagon in 2020.

Unilateral “100% renewables” commitments multiply

In the same vein, our expectation of more unilateral commitments to 100% clean energy in 2020 was disappointed by policy-makers’ attention being turned elsewhere.  Give the size of job losses and economic problems stemming from the pandemic, other priorities dominated the agenda.  The decline in emissions due to reduced transport activity also contributed to reduced urgency.  We can expect both a bounce-back in emission levels post-COVID, and renewed action on both the joint and unilateral fronts, especially given the results of the US election.

Financing premiums appear for climate risks

The press continued to be filled in 2020 with stories of problems for insurance companies related to climate change – whether from flooding or fires.  Yet we were premature in our expectation that this would become a visible piece of financing costs.  It won’t be long now…

What Infrastructure Ideas did not predict, and which massively impacted infrastructure in 2020, was COVID-19.  While a few areas flourished, notably logistics, infrastructure businesses designed for transporting people rather than goods were devastated by a disappearance of demand – the fallout for mass transit, airlines and railways will continue to unfold over the next 12 months (see our pieces on the impact of the coronavirus on infrastructure, and on airlines from May).  On the energy front, it was a bad year for coal, natural gas, and oil, with all the decline in energy demand being absorbed by fossil fuels.  We can also expect that provision of public infrastructure, especially in economically hard-hit emerging markets, will face a steep decline until public finances stabilize.  Look soon for our 2021 predictions.

Cities and Climate Change

December 2020

This is the second in a series of Infrastructure Ideas articles on Infrastructure and Politics, following last month’s earlier review of Infrastructure and the US Election

The past four years have been largely disappointing in many areas of infrastructure.  Among others, after much hype, the trillion-dollar infrastructure plan for the US never materialized, with the same fate befalling the “billions to trillions” campaign for infrastructure in Emerging Markets.  Two infrastructure-related areas where the past four years have nevertheless seen progress have been in municipal infrastructure, and in climate-friendly energy technologies.  Mayors in the US – and in many parts of the world – have been increasingly stepping up to address infrastructure needs left untouched by central authorities (see “what did all those infrastructure weeks add up to?” in Bloomberg CityLab).  Meanwhile renewable energy technologies have continued to drive down the price of zero-emission electricity generation, well-below that of fossil-fuel alternatives, and energy storage technologies have begun to emerge.  In this article, we’ll take a look at the combination of these two positive trends and see how cities are doing on climate change.

With the Trump administration in the US walking back previous national commitments to reduce emissions and fight climate change, many US cities stepped into the void with their action pledges.  Michael Bloomberg’s and Jerry Brown’s “We are Still In” coalition was one of many that took steps to counter the administration’s roll-back efforts.  For example, today 1 in 3 people in the US live in a city or state jurisdiction which has committed to 100% clean energy.

A recent in-depth data analysis by the Brookings Institute noted that over 600 local governments in the US have developed climate action plans that include greenhouse gas inventories and reduction targets.  This reflects the depth of public concern about the consequences of a warmer planet among urban populations – and the lack of similar concern in the rural areas which have formed the political support for the Republicans in the US.  Brookings’ analysis, focused on the 100 largest cities in the United States, with the following key findings:

  • Slightly less than half of large US cities have established GHG reduction targets. Where the goals exist, they are aligned with the IPCC 2- degree target, but tend to fall short of the pathways that would limit warming to 1.5 degrees.  These cities account for 12% of the total US population.  An additional 22 cities have committed to reducing GHG emissions but have not yet established specific emission reduction targets or completed a baseline emission inventory upon which to base a reduction plan. Most targets remain non-binding.  Of the 45 cities with plans, 17 have implemented new or updated plans since the Trump administration took office in January 2017.
  • Collectively, the total annual reduction in emissions achieved by the 45 cities with both targets and inventories would equate to approximately 365 million metric tons carbon dioxide equivalent, 6% of total US emissions, or the equivalent of removing about 79 million passenger vehicles from the road, and roughly 7% of the emission reductions to which the U.S. originally committed to achieve by year 2050 in relation to the Paris Agreement.
  • In practice, and despite genuine achievements in many cities, roughly 2/3 of cities are currently lagging their targeted emission levels.  Some 13 cities do not appear to have any publicly available GHG inventories for the years subsequent to the establishment of their climate action plan. Based on their most recent GHG inventory data, 26 of the 32 cities that had at least one additional inventory since 2010 experienced a decrease in emissions compared to their baseline emission levels, while six cities experienced an increase. Los Angeles, California has experienced the largest decrease in emissions (about 47% below 1990 baseline levels), while Tucson, Arizona has experienced the largest increase in emissions amid sprawling growth (39% above 1990 baseline levels), followed by fast-growing Madison, Wisconsin.  On average, the cities analyzed in this study will still need to reduce their annual emissions by 64% by 2050 in order to reach their ultimate GHG reduction targets.

The early November elections also signaled support for further action by voters in a number of cities.  “Community choice” energy programs, which enable municipal governments, rather than utilities, to decide where local power should be sourced and therefore accelerate shifts to “green energy”, were approved in a number of cities, including Columbus, Ohio, and East Brunswick, New Jersey.

Of course, climate-aware cities acting on their own can’t stop climate change.  Efforts have to go beyond the pioneers, and more than half of the US’s largest cities lack serious climate plans, and many of the plans that do exist lack viable agendas for implementation. Change, in any area, requires diligent review and assessment to learn what really works.  Networks such as the C-40, or the Climate Neutral Cities Alliance, are helpful in trying to stimulate this learning across more cities, but these so far have tended to help early adopters learn more from each other, rather than stimulate more cities to act.  One analysis in Nature Climate Change showed that existing climate studies under-represent the challenges of small cities of fewer than 300,000 people, where 40% of urban dwellers live in OECD countries, and those of the fast-growing cities in the global South.  The study found that Africa, the region with the fastest growing cities, is the least well-represented in the urban case study literature, and that small Asian cities are projected to have the largest share of the global urban population by 2030, yet are also poorly studied.  Such “mapping” of the gaps of where cities are putting in place climate change plans, and the gaps in information available for different segments of cities, is a useful step forward.

There is a long way to go, and a lot of damage has been done at the federal level in the past four years.  Likely Republican retention of the control of the US Senate, pending the two January run-off elections in the state of Georgia, will dampen the new Biden administration’s efforts to take much more aggressive on climate mitigation, though pressure on vehicle efficiencies and emissions is likely to be enacted, and to make a big difference.  States and cities will still continue to play a disproportionate role in reducing US emissions.  While many of the cities whose actions will have an impact are located in the “red states” whose leaders continue to ignore climate change, the cities themselves have different voting patterns and preferences than the states they are in.  Hope on US emissions reductions is still best placed in cities and mayors: expect to see them getting much more support from the federal level going forward, and expect fireworks where “red state” governors try to block the ability of cities in their states to enact climate change plans.

Previous Infrastructure Ideas Posts on the theme of Infrastructure and Politics:

Infrastructure and the US Election  — November 2020

Walking Away from PPAs: Spain Revisited  — February 2020

Blue Coal ?  — October 2019

And Many More Strikes to Come  — May 2019

Populism Still Trumps Infrastructure SolutionsFebruary 2019

Infrastructure WeakMay 2018

Infrastructure Meets PoliticsApril 2018

A PPP Saga, Part II – Back from the Brink

November 2020

Earlier this week came a major announcement concerning one of the world’s largest Public-Private Partnerships (PPPs).  The State of Maryland announced it had reached agreement with Meridiam Investments and Star America to restart the $5 billion Purple Line mass transit project, which had been declared terminated less than two months before (see Infrastructure Ideas’ previous “A High-Profile PPP comes apart”).  The agreement calls for Maryland to pay an additional $250 million to the consortium to partially address cost overruns, and the consortium will resume work on completing the 16-mile light rail line, while replacing the main construction contractor, Fluor Corporation.  Lawsuits going in both directions will be dropped.

This announcement has some significant implications, which we’ll recap here.

First, this is really, really good news for residents of Maryland, especially those living in the vicinity of the construction.  While bad enough that their streets had been torn up to make way for the project, many along the project route were facing the prospect of several years of looking at half-finished structures and blocked streets, while the state would have sought some other way forward for completing – or at least cleaning up – the project route. 

It is good news for public transportation in the Washington DC area, and by extension for other urban areas across the country looking at improving mass transit options.  A high-profile failure in the Washington metro area would have been a damper on plans for other large-scale projects; instead, the agreement signals it is possible to negotiate one’s way out of a very messy situation forward at a reasonable cost.  The added bill of $250 million for the contracting authority comes to less than 5% of total project costs; while this is still a lot of money, a cost overrun of only about 5% is not so bad for a massive infrastructure project.  The average purely public infrastructure project will have higher cost overruns than this. 

This is very good news for the State of Maryland: escaping the situation, with its already extensive delays, at a far lower cost than might have been.  The contractors had been seeking over $800 million in extra funds for cost overruns, more than triple what Maryland has now agreed to pay, and had the state had to assume the cost of completing the project itself without the consortium, it would likely have faced yet higher overruns.  On top of that, Maryland avoids the potential liability of having to make termination payments to the project’s bondholders.  Those bondholders, mainly pension funds and insurance companies, provided some $313 million to the project, funds which were to be repaid either through project revenues, or termination payments underwritten by the state.  Arguably Maryland could have been on the hook for as much, if not more, than the $250 million it has now agreed to pay the Purple Line consortium, and that without getting the project completed.

This is also good news for Meridiam and Star America, the remaining Purple Line Partners, for whom a full write-down of the equity invested in the project would have severely dented their reputation and financial status.  Both have a lot at stake here: Paris-based Meridiam is pursuing a role in planned multibillion projects to add tolling to the Capital Beltway and Interstate 270 in the Washington DC area, while Star America’s selling point is its expertise in Public-Private Partnerships.  It is also good news for the holders of the project’s $313 million in private activity bonds.  While these bonds were secured by termination payments underwritten by the state of Maryland, bondholders were still at considerable risk of facing write-downs of their principal on the bonds in bankruptcy court, should the project have reached that stage.  The custodian for the bonds, US Bank, earlier this month agreed to forebear from collecting or declaring default on the bonds for a period, giving the two sides some space to reach an agreement – which appears to have been a wise decision.

The agreement may finally be good news as well for private infrastructure investors and lenders generally.  As a new administration comes to office in the US, and looks to address the country’s perennial infrastructure problems, PPPs will not have quite the black eye they would have.  This has implications for the potential role of PPPs in the US, and the potential demand for private capital in infrastructure in the US.  While the progressive wing of the Democratic party has generally shown limited enthusiasm for involving the private sector in infrastructure, at least PPPs will remain as a not-quite-as-strongly discredited option for policy-makers.

On the other hand, the good news in this new Purple Line PPP compromise does have some limits.  This new agreement, with the government agreeing to pay more than it had substantially agreed to pay for the project, will to an extent play to one negative aspect of the reputation of PPPs:  that they’re at frequent risk of renegotiation.  Latin America saw one of the earliest waves of PPPs, in the 1980s – many for toll roads in Mexico; these became over time frequently criticized for their cost overruns – and the attendant corruption that turned out to be involved in contract renegotiations.  So while PPPs will be “less discredited,” the saga will not exactly be an advertisement for PPPs.  Coupled with the ongoing problems of the Silver Line metro extension across the Potomac River from the Purple Line, the Washington DC’s flagship mass transit investments – some of the largest in the country today – will not warm the hearts of urban public transport expansion advocates.  One could argue that “winners” here will eventually include those advocates for forms of public transport which are less-capital intensive than light-rail and subways, notably high-speed bus lines.

One lesson which we hope will come out of the saga will be a simple one: mind the details.  Simple, even though it involves more lawyers, at least at the outset of large PPP projects.  It appears in retrospect that, if Maryland’s planners had taken a bit more time at the outset to mind the details in the Purple Line contracts — to make arrangements for monitoring progress on the project, and to assess potential right-of-way problems, they might now not be “celebrating” a major renegotiation.  They might instead be celebrating the opening of service across the Washington suburbs.

And, oh yes: Maryland now needs to come up with another $250 million.  It’s not yet clear where this will come from.  The new transport service opening?  Maybe in 2024.