Silver Linings

Silver Linings: the COVID-19 crisis and infrastructure
May 2020

The COVID-19 epidemic has transformed pretty much all aspects of life over the past three months. Our previous Infrastructure Ideas column, written in the early days of the pandemic, outlined some of the possible effects of COVID-19 on the world of infrastructure. As is the case in so many areas, the implications were depressing. It is also apparent that positive news are in great need – and not based on distorted data and magical thinking, as can be seen coming from some quarters. Today’s column looks then at some silver linings for infrastructure in the pandemic era – and there are some!

We’ll start with the two most obvious “winners” from the crisis: logistics, and emissions reductions.

1) New and expanded logistics opportunities. As can be readily seen on any highway or city street, the amount of goods being delivered to homes through (generally) online orders has skyrocketed in 2020. The world’s biggest retailer, Walmart, has reported a 74% increase in e-commerce sales for the last quarter. Volumes have grown so sharply that even logistics giants are having difficulties keeping up: FedEx has asked several of its major store clients to slow or limit home delivery sales in order for FedEx to be able to manage shipping logistics. Amazon, possibly the biggest winner of all, announced back in March that it would be hiring for as many as 100,000 new positions, mainly in warehouse handling, and reported a 26% increase in quarterly sales – an impressive feat for a company with already over $200 billion annual revenue. And providers of logistics software and supporting services are also thriving.

The jump in demand for infrastructure logistics driven by e-commerce and home delivery services is broad-based and likely to remain with us. As Coronavirus infections continue to spread into new areas, demand is growing in virtually all geographies. An example is the three-year old Colombian company Liftit, recipient of an investment from the IFC. Liftit provides a technological platform that connects truck drivers with companies that need cargo delivered (similar to a ride-hailing app), and has already expanded beyond Colombia. The matching of large customers with truck fleets is a crucial link in the supply chains, especially in regions where the majority of drivers are independents (See more on Liftit here). In Pakistan, a similar app-based service connecting people and goods via motorbikes in major cities, Bykea, is getting a far-higher profile through the delivery of food parcels for thousands of people during the crisis. Bykea uses smartphones, a call center comprised mostly of women working from home, and a network of 30,000 motorbike driver-partners. In Africa, the use of drones for logistics has gotten a major COVID-related boost from the demand for transporting test samples to labs. US startup Zipline has launched operations for its pilotless flying vehicles in Ghana and Rwanda, also using them to ship protective equipment, vaccines, drugs and other supplies. These kind of advances, combined with changes in consumer demand (buyers who discover convenience which they had not tested previously, and/or those who remain wary of crowded retail shopping situations in the future for health reasons), will continue to fuel logistics growth well into the future. And an analysis by the Brookings Institute (Could COVID-19 help logistics?) shows some of the labor-related benefits of logistics jobs indicates that these jobs often carry good training opportunities with transferrable skillsets, and potentially higher pay relative to low formal educational barriers to entry.

2) Emissions reductions. An international study of global carbon emissions found that daily emissions declined 17% between January and early April, over 1,000 metric tons compared to average levels in 2019, and could decline anywhere between 4.4% to 8% by end 2020. That would mark the largest annual decrease in carbon emissions since WW II. Carbon reductions are primarily driven by fewer people driving — surface transport activity levels dropped 50% by the end of April. This was equal to (50%) the fall in the amount of gasoline supplied in the US—a close measurement of direct consumption— over the two-week period ending April 3. With all those cars now sequestered in garages, air quality around the world has gone through the roof. As reported in Wired, researchers at Columbia University calculated that carbon monoxide emissions in New York City, mostly coming from vehicles, fell by 50% in March. Another positive side effect of this is on public health: research from the Harvard School of Public Health has shown that air pollution is associated with higher Covid-19 death rates, even small increases in long-term exposure to fine particulate matter leads to significantly higher mortality. Chances are not great that emissions will stay on this path post-crisis, but for now this piece of news is good for the climate.

3) Acceleration of the energy transition. Aside from the two obvious winners above, there are other interesting trends flowing more under the radar. One is on energy transition. While it is likely that energy use will rebound sharply after the pandemic, its carbon intensity should be lower. Of particular interest is that while the coronavirus lockdown will cause the biggest drop in energy demand in history, it looks like renewables will manage to increase output through the crisis. The International Energy Agency (IEA) says that demand is likely to fall 6% in 2020, with rich countries showing a steeper decline, the U.S. falling 9% and the European Union losing 11%. Global oil demand is poised to slump by about 9%, coal demand is falling about 8%, and natural gas about 5%. Yet the IEA expects production of wind and solar to grow in 2020. In the first week of April, it was widely reported that wind and solar had produced more electricity in the US than coal did for two months in a row, for the first time on record. A Wood Mackenzie analyst, Matthew Preston, notes that coal is now more expensive in most of the US than natural gas, wind or solar energy: “Just about everything that can go wrong, has gone wrong for the coal industry.” More banks, including HSBC in April, have announced the cessation of coal financing; HSBC’s announcement closed previous loopholes for coal plants in Bangladesh, Indonesia and Vietnam, and included a Vietnamese project for which it was the global coordinator. HSBC had reportedly financed $8 billion of new coal plants over the past three years. While oil and gas prices have fallen sharply in 2020 to date, there are signs of supply reductions and cost increases on the post-crisis horizon. Moody’s had announced already in late 2019 that 91% of all US third-quarter defaulted corporate debt was due to oil and gas companies. As wind and solar prices continue to fall (see below), coal’s lack of competitiveness will grow, while gas will also have an increasingly harder time competing on costs against renewables. Expect that projections for renewables’ share of the energy mix in future years begin to tick up.

4) Technology continues to move forward. The single brightest development in infrastructure for the past decade has been that energy has been getting cheaper around the world, driven initially by the increased supply of natural gas enabled by new imaging and drilling technology, and in more recent years by the continued technology-led plunge in wind and solar costs. While these gains have fallen out of the headlines during the COVID-19 pandemic, they have been continuing.

In late April, yet another global record-low solar price was achieved. And it was achieved for the world’s largest solar project. Abu Dhabi announced that the winning bid for its Al Dhafra project – which at 2 Gigawatts will be the largest single-site solar energy project in the world – came in at a stunning 1.35 US cents per kilowatt-hour. A consortium of EDF and JinkoSolar was the winner. This breaks the previous record of 1.6 cents/Kwh from January in Qatar, and 1.7 cents/Kwh from November 2019 in Dubai. An even larger project, on multiple sites within one solar park, Bhadla solar power park in Rajasthan, India, became fully operational in March. The park has 2.25 GW of now operating solar capacity. The solar park saw multiple record-low tariffs (down to US 3.8 cents/Kwh) during some highly competitive auctions. More and more wind and solar capacity is also being developed in “hybrid” projects including battery storage. According to the US Energy Information Administration there are already 4.6 GW of wind, gas, oil and photovoltaic power plants co-located with batteries in the U.S., with another 14.7 GW in the immediate development pipeline and 69 GW in the longer-term interconnection queues of regional power markets. In the interconnection queues, a quarter of all proposed solar projects are combined with batteries, and in bellwether California, almost two-thirds of solar projects are proposed as hybrids. Power-purchase agreement prices for hybrid power plants are continuing to plummet, with declining costs for wind, solar and batteries as these technologies mature. And on the newer-technology end, in early May Minnesota utility Great River Energy confirmed it will deploy a one MW battery with 150 hours capacity – completed unprecedented for the energy industry. The battery, an “aqueous air” battery system from Form Energy, is due online late 2023, and increases contracted battery storage records by more than 20 times. This is the first announced deal that will take the technology out of the lab and deploy it in a full-scale power plant context. In conjunction with this, Great River Energy, the second-largest power supplier in Minnesota, announced plans to phase out coal power. The arrival of long-duration storage will be another major turning point for energy systems worldwide.

5) And some miscellany. While not rising to the level of the previous four positives for infrastructure, there are a handful of other interesting developments for infrastructure investors and users to keep an eye on during the pandemic. One is around highly depressed air travel: while airlines seem to be doing a reasonably good job keeping flying as virus-free as possible, conditions at airports have potential travelers very concerned about returning to flying. This may well lead to a push for building new airport terminals of very different designs than current terminals; “Future-proofing” has become an “in” term for airport designers, with both health screening facilities and more spaces to enable social distancing than today’s terminals, which often seek to maximize density. This may entail terminals built with steel instead of concrete to increase flexibility, as well as very different uses of space. Investors may see an unexpected area to put capital into infrastructure here. A second area is expanded broadband access. As more schools across more jurisdictions try to implement distance learning, the importance of accessible internet where it is today not available has shot up the list of political priorities. Close to 200 countries have announced or implemented school closures in 2020, with the majority seeking to implement online courses, and quality of internet access has become a major issue. We can expect this area to draw on a far greater portion of public infrastructure spending – possibly as Public-Private Partnerships – as a result of the crisis. A third and related area stems from the exponential increase in online courses driven by the crisis and school closures. This, combined with improved rural broadband access, could become a major factor in expanded technical training in developing countries. Lack of trained staff is a significant bottleneck for rail, logistics, and other infrastructure services in many countries. Fourth, bicycle-sharing and e-bike programs look like they may gain from the crisis. While initially bike-sharing plunged from concerns over potential virus spread, they have strongly rebounded in many places. Bicycle ridership has soared generally, as public transit is viewed as a source of virus exposure risk and some cities close streets to cars to enable more socially-distanced walking (and biking), and sterilizing equipment has emerged as easier for shared bicycles than for shared cars. Miami is one place that has also launched expanded e-bike delivery services during the pandemic. And fifth, the virus may stimulate greater attention to urban sanitation generally, as urban areas have been disproportionately affected by COVID-19. Perhaps we may at long last see an uptick in public infrastructure spending in sanitation, or greater willingness to consider Public-Private-Partnerships in the area.

These are trying times for everyone, including in infrastructure. But at least there are silver linings. We all need positives some of the time. And at some stage, the crisis will be over!

The Drones are Here

The Drones Are Here
November 2019

Drones are here. Production is up, prices are down, and they’re showing up practically everywhere. Including, of course, where you don’t want them – as the headlines of drones interfering with firefighters in California last week illustrated so clearly. Infrastructure will never be the same again.

Hot off the press are the “drone airlines.” In late September the first of these became certified in the US by the FAA, run by UPS (UPS now runs the first official drone airline). UPS Flight Forward now has the same status as business jet operators, or airline services that run on-demand rather than scheduled services. UPS can now expand from its North Carolina pilot, where it has run over a thousand revenue-generating flights on a hospital campus, moving supplies around. Only a few weeks later (or a few weeks ago, however you want to think about it), Alphabet’s Wing began commercial deliveries using drones. The first operating segment of Wing’s business is just north of UPS’ pilot, in southern Virginia, and is being used to deliver packages for major clients, such as Walgreens. By the end of October, Uber had gotten into the contest, showing the design of the new six-rotor (for vertical takeoffs and landings) drone, with about 20-mile range, it plans to integrate into its Uber Eats delivery chain.

drone run by alphabet

While it’s possible that pilotless airlines will eventually be a thing, the real impact that these flying drones will have in transportation is on logistics. As costs continue to fall, and range continues to increase, and the machines continue to get smarter, and urban roads continue to be congested, drones have the potential to create major advantages for logistics companies. Increasingly they are as cheap or cheaper to buy than ground transport vehicles, and they can get from point to point faster than most vehicles can – at least within the range of the drones. For now the transport advantage is limited to small and/or high-value cargo, but one can see this boundary evolving rapidly in the near future.

To date (well, one month into official commercial drone services), only a handful of companies are involved. The early adopters already have major investments in electronics and technology surrounding transport logistics. But while it is logical that these players have gotten out the door first, the barriers to other firms adopting drones as part of their own logistics chains are pretty low. Sure, regulation is an issue, especially today in jurisdictions such as the US where most services are regulated; it is not surprising that Europe has seen little or no movement in drones to date. Rules are coming. Putting in place the surrounding technology to use and organize a large fleet of drones is a major investment, but the technology is getting simpler – and the costs keep coming down. Expect the use of this technology to spread fast. Some of the biggest potential for drone transport may well be in the mega-cities of the developing world. There logistics are the most inefficient, and therefore costly for users, and entry regulations likely to arrive later than in heavily-regulated Europe. The relative value-added of cargo transporting drones may be especially high in places like Mumbai, Bangkok, Buenos Aires, and Lagos.

The prospective infrastructure market for drones is not limited to transport. Some power utilities have shown significant interest in the technology (see “Why Power Companies Love Drones,” from Bloomberg New Energy Finance). Here the driver is not so much the ability of drones to carry things from one place to another, but rather their ability to carry increasingly powerful, increasingly small, and increasingly cheap imaging technology aloft over hundreds of miles of power transmission lines. As BNEF points out, drones offer a cheaper and more effective way of monitoring infrastructure than traditional methods of sending workers to dangerous, remote terrain. Drones have already come into widespread use by power companies in the US, and it is forecast that upwards of 400,000 will be deployed in the energy sector by 2020. Aside from transmission lines, drones can also inspect wind turbines and solar panels for nicks and other issues which may reduce production efficiencies. They can also potentially be used for simple repairs on lines – as seen in their use by Duke Power after Hurricane Maria in Puerto Rico. The market is not trivial. Price Waterhouse Coopers has estimated the market for drones just in the US energy sector at $9.5 billion. Again, while this technology is rolling out initially in the US, one can see – especially as prices keep dropping – its very high value for utilities in the developing world, where logistics of getting to lines and monitoring is often made more complicated by geography and poor surface transport. For utilities in sub-Saharan Africa in particular, which often have extremely high Transmission and Distribution losses, drones may offer a low-cost means of saving very large amounts of money – not to mention significantly improving the availability of electricity.

An intriguing corner of infrastructure where drones may offer even yet higher value is: water. The impact of flying drones on an infrastructure service delivered largely below-ground may not seem intuitive. The important thing to focus on here is what a drone is: it is not primarily a “mini-airplane;” rather, it is a mobility platform – technology to move something else around. The something that gets moved around in logistics is a client’s cargo. The something that gets moved around for a power company is imaging technology, specifically above-ground imaging technology. For a water utility, moving imaging technology around can be extremely valuable: it just has to be underwater imaging technology, rather than above-ground. Now, this exists. And it is cheap. Check on Google, and you’ll find several submersible drones you can buy yourself – some for under $1,000 (see Forbes: Most Drones Fly. This Drone Swims). Water utilities have higher transmission and distribution losses than power companies – in fact for many water utilities, “non-revenue water,” essentially water lost somewhere in the underground pipe system, is the highest cost element for the company, and higher than profits. The problem for water utilities is that it is difficult to see underground pipes: it’s expensive and disruptive to dig them up. Ideally, you want to be sure that you know exactly where a leak is before you dig. This is where drones come in: a submersible drone with a camera makes it much cheaper and faster to find leaks, meaning that pipe maintenance becomes much cheaper, less risky, and faster. One can see potentially large impacts here on the economics – and service standards – of water utilities. And again, one can see the potential value-added being the highest where the inefficiencies today are the greatest: in the developing world.

For infrastructure investors, what are some of the implications of drones? The most visible and likely will probably be in logistics. As we saw above, the more inefficient a market for commercial transport is today, the greater the potential impacts of drones to carry cargo. So one can see logistics companies everywhere in the world wanting to improve their business by incorporating them. With the hurdle of mastering some of the technology involved, one could also potentially envisage in some markets a type of company which does not exist today: cargo transport companies specialized in drone usage, especially in markets with many large urban areas and challenging ground transport conditions – say Brazil, or Nigeria. Given the potentially widespread use for drones in any geography, one can also foresee the creation of companies specialized in selling, servicing, and/or leasing drones in multiple markets – potentially across different infrastructure sub-sectors. For power and water utilities, where drones can potentially have a significant impact on reducing transmission and distribution costs, yet where incumbent utilities may not be at the forefront of deployments of new technologies, one can see the possible development of wide-spread programs to encourage, facilitate, and finance the deployment of drones. And many more. Investors will want to become conversant with this new technology, look for related investment opportunities which have not existed previously, and be a channel for clients to see how these can impact their businesses.

Yet another disruptive technology impacting infrastructure. As with some of the others – wind turbines and solar panels – drones have the potential to enable the delivery of services more cheaply and efficiently. But as with some of the others – dockless scooters for example – they have a less favorable side too. As we saw this Summer with the attack on Saudi Arabian energy facilities by drones launched from Yemen, a mobility platform to move things around can carry destructive cargo as easily as useful cargo. So as with the proliferation of more efficient electronic control systems and data management which has helped utilities, but also opened them up to more risks, so with drones. Drones will have a big market, and a big impact on infrastructure – and they’ll be one more element of risk for companies to keep an eye on. Off we go!