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 Ideas’ 2018, 2019 and 2020 predictions, and here for how well the predictions tracked for 2018, 2019 and 2020). Here are ten infrastructure predictions for 2021.

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%.
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.
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).
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).
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.
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.
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 generation, coal 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.
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.
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.
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.

A High-Profile PPP Comes Apart

October 2020

Earlier this month in Maryland, the state government took over the $5 billion-dollar Purple Line mass-transit project. Running 2 ½ years behind schedule, close to $1 billion over budget, and still with some $1 billion of work to go, the takeover officially brands as a failure one of the most ambitious and largest Public-Private Partnerships under implementation across the world, let alone the United States.

The high-profile flop comes at an important time for Public-Private Partnerships (PPPs) across the United States. A widely used method for building infrastructure in Europe, Canada, and increasingly in Emerging Markets, PPPs have never fully caught on in the US. Some parts of the US see PPPs as central to state or municipal-level infrastructure development: Virginia, across the Potomac River and next-door from Maryland, is a notable example. PPPs were also central in the (brief) discussions about a “trillion-dollar infrastructure initiative” in the first year of the current US administration. Yet suspicion about the use of the private sector in infrastructure remains politically strong, especially though not only in democratic circles. With the continued federal policy inaction and deterioration of infrastructure across the country, the likelihood of a major infrastructure plan coming forward in 2021 to finally address the situation is growing. How much such a plan turns to the private sector and to PPPs may well be affected by the Purple Line saga.

Purple becomes Black and Blue

The Purple Line is the latest color-coded line addition for the Washington DC subway network. The 16-mile East-West line is intended to use light-rail to connect a number of suburbs in the state of Maryland, from New Carrollton to Bethesda, complementing existing lines which mostly flow in and out of central Washington. The project is designed as a 36-year build-finance-operate-maintain Public-Private Partnership, administered by the state of Maryland’s Transit Administration (MTA), with service originally slated to begin in 2022. In 2016, Purple Line Transit Partners, a consortium headed by Fluor Enterprises, was announced as the winning bidder selected to partner with MTA on developing the project. The consortium members also included Star America and Meridiam, a leading infrastructure investment fund which is the largest equity partner in the project. The partners beat out three competing bidders led respectively by Vinci/Alstom, Macquarie/Skanska, and Edgemoor/RATP (the development arm of the Paris metro). With a $5.6 billion contract, the project is believed to be Maryland’s most expensive government contract ever, and is one of the largest PPPs anywhere.

Problems began early for the Purple Line. Construction began only in August 2017, delayed by a lawsuit over environmental impacts. More disputes followed – over timing of right-of-way acquisitions and further environmental permits, and the contractors began filing major time extensions. Relations between the MTA and the consortium deteriorated, and by the Spring of 2020 the project was over two years behind schedule and overruns had topped $750 million. In parallel, consortium-leader and construction contractor Fluor began experiencing significant financial pressures, driven by cost overruns on multiple projects and an SEC investigation. The MTA and the Purple Line Transit Partners spent several months arguing over the growing financial gap, without coming to agreement, and in August Fluor announced it would quit the project over the cost overruns. The MTA this month took over hundreds of subcontracts to continue construction, and over $1 billion worth of project bonds have been downgraded to junk bond status.

Whether the project ever reaches closure, or Maryland is left with a string of partially-completed stations and rail lines, is highly uncertain at present. The state is now managing the project in the short-term while the MTA figures out a longer-term plan for finishing — and paying for — the remaining $1 billion worth of construction. The contracts that the state has assumed include the manufacturing of the light-rail vehicles, the eventual operations and maintenance of the rail line, erosion and sediment control, relocating overhead electrical wires and underground utilities. Officials say they will decide in the coming months whether they will continue managing the project, seek a new construction contractor or procure another public-private partnership. It is unclear how much the various options would cost or how the state would pay for them at a difficult time for the state budget (see the Washington Post’s “Maryland likely to be on the hook for millions”).

Implications for PPPs

The troubles of the Purple Line are likely to have an impact on Public-Private Partnerships across the United States. The Purple Line has received national attention as one of the first U.S. transit projects to be built via a public-private partnership, including private financing. Public-private partnerships have begun to gain popularity with cash-strapped governments. Now, from a rail project once touted as a national model of how governments could partner with the private sector to build expensive infrastructure, it is now receiving much less attractive national attention. The risk of the Purple Line being abandoned mid-construction comes at a time when the likelihood of a major push soon on infrastructure investment in the US is growing more likely. Leaders on infrastructure on both sides of the aisle in the US Senate, Tim Kaine and Rob Portman, have been signaling that they expect a major infrastructure bill to go forward in 2021, irrespective of the outcome of the November election.

PPPs as a whole generally have achieved positive results. A World Bank study found some 2/3 of PPPs reviewed achieved intended development outcomes, as did over 80% of PPPs supported by the International Finance Corporation (IFC). When well-designed and executed, PPPs can balance the public policy objectives of governments and the financial and construction capabilities of the private sector. They can facilitate tapping private capital when government funds are scarce, and can improve and make more consistent delivery of key services. Studies have shown that failures, cost overruns and delays tend to be more common in purely public-sector managed projects than in PPPs. Yet PPPs are no guarantors of success – things do go wrong, and they tend to have one very large area of vulnerability: they are often highly visible, and easily politicized. So individual project failures for PPPs gain far greater visibility than those of “normal” infrastructure projects, and are more easily turned into emblems of a particular administration’s “failure” than are problems with state-run infrastructure, or even the inability to deliver new infrastructure investment or improved services. Virginia, for example, has many successful PPPs in operation, yet a lot of political attention focuses on the failure of a PPP tunnel in Norfolk. Miami-Dade County officials only last week postponed consideration of a planned monorail project led by Meridiam Partners and also involving Fluor, citing among other things the experience of the DC area’s Purple Line project.

By contrast, what often separates successful from unsuccessful PPPs is neither glamorous, nor highly visible. Attention to detail, both in design and administration of PPPs, is the single most important element of success. Attention to detail can avoid mistakes in agreement on arcane provisions in risk-management, like the ones that bankrupted the city of Harrisburg years ago on a contract for a new incinerator. The Purple Line’s PPP contract is over 800 pages long, and yet those 800 pages failed to clearly delineate the responsibilities now being argued over between the state and the consortium. Indeed, the most common factor in PPP problems has tended to be a rush to get deals done on the part of government officials. A rush tends to push toward simplification, which is in principle fine but often translated into making bidding by potential partners only an issue of lowest cost, without enough attention to contract provisions for delivery, quality and dispute resolution. The Purple Line bidding process was done on a pure low-bid basis, and there were early rumblings that Maryland pushed the bid too fast, and left too many issues open – in spite of the 800-page contract.

We’ll see what the future holds for light-rail service in the Maryland suburbs, for Fluor and the project partners, and for lessons drawn from the government’s takeover of the Purple Line. Two things for sure: you can expect plenty of discussion about infrastructure in the US in 2021, and every time PPPs come up as part of the solution, the Purple Line will be part of the discussion.