Infrastructure in 2020: Ten Predictions

Infrastructure in 2020: ten predictions
January 2020

1. Wind and solar keep growing.

Growth in global renewable energy investment in 2018 and 2019 has been akin to the Sherlock Holmes tale of the curious incident of the dog that didn’t bark – there hasn’t been any. After a down year in 2018, global renewable energy investment stayed essentially flat at $282B in 2019, according to Bloomberg New Energy Finance (though still more than double BNEF’s estimate of investment in fossil fuel-based generation). Look for numbers to head back up in 2020, on the back of renewables’ cost advantages. In the US, the EIA forecast last week that wind and solar will make up three-quarters of new capacity additions in 2020, breaking previous records of annual capacity additions. The big variable for the coming year will be the largest renewable market in the world, China. The missing global renewable growth would have been there in 2018 and 2019 were it not for declines in China, whose $83B 2019 investment level was down for a second straight year, primarily in solar which is down 2/3 since its 2017 peak. As China transitions away from its Feed-in-Tariff mechanism for domestic solar generation towards competitive auctions, Infrastructure Ideas expects prices for new capacity to tumble, as they have everywhere else that auctions have taken hold, and growth in solar installations to resume in response. For Emerging Markets other than China and India, wind and solar investment rose 22% to a record $47.5 billion. In 2020, look for $300B in investment, a record 200 GW in new wind and solar capacity, and renewables as a share of net new generating capacity added worldwide to cross 70% for this first time.

2. Offshore wind is the new big thing

It looked like a curiosity for many years, but offshore wind is now breaking into the mainstream of electricity generation. Only five years ago, offered prices for offshore tended around $0.15-0.20 a kilowatt-hour, well-above the price for competing sources. But larger and more efficient turbines, bigger projects, access to better offshore wind resources, and more developed supply chains have been driving prices down. In September 2019, the UK saw bids for offshore generation at under $0.05/KwH, and now offshore is able to compete without subsidies in many markets. Bloomberg reports offshore wind financings in 2019 came close to a whopping $30 billion. Tenders are planned in many countries, and are spreading beyond initial markets of Europe, the US and China. Vietnam is looking at what could become the world’s largest offshore wind farm with a capacity of 3,400 MW. Look for many offshore wind headlines in 2020.

3. Challenges mount for power grids and utilities

Grid operators will continue to see a ramp-up of challenges associated with the energy transition in 2020. In developed markets, these challenges include continued switching to lower-cost generation sources, transmission, integrating storage, and integrating growing numbers of electric vehicles. The average EV traveling 100 miles uses as much power as the average US home does daily. California projects that EV’s will use over 5% of the state’s generation capacity by 2030. In developing markets with technically weaker grids, dealing with intermittency will be a bigger challenge, as well as integrating distributed generation and storage. Emerging Market cities may also create new demands as they start adopting electric buses in large volumes, the way we’ve seen in China. Large EV bus fleets will put significant pressure on charging infrastructure resources, while also offering potential storage solutions for urban utilities, especially as Vehicle-to-grid technology, or V2G, becomes more available. Look in 2020 for larger transmission investments in developed markets, and increasing concern in Emerging Markets – particularly those with state-owned grids – about how to modernize grids.

4. Non-lithium batteries get serious

As recently headlined in the Economist, Generating clean power is now relatively straightforward. Storing it is far trickier. Total investment in storage in 2019 came to around $5B, 99% in lithium-ion batteries. While this has been a major success, grids will need complements to lithium-ion technology soon. Though the cost of lithium-ion batteries is falling quickly, longer-term storage is likely beyond its practical capacity. Capacity to keep growing with solar and wind is also a question: the Institute for Sustainable Futures states that a world run fully on renewables would require 280% of the world’s lithium reserves, while concerns over sustainable sourcing of cobalt remain. Companies focused on longer-duration storage alternatives saw a major influx of investment in 2019, led by Energy Vault $110 million funding round, the single largest equity investment in a stationary storage company, according to Wood Mackenzie. Highview Power signed the first liquid air storage offtake deal, for 50MW in Vermont in December 2019. While 2020 project announcements with non-lithium batteries will remain small, look for them to make big headlines. And look for them to spread faster into smaller, low-income developing countries. The economics are more favorable in remote or island grids, where imported diesel creates a much-easier benchmark for storage to beat on price. Canada’s e-Zn targets remote communities that stand to benefit by offsetting diesel generator usage. NantEnergy, using zinc-air batteries has installed some 3,000 microgrids.

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

One of our safest predictions. New studies and projections will continue to show climate change having a larger impact sooner than their predecessors. And politics, centered but not limited to the US, will again prevent significant concerted action to reduce emissions. The 2019 Madrid Summit was a glaring display of the stand-off. The only possible change for even 2021 here is the November election in the US.

6. Emissions-free city zones multiply

Though no global climate agreements are on the horizon, there is much climate policy activity at the local and national level: one big example is emissions-free city zones. This month, Barcelona opened southern Europe’s biggest low-emissions zone, covering the entire metropolitan area. Petrol-driven cars bought before 2000 and diesels older than 2006 are banned and face fines of up to €500 each time they enter the zone, which is monitored by 150 cameras. The new Spanish government is said to be planning low emission zones for all towns with over 50,000 residents. Whether driven by national or municipal authorities, we can expect to see such initiatives multiply rapidly, driven both by concerns over global climate inaction and over local air quality. Such zones now create opportunities for carmakers, though one can also expect to see EVs increasingly favored by such mandates, tilting the new opportunities towards EVs – and providers of EV infrastructure.

7. Unilateral “100% renewables” commitments multiply

Between frustration at the lack of global progress on reducing emissions, and the prospect of increasingly cost-competitive renewables and storage resources, a growing number of US states and utilities are setting targets for reliance on 100% clean energy. Thirteen US states, along with Puerto Rico and the District of Columbia, have now set 100% clean energy targets. Another four large states have announced plans to do so. Half-a-dozen large private-sector utilities have also committed to 100% clean energy targets, including famously coal-intensive Duke Energy. These mandates will continue to open new opportunities for renewable energy and storage providers, and importantly will likely offer less price-sensitive demand for longer-duration storage providers. The mandates will also start to impinge increasingly on natural gas demand for generation, and risk beginning to strand fossil-fuel generation capacity ahead of technical end-of-life timetables.

8. Financing premiums appear for climate risks

A big piece of news in the finance world last week was Blackrock’s announcement it would put in place a coal-exclusion policy. But even with Blackrock’s heft — it is the world’s largest investor in coal – this by itself is not a huge game-changer: not much new coal is going up in Blackrock’s geographies. Expect the bigger news in 2020 for infrastructure financing to instead be the appearance of the higher financial costs related to climate risks. In many ways it is shocking this has not happened yet, though a good piece of reporting from the New York Times last September pointed a finger at a big reason for the US. The Times reported that US banks are shielding themselves from climate change at taxpayers’ expense by shifting riskier mortgages — such as those in coastal areas — off their books and over to the federal government. Regulations governing Fannie Mae and Freddie Mac do not let them factor the added risk from natural disasters into their pricing, which means banks can offload mortgages in vulnerable areas without financial penalty. That cannot last without soon bankrupting the two biggest pieces of the US mortgage system (although it would be consistent for the Trump administration to prefer that option). The broader insurance industry is also suffering. According to Swiss Re, 2017 and 2018 were for insurers the most-expensive two-year period of natural catastrophes on record, most of them related to global warming. 2018’s most expensive insurance payout anywhere in the world was for the California Camp Fire. Fortune noted that new research shows that the wildfires of 2017 and 2018 alone wiped out a full quarter-century of the insurance industry’s profits. Unlike Fannie Mae and Freddie Mac, private insurance companies can react, and they will have to charge more to stay afloat. Expect 2020 to be the year that insurance prices begin to factor in climate-related catastrophe risks in a big way, and for that to begin flowing through to financing costs.

9. Delivery vehicles become the new EV focus

Electric car and bus sales volumes continue to grow, but expect electric vans to get a lot of the attention in 2020. Already in September 2019, Amazon placed a massive order for over 100,000 electric delivery vans – worth about $6B. The continued rocketing growth of the e-commerce delivery business, and the frequent use of diesel vehicles for delivery, make for an attractive and fast-growing market for electric vans. As noted by Wired, urban deliveries don’t require all that much range. Routes are predictable and plannable, and because the vehicles return at the end of every shift to a depot, recharging them is a breeze. Add the concerns of many cities about transport emissions, as noted above, and the attraction of the new market segment is easy to see. Now 2020 has started with a $110 million investment for Arrival, a UK start-up making electric delivery vans, from the combination of Hyundai and Kia. Arrival promises that its vehicles will be cheaper than their traditional, diesel-powered competitors, even without further declines in battery prices. Interestingly Arrival’s business model will also facilitate more rapid expansion to Emerging Markets than for makers of other EVs. Rather than building a huge new production plant, Arrival will work from “microfactories” that make only 10,000 or so vehicles a year, but sit closer to where their customers are, and making geographic expansion simple. Look for major changes in the logistics business in emerging country cities to flow from this soon.

10. More alarms over hacking of infrastructure

Many new opportunities are opening for infrastructure investment. Yet risks are growing as well. The hacking of Ukrainian energy company Burisma late in 2019 by the Russian military was clearly politically motivated. Hacking capabilities continue to grow far faster than defenses. Look for more widely-publicized attacks on infrastructure assets in 2020.

$3 billion for Mobility in the Middle East

In June 2018, Infrastructure Ideas surveyed the mobility revolution in transport. It was clear that capital was soon going to be flowing here in amounts rivaling traditional transport sectors such as ports, airports and railways. And while 95% of the capital to date in these sectors was being deployed in OECD countries, we predicted that soon, as in most areas of infrastructure, the majority of new capital would be seeking out higher growth opportunities in Emerging Markets. It didn’t take long to check that prediction.

Last week, Uber announced that it would acquire the Middle East’s largest ride-sharing service, Careem, for over $3 billion.

This will be one of the largest private infrastructure transactions to date in the Middle East. And for a company that is barely six years old. Careem, based in Dubai and operating across fifteen countries in the Middle East and surrounding areas, was founded in 2012. Ride-sharing was not even its initial business, as it was founded as a corporate car service, before following consumer demand into ride-sharing and delivery services similar to Uber Eats. Large markets served by Careem include Pakistan and Turkey.

For Uber, this is not only big money, but a departure from how it has addressed its Emerging Market competition to date. In China, in Indonesia, and in Russia, Uber has previously chosen to sell its in-country operations to local rivals, preferring to raise cash to cover losses, rather than maintaining loss-making operations in more countries. The Careem acquisition signals that as it edges closer to breaking even and to profitability, Uber may now be more willing to pay for control of Emerging Market rivals. Uber is initially signaling that Uber and Careem services will run in parallel in the dozen or so countries where the two both operate. CEO Mudassir Sheikha will continue to run Careem, according to Uber’s announcement. China’s Didi Chuxing, the biggest ride-sharing company in China, has been one of Careem’s largest investors. Careem’s previous fund-raisings had generated some $800 million, and analysts place Uber’s acquisition price at about a 50% premium to previous valuations.

The announcement follows by days the IPO by Lyft, which valued Lyft at $22 billion. Uber’s preparations for an IPO have been widely covered, with an expected valuation of around $120 billion.

This is another sign of how technology, after revolutionizing the energy business, is having a larger and larger effect on other parts of the infrastructure world. As we’ve previously written, for investors, staying locked into traditional segments and failing to understanding the impacts of technology will carry a high cost in missed opportunities.

EV Buses: the next big thing (maybe)

EV Buses: the next big thing (maybe)

Over the last two years, electric buses emerged as “the next big thing” in infrastructure for cities around the world. As noted by Infrastructure Ideas last year (“Notes from the Revolution: implications for infrastructure investors”), the market for electric buses has been developing even faster than the much-publicized market for electric cars. McKinsey calls this “the most successful electric vehicle segment,” with a 5-year sales growth rate of over 100%. Bloomberg New Energy Finance forecast, due to EV buses’ advantages in operating and maintenance costs and concerns over urban air quality in many mega-cities, that electric buses will capture as much as 84% of the new bus sales market as early as 2030. The European Commission has called for 75% of all buses to be electric by 2030.

For those readers who don’t ride buses, especially those in North America where e-buses are barely beginning to be introduced, this might look like a quaint but largely irrelevant sideshow. Yet this is already be a $50 billion dollar a year infrastructure market, and global investments in electric buses will likely be well over $1 trillion through the end of 2030. Not a market to sneeze at.

Yet as 2019 gets going, the prospects for EV have gotten cloudier. A lot of advantages and enthusiasm remains, but the experience of early adopting cities has also raised concerns to be addressed. Let’s see what is happening.

Over 100,000 electric buses were sold in 2018, costing between $300,000-$1 million each. Of those, over 85% were sold in China, which has a huge lead over the rest of the world in adoption and production to date. So the experience in China is by the far the deepest. But let’s begin with the more limited European and North American experience.

The experience to date with EV buses in the USA and Europe was summed up recently by City Lab’s Alon Levy in his column “The Verdict’s Still out on Electric Buses.” EV buses have been shown to struggle when it’s too hot, too cold, or too hilly. Much of the issue has related to charging range, with for example Albuquerque finding that their new fleet – purchased from Chinese market-leader BYD – is showing a range of about 2/3 the contractually indicated range of 275 miles per charge. Most of the buses there ran on the city’s Central Avenue route, which features a large elevation change – consistent with the experience of Hong Kong, which also found that EV buses struggled on the hills there. Albuquerque has reportedly returned their buses to BYD. Phoenix, also in the Southwest, reported issues when temperatures hit Summer peaks over 100 Fahrenheit. Meanwhile cities in Minnesota and Massachusetts have found that EV bus charging range drops off significantly when temperatures drop to freezing or below. In Moscow, where Mayor Sergey Sobyanin has made a big push for electric buses, early experience indicates that roughly double the number of buses anticipated have been needed on routes run with EV buses, due to higher than planned time required to charge the buses.

If performance is problematic, and translates into higher – as opposed to lower – operating costs, this burgeoning new market may be in trouble. After all, like with other electric vehicles, EV buses still cost more to purchase than traditional diesel buses – up to 30% more. Notes of caution, as a result, are becoming more common across transit agencies.

China, as noted, now has much more experience with EV buses than North America – in fact, more experience than the rest of the world combined. How has this gone? The answer: much better, but to some extent the verdict is also still out.

Chinese cities such as Shanghai and Shenzhen have become world leaders in electric mass transit. A recent profile of the Shenzhen experience – where all 16,000 buses are now EVs — in The Guardian (“Shenzhen’s Silent Revolution: the world’s first all-electric bus fleet”) was extremely positive. Service levels have been satisfactory, annual CO2 emissions have been cut by nearly a million tons, air pollutants cut as well, and fuel expenses slashed. Because of the volume of the market, EV buses cost less than half (about $300,000) than they do in the US. Which still implies that Shenzhen has bought about $5 billion worth of buses. In the next two years, another 30 Chinese cities plan to achieve 100% electrified public transit, including Guangzhou and Nanjing. Yet a big piece of the success has been on the back of public subsidies. These subsidies make all sorts of sense in terms of public interest in China, with air pollution having been a major health and policy concern in many Chinese cities for years. But they are large – reportedly at around 50% of the capital cost of a bus, plus some operating cost support. These subsidies are due to lapse after 2020, so it will be interesting to see how the domestic market evolves subsequently. Investment in charging stations has also been substantial, with Shenzhen building around 40,000 charging points. And, as elsewhere, hilly terrain (Hong Kong) and cold (northern China) have negatively affected EV bus performance.

What to make of all this? EV buses, like most other disruptive technologies, will take some time to shake out issues. And the issues are real. Yet, it’s easy to forget that the early generations of wind turbines and solar farms failed to meet performance expectations, and experienced various teething problems. These problems haven’t prevented wind and solar from accounting for the vast majority of new electric capacity additions. And both charging technology and bus batteries are still evolving rapidly, with costs continuing to fall and capabilities improving. Perhaps some jurisdictions will decide that unusual conditions – cold, heat, or terrain – should make them late adopters, or hold-outs on EV buses altogether. And many cities will exercise some more caution in planning and procuring their next generation of public transit capacity, which is a good thing. In many Emerging Market cities, with substantial numbers of informal buses plying routes, transitions will take a lot of effort to manage. And it will take a lot of money, which cities will need to finance.

But in the end, EV buses are a superior technology, with rapidly declining costs, and that will be the determinant of the market. Cities will only face more demand for better air quality. Charging costs are far lower than diesel fuel costs. Technology advances and larger manufacturing scale will turn the current upfront cost disadvantage of EV buses into a large cost advantage over the coming decade. “Range anxiety” will find solutions, in improvements of both battery technology and convenience of charging. As for the reliance on subsidies, this is of course an important issue. Yet again the parallel with solar power generation is instructive: subsidies in early years raised production volumes, and accelerated the technology-driven decline in costs. In 2012/2013, for instance, an observer of solar power would have seen something similar to the EV bus market: an apparent reliance on subsidies driving volume, especially in China, and a 20-30% cost disadvantage over alternative technologies. Five years of cost declines later, the cost disadvantage has become a large cost advantage, and subsidies irrelevant. Hard to find reasons that the same story won’t play out with EV buses.

For cities, and for investors, a note of caution on EV buses is fine. Ignoring the coming of a $1 trillion market would be an expensive mistake. Not all cities will spend $5 billion on bus fleets like Shenzhen, but there an awful lot of big cities in the world. This will be a capital-intensive transition. Stay informed and up to date. The diesel bus is heading in the direction of the coal-fired power plant.