TD Asset Management: The role of infrastructure in the energy transition

Energy transition infrastructure may present investors with portfolio opportunities, say TD Asset Management’s Carl Elia and Ben Lemire.

This article is sponsored by TD Asset Management.

With many countries moving to greener energy sources, investors are being called upon to finance a multi-­trillion-dollar build-out for energy infrastructure focused on the transition to the low-carbon economy. In this interview, Responsible Investor sat down with Carl Elia, vice-president and director, infrastructure investments, and Ben Lemire, vice-president, ESG, alternative investments at TD Asset Management, to discuss how the transition to clean energy may present infrastructure investment opportunities. They say that long-term thinking is key, and argue that investments in generation, storage and transmission of energy will play a key role in the transition.

What are your priorities in your transition strategy?

Carl Elia
Carl Elia

Carl Elia: I believe that investing in new energy infrastructure may present an opportunity to generate an attractive risk-adjusted return. Over the last 20 years, global infrastructure investment has mainly been dominated by large investment managers. In addition, renewable energy and power investments tend to be mid-market, especially when it comes to wind or solar infrastructure. As such, our priorities for the energy transition have focused on the mid-market or smaller investments, as well as growth. Participating in the energy transition requires the ability to build new infrastructure, and that has been a key part of our strategy.

Ben Lemire: Just among the OECD countries, we’re looking at almost $7 trillion in global investment by 2030 to meet climate and development objectives. A lot of that capital is going to be focused on greening the grid. Long term, 95 percent of electricity production will have to be clean and green by 2050, according to the Science Based Targets initiative. There is also an increasing focus on energy security, with utility prices skyrocketing in many markets.

While in the short term, the costs of decarbonisation and electrification can be challenging, in the long term, I believe there’s a lot of potential in electrification and fuel switching to support the energy transition in most markets. Carbon-intensive infrastructure sectors are expected to be challenged during the energy transition, particularly if they operate in markets where regulations are becoming more stringent around carbon pricing. In our view, there’s an opportunity for infrastructure investors in the energy transition to have exposure to renewable energy strategies and build-up capabilities and assets.

Where are opportunities emerging geographically?

Ben Lemire
Ben Lemire

BL: We have a global focus with our infrastructure funds, but here in Canada we’re seeing lots of opportunities. Certain provinces that historically have had carbon-intensive electricity grid mixes are transitioning to cleaner, greener forms of energy. So, there’s lots of opportunity – not only in renewable energy generation, but also in energy storage, as well as transmission and distribution infrastructure. Many of the grids in Canada are pushing the decarbonisation agenda quite aggressively, and we believe that this will only accelerate between now and 2030.

In the US, there’s a lot of potential with the new Inflation Reduction Act. We’re seeing reforms to provide tax credits for renewable energy, which may bolster investment. In the EU, green hydrogen is increasingly being prioritised as part of the solution to energy security, especially for countries that rely heavily on Russian oil and gas.

“There’s a lot of potential in electrification and fuel switching to support the energy transition”

Ben Lemire

CE: When thinking about jurisdictions, our focus is on stability and the commitment to decarbonisation at the government level. It’s about ensuring that we’re in the right markets. As an infrastructure investor, we’re putting money to work for 30-50 years, so we need to understand the commitment of our counterparts and relevant policy frameworks that are in place.

How does a focus on electrification impact where you target investment?

CE: Electrification is incredibly important. The worldwide electrical grid is running at about 7 terawatts today – that could grow to over 20 terawatts in the next 30 years. Over 80 percent of that growth will be in onshore wind and solar energy, and upgrades will be needed for the grid to support those renewables, according to our research.
When thinking about long-term infrastructure investment, the target technology needs to be sound. We look for proven technology that’s been deployed for several years. We see opportunity now in traditional wind and ­solar energy generation, which has been around for 20 years or so.

BL: There’s also an opportunity in energy storage, particularly when combined with renewable generation. New storage capacity is needed for grid stabilisation, resiliency and redundancy. While we think a lot about the mitigation of climate change and energy transition opportunities, we also look at physical climate risk and grid adaptation requirements. For example, we consider whether the places where we operate may be exposed to physical climate hazards, and if new infrastructure helps reduce imbalances in the network and improve overall grid resiliency.

It’s also important to consider the future-readiness of our assets on the path to energy transition, for example, by installing electric vehicle charging stations in highway service facilities and developing the infrastructure to expand those stations as needed. Finding those cost-optimal capital injection points for putting transition assets or technology in the right space at the right time are important because you don’t want to put that capital to work too early.

What questions are you getting from investors about the energy transition and its impact on their portfolios?

BL: We’re seeing many investors increasingly focus on climate risk and climate mitigation. They are becoming more sophisticated in the depth and breadth of their queries, and their understanding has really evolved in the last few years. Many investors want us to have a holistic understanding of material ESG factors depending on what sector, what asset and what location we’re operating in. The energy transition is a big part of that, but we’re seeing increased interest in all facets of ESG. These investors are starting to think about their portfolios not only from a financial materiality or investment return perspective, but also in terms of the ESG impact associated with their portfolio.

CE: From a return perspective, investors may see an opportunity to access returns based on the commercial attractiveness of investments that help to accelerate the energy transition. I think investors have to be thoughtful about where that growth fits within a portfolio. As business models evolve around new technologies, some investment managers have launched funds as ‘transition funds’ or ‘green funds’ and sometimes they are being slotted into infrastructure funds. But the return profile and the risk profile of such funds tend to look more like venture capital. Investors should think carefully about how these types of investments fit within their broader portfolios.