Infrastructure and renewable energy in 2024: key trends to watch

With 2024 well under way and infrastructure and renewables markets busy across a range of transactions and sub-sectors, the Corrs infrastructure practice has peered into the crystal ball and discerned five key themes and trends that we expect to drive activity in the coming twelve months.

1. Government will (continue to) be important to the next phase of the energy transition

The rollout of renewable energy generation and storage capacity, and the required changes and upgrades to transmission infrastructure, lag what is required to achieve Australia’s emission reduction targets and we expect 2024 to see further legislative and financial support from federal and state governments in an effort to address this. However, governments in Australia and globally are increasingly aware of the political balancing act required to facilitate the build out of this infrastructure and respond to a perceived need to increase their involvement in (and potentially subsidies to) the build out of this asset class while keeping the lights on and power prices stable and obtaining (or maintaining) stakeholder support and social licence for generation and transmission infrastructure (as to which, see below).

This balancing act is manifesting in the expansion of the capacity investment scheme (CIS) to both generation and storage, the development of REZs in several states, the establishment of State owned corporations directed at developing and owning renewable energy generation, storage and transmission assets, the LTESA and REZ access auctions in NSW, the $20 billion Rewiring the Nation funding provided by the Federal Government in the 2022-23 budget, a $2 billion commitment by the Federal Government to the Hydrogen Headstart Program, and the first round of applications for feasibility licences for offshore wind.

Alongside the development of renewable energy, there is an increased focus on the decarbonisation of existing carbon intensive industry. This presents both a practical and financial challenge. The Federal Government’s Safeguard Mechanism provides a powerful and increasing incentive over time for the largest emitters to limit their emissions, and the development of an Australian Carbon Credit Unit scheme alongside this will lead to opportunities for green projects and natural capital. However, funding decarbonisation requires that investors move from avoiding carbon intensive sectors towards engaging with them. Recent years have seen some very high profile investments in Australia’s energy generation and retail sector, with a thesis of providing capital to facilitate that sector’s transition away from coal, and we expect this to continue.

We are also seeing increased interest in other forms of decarbonisation, including the electrification of mining and transport fleets, development of green steel technology, biofuels, and the roll out of EV charging infrastructure. The introduction of mandatory climate-related financial disclosure should assist investors by increasing the supply of reliable and readily comparable information on climate related risks and opportunities, although perhaps at the expense of an increased reporting burden and associated disclosure risks for entities within its scope.

There is no doubt that government intervention in the form of the US Inflation Reduction Act and CHIPS and Science Act have fundamentally altered the global allocation of infrastructure capital. Would the amount of investment in energy transition in the US be as significant without the IRA? The prospect of a second Trump presidency in light of his well-publicised opposition to the IRA adds yet another element to global geo-political uncertainty. That said, for non-US markets it is equally plausible to think that investors will start hitting geographic allocation limits in the US (with or without changes to US regulatory settings), transition investment in such markets will return to a (somewhat) level playing field and ultimately support sovereign initiatives. On the whole, as with any major uncertainty we speculate that there will be, for some period, pause for thought in relation to the global allocation of capital and transactional activity.

2. Sophisticated stakeholder engagement will be more important than ever

As mentioned above, stakeholder engagement has roared into view as a key issue for developers of infrastructure in Australia.

The build out of transmission and distribution networks, onshore renewable generation and firming and the development of supporting infrastructure for offshore wind and the nascent hydrogen market will all impact upon significant parcels of Australian land. Appropriate engagement with indigenous custodians of this land and local community groups will be critical to these projects proceeding in a timely manner. We have seen various cases where infrastructure developers have complied with the letter of the law, only to find that the extent and nature of their engagement with local interested parties has fallen short of community expectations.

As a result, we expect to see increasing levels of sophistication for infrastructure developers in their identification and engagement with relevant stakeholders, that investors will start to conduct more detailed due diligence on the history of this engagement in assessing the risks of their investment and that for the really nation-shaping projects, the relevant Government(s) will need to build community consensus and ensure that the benefits of state or nation-wide projects extend to the local communities.

3. A broader range of financing approaches

Consistent with the broader energy transition theme, 2024 will be an important year in the evolution of the sustainable financing market in Australia, as improving regulation starts to provide greater transparency to participants. Commonwealth Treasury and the Australian Sustainable Finance Institute are co-leading a joint government and industry initiative to develop a sustainable finance taxonomy for Australia, as part of a broader objective of facilitating the provision of capital to non-green businesses as they transition. This is an Australian-focussed taxonomy, with one of its first difficult tasks to provide detail to potential participants in this market on what exactly constitutes a ‘transitional’ activity. Given current regulatory scrutiny of greenwashing claims and the associated risks for participants in the sustainable finance sector, greater certainty should facilitate to a more widespread adoption of sustainable financing products in the sectors that need capital to decarbonise.

The volume of transactions in the infrastructure M&A market has been relatively low relative to the boom years of COVID, outside of some significant renewable energy platform sales. We expect transaction volumes to recover in 2024, albeit with more of a focus on trading of stakes in some of the large infrastructure assets and utilities. These sorts of stake-trades are being driven by the requirements of closed end funds and superannuation investors re-balancing their portfolios as detailed in our predictions for M&A in 2024.

Flowing from this, we anticipate more opportunities for lenders to provide “holdco financing”, particularly for assets where there are limits on the quantum of senior debt at the asset level, or where indexation has led to improved cashflow generation relative to the existing senior debt structure. We also see a role for single-investor fund financing transactions to help equity investors smooth the drawdown profile of their investments in existing assets which require further equity contributions, for example, to fund the equity portion of large construction and development activities.

4. AI will supercharge the growth of digital infrastructure

The business case for investment in data centres, and fibre optic and mobile telecommunications has never been stronger. While the sector has already expanded significantly to service the boom in cloud computing, social media and internet of things (IoT) applications, the emergence of Artificial Intelligence as the most important productivity enhancing technology since the Internet, will enable further growth and require enormous investment.

Telecommunications carriers and data centre developers and operators will seek out partnerships with patient infrastructure investors to source the large amounts of capital required to achieve their business plans. A case in point is AirTrunk, which is now said to be worth up to AUD 16 billion following an ambitious rollout of infrastructure through Asia supported by Macquarie Asset Management and is widely expected to launch some form of sale process in 2024.

In telecommunications, carriers are also likely to continue to seek to establish network sharing joint ventures with other carriers and potentially with investors. While Telstra’s ambitious regional network sharing arrangement with TPG Telecom was blocked by the Australian Competition Tribunal, the Tribunal made it clear in its decision that network sharing arrangements are achievable within the bounds of Australian competition law.

Look for carriers to leverage investments in other network assets, including fibre networks, to offload unused network capacity and raise cash for investment in spectrum and improved network performance and coverage. While such arrangements make eminent commercial sense, they can be difficult to negotiate as Vocus’ failed bid for TPG’s Vision Network shows. Finding a balance between the carrier’s need for operational control and the investor’s needs will be key.

Lastly, fibre networks for greenfield housing and apartment developments will continue to be an area for intense competition between established private operators, such as Uniti, and the nbn. Emerging fibre network operators such as Melbourne based DG-Tek will likely require investment to compete in this space.

5. Infrastructure platforms as an asset class in their own right

On the back of the Blackrock – GIP management transaction, Blackrock’s CEO Larry Fink observed that the “future in private markets is going to be in infrastructure”. There is much to support the observation that infrastructure management rights are, and will continue to be, a prized possession and that we should expect to see further activity.

The sheer size of infrastructure funds currently being raised, and the associated deployment challenge for those funds, will we expect lead to an increased demand for larger transactions and consolidation of smaller players. We are already seeing high levels of interest in infrastructure (including renewables) platforms. The attractiveness of infrastructure management platforms as an acquisition target will be driven by a combination of the same characteristics that make infrastructure assets attractive in the first place (for example, defensive qualities in a higher interest and inflation environment), the global trends discussed elsewhere in this note, in particular the need to deploy vast sums into decarbonisation and digital infrastructure, and also as a result of some of the headwinds that face GPs and LPs in other sectors (think the US Department of Justice’s increased scrutiny of PE healthcare deals). We would therefore expect further consolidation and control transactions that involve infrastructure platforms. This, in-turn, is likely to be followed by further transactional activity as consolidated portfolios are rebalanced and reshaped.

In addition, closed – end funds raised in the second half of the 2010s are reaching the end of their investment horizon and would typically be required to liquidate assets and return capital. Given industry dynamics (for example, that according to recent data most pension funds remain underweight in their allocation to infrastructure) we would expect to see alternative initiatives which allow existing LPs to retain their exposure to important assets (including those within the transition, digital and critical infrastructure sectors) – where LPs still insist on liquidity we may well see further initiatives by GPs to move desirable assets into continuation funds and secondary processes to divest non-core assets.