How is the ongoing energy transition impacting the energy sector?
Biraj Borkhataria: The energy transition is obviously a huge challenge for the sector, and for society. I think from the energy sector perspective, the balance is trying to run the core business in a disciplined fashion, and also slowly transition your capital into transition growth engines, such as biofuels, sustainable aviation, hydrogen, carbon capture, and various other elements.
Shelby Tucker: The approach to the energy transition is an evolving aspect to the landscape in energy. If you go back only a few years ago, energy really was really only associated with the oil and gas sector. I cover utilities on the power side, and now we are a lot more engaged with our counterparts on the energy side. We are part of our broader, collaborative solution to decarbonize.
Why are investors interested in the role of infrastructure when it comes to the energy transition?
Shelby Tucker: Infrastructure is a key component of decarbonization. The solution must provide power and electricity to all markets, and all parts of society. Electric cars are a good example. Introducing EVs is a crucial way to reduce carbon in the market, but requires a significant change in infrastructure – charging points etc.
If you can create an infrastructure that brings power to as many places as possible in enough quantities as possible you enable decarbonization – and that is why infrastructure is going to be such an important part of the story.
Robert Kwan: I think one of the big things that we’ve seen when it comes to opportunities created from the energy transition has been the potential for investment in infrastructure to help aid the transition – while continuing to invest in conventional energy infrastructure at the same time.
So really, one of the biggest takeaways is that this is not an either/or situation when it comes to investment. The energy transition is giving companies lots of opportunities to invest in their core businesses, as well as leveraging off of their existing infrastructure footprints to generate new opportunities to help their customers decarbonize their operations.
How is the sector approaching decarbonization?
Luke Davis: I think decarbonization continues to be a theme across the world, and even the smaller producers want to be a part of that transition – and provide longer term solutions. So, they have done, and continue to do, a lot of work to enable that.
On a macro level, decarbonization will be the most material change, and on a long-term basis I think the entire industry really does want to be part of that solution.
Robert Kwan: While one of the biggest macro drivers in the industry is the drive to decarbonize, on the other side is affordability. As we are seeing, decarbonization is costly – it drives up energy prices; however, on the flip side, energy affordability is extremely important from a political perspective. We've seen several instances where governments have stepped in to try to reduce energy prices, and typically that runs contrary to decarbonization initiatives.
What are some of the key forces impacting the energy sector?
Shelby Tucker: During any kind of uncertainty about recession or continued inflation, the utilities sector tends to be a bit more defensive. They pay good dividends and tend to be viewed as a place to hide if the market does not function too well.
In the utility sector we have quasi-certainty that we can recover our investments, because we have regulations in place. We haven’t seen any constraints on finding capital, but there are constraints on how much we can charge customers over time. We’re mindful of the impact it could have on the customer.
The Inflation Reduction Act (IRA) has provided tax credits that can flow to customers, rather than benefiting shareholders like in other industries. Because utilities can pass the benefits on to the customer it can help their bills go through.
How has the macro environment changed in recent times?
Biraj Borkhataria: The key change in the macro-outlook in the last couple of years has been geopolitical uncertainty. It’s a very different environment to what we saw prior to the war in Ukraine. It’s fundamentally changed the way politics is happening and the way policies are being set.
There is a greater emphasis on doing things in-country and building domestic supply chains rather than the globalization we have seen in the last few decades. Policy is changing across different geographies, and this makes it difficult for companies to deploy billions of dollars of capital. In some cases, the companies will just have to put some money down and take risks. In other cases, governments will have to backstop investments with policy.
