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Why is renewable infrastructure a compelling and defensive investment?

Renewable infrastructure is an asset class that many investors are beginning to incorporate in their portfolios due to its compelling risk and return characteristics. The asset class provides defensive characteristics through multiple market cycles and can provide consistent returns over extended periods of time.

RENEWABLE INFRASTRUCTURE • DEFENSIVE • ASSET ALLOCATION

What are infrastructure investments? 

Infrastructure is a large asset class with a variety of investments that have the following characteristics:

  1. Essential or necessary product or service: Infrastructure assets provide services that are hard not to use even in a difficult economic environment. Examples include: electricity, water, sewage, cell phones. 
  2. Long useful life: Infrastructure assets have very long useful lives and usually last between 20-50 years.
  3. Monopoly or quasi-monopoly market position: A local utility that provides power, water, sewage is monopolistic by nature given the significant investment it takes to set up and deliver these services to homes. A cell tower or toll road would have a quasi-monopoly as there are very limited options beyond them for these services.
  4. Operate in regulated environments and/or are less affected by economic cycles: These assets can be regulated by authorities and/or benefit from the government encouraging additional investments in certain areas such as renewables with the passing of the Inflation Reduction Act. 
  5. Cash flow and earnings vary minimally in multiple environments: Cash flows have limited variation given these assets necessity in all market environments and the monopolistic structure of the assets. 

Five Reasons Why Renewable Infrastructure is Defensive During Tough Economic Cycles

 

  1. Steady Income Streams: Infrastructure assets, such as renewable power, waste-to-value, biogas, etc. often generate stable and predictable income streams over a long period of time, even during economic downturns. This provides a defensive characteristic for investors seeking income stability.
  2. High Barriers to Entry: Infrastructure projects often require significant capital investment, regulatory approvals, and expertise, creating high barriers to entry for new competitors. This can provide a defensive moat around existing infrastructure assets, protecting them from new entrants and competition.
  3. Inflation Protection: Infrastructure investments are often tied to inflation-adjusted revenue streams, such as tolls or fees. As a result, infrastructure investments can provide a hedge against inflation and maintain their value over the long term.
  4. Government Support: Infrastructure investments are often backed by government guarantees or concessions, which can provide a level of protection against default risk. Additionally, government support can provide stability in uncertain economic environments, further enhancing the defensive nature of infrastructure investing. See additional discussion on the Inflation Reduction Act and the expected benefit to renewable infrastructure investments
  5. Long-term Horizon:  Infrastructure investments are typically made with a long-term horizon in mind, often lasting several decades or longer. This long-term investment horizon can provide stability and resilience against short-term market volatility, making infrastructure investing a more defensive investment strategy. 

Benefits of Renewable Infrastructure Investments

Portfolio diversification: In general, renewable infrastructure assets have a low correlation to stocks and bonds. Further, this asset class can reduce volatility in investors’ portfolios during economic turmoil as a result of stable earnings streams throughout economic cycles. 

Income Potential: Given the highly predictable cash flows of renewable infrastructure assets, these investments usually provide strong income potential. 

Growth: The global infrastructure market is expected to experience one of the greatest capital investment cycles ever given the transition from fossil fuels to renewable energy sources to address climate change. Additionally, countries are seeking energy security as a result of the war in Ukraine and dependence on foreign powers for energy needs.

Inflation Reduction Act

The inflation reduction act’s $370 billion commitment to clean energy will provide significant benefits to the renewable energy space and could significantly boost returns. Some key items encompassed in the act include: 

  • Extension of tax credits for solar, wind, geothermal, hydropower and biomass generated electricity for projects started prior to 2025
  • Making standalone battery storage and interconnection facilities eligible for federal tax credits
  • Creation of “technology neutral” credits beginning in 2025
  • A 3-year carryback provision to expand the tax equity market
  • Transferability provisions for federal tax credits, allowing more efficient monetization for investors
  • Large new incentives for renewable natural gas, renewable hydrogen, electric vehicle infrastructure and energy efficiency
  • Significant focus on prevailing wage labor at qualifying projects, Made in USA components and building in historically underserved areas

Risks to Renewable Infrastructure

Political and Regulatory: Regulations and changes to the tax code can negatively affect the cash flows and valuations of these assets. Additionally, while rare, these assets have been nationalized, or taken over by governments. 

Technical & Operational Capabilities: Owners and operators must be highly skilled given the complexity of running these assets. 

Anticipated Shift to Renewable Energy 2020 – 2050

The following chart shows the dramatic projected increase in renewable energy versus other sources of electricity generation. As you can see, renewables are expected to roughly triple between 2020 and 2030.

Citizen Mint believes investing in renewable infrastructure is a multi-decade opportunity. The majority of these investments will be in solar and wind projects which will be the greatest source of new power generation as noted in the chart above. While previously expensive to build, the prices for wind-generated energy has dropped 70% per megawatt hour (MWh) and 90% for solar over roughly the last decade, reducing the need for government subsidies while also accelerating plans of large electric utilities to switch from fossil field (oil and coal) to renewables.

Learn how infrastructure and other real assets such as real estate and natural resources by downloading our Guide to Real Assets white paper.

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