Transition indicators in action: energy infrastructure credit

Understanding the speed of the energy transition can highlight risks while revealing compelling investment opportunities. To help investors gauge the pace and path of the transition, we identified key metrics that investors should monitor in our recent paper, The energy transition: 10 essential indicators for institutional investors.

Leveraging this framework, Senior Managing Director and Portfolio Manager for Nuveen’s Energy Infrastructure Credit (EIC) team, Don Dimitrievich, describes how three indicators—clean energy capital expenditure, planned coal plant retirements and government trade policies—relate to the EIC’s market landscape and impact their investment strategies. This article is part of a series.

Power demand is the biggest value driver for energy infrastructure. After years with little growth, a confluence of factors is catalyzing demand for more power, including increased electrification arising from the growth of renewables for power generation, electric vehicle transportation and the advent of generative AI. The mix of how that power demand is going to be met is changing, which has implications for financing mechanisms, investment opportunities and risk factors.

Indicator #1—CAPEX ratio to rise but the importance of debt capital often overlooked

In 2023, capital expenditure for clean energy modestly outpaced fossil fuels in the United States (1.4:1)1. That ratio is expected to ramp up as steady capital spending on fossil fuels will be offset by increasing clean energy investment. Scenarios range approximately between a 6:1 and 13:1 ratio by 2030.¹

On balance, renewable power generation is more capital intensive than conventional generation because much of the costs are in the building and development of the infrastructure, compared with variable maintenance and fuel-related costs needed for conventional power generation. Consequentially, the increase in clean energy spending will need a robust supply of debt financing. This dynamic underpins a rapidly growing opportunity set for attractive deals in our investable universe.

Indicator #6—aggressive coal phase out plans and rising energy demand underscore opportunity

Coal capacity in the U.S. has declined from 296 GW in 2013 to 188 GW in 2023, and another 100 GW is expected to retire in the next decade.² Will new clean energy supply offset combined effects of the reduction in coal power generation and the secular increases in power demand described above? On an annual basis, for every GW of coal retired in the next decade five GWs of renewable energy capacity is expected to come online. In fact, approximately 1TW (=1,000 GW) of solar, 1TW of storage, 360 GW of wind and 79 GW of gas projects are currently waiting in the queue to connect to the U.S. grid.³

On the surface it appears that projected additional power demand can be met by new clean energy supply. However, grid connection and transmission has emerged as a significant bottleneck, alongside issues such as the lack of planning and regional frameworks for overcoming and/or streamlining such obstacles. The actual pace of retirements of coal plants is therefore uncertain and may prove slower than anticipated in the near future depending on how some of these impediments are resolved.  In fact, we have already witnessed that some coal plant retirements have been delayed given surging power demand, such as Maryland's Brandon Shores coal-fired power plant.

High renewable energy capacity potential when coupled with energy storage systems represent a significant opportunity to meet surging power demand. We also see transmission-enhancing infrastructure and distributed generation as compelling areas of the market given their role in enabling the large-scale shift in energy supply sources already underway in the U.S.

Indicator #7—transition bottlenecks embedded in protectionist dynamics

The U.S. Inflation Reduction Act has obvious benefits to the low-carbon transition from a U.S. government investment perspective and the improved profitability potential of clean energy technologies. But the protectionist tilt of the policy causes two unintended consequences as it relates to the speed of emissions reductions.

First, requirements for U.S. sourcing of materials and components (and related import tariffs) raise input costs and, consequentially, total costs for the deployment of clean energy. This may potentially reduce the pace of adoption. Secondly, the policy’s focus on domestic manufacturing, which is necessary to reduce reliance on infrastructure equipment sourced from China, will likely cause a meaningful increase in energy demand, which may further strain grids.

This is where selectivity in investments and flexible financing solutions are important. Experience through multiple economic cycles and energy credit expertise can help investors assess the feasibility and profitability of projects. Flexible financing solutions with financial and operational covenants are also important to help address capital cost and inflationary challenges from a structuring standpoint.

Nuveen’s Energy Infrastructure Credit team provides private debt solutions to companies that are progressing the transition to a low carbon economy while also facilitating energy security. Click here to learn more about the Energy Infrastructure Credit strategy.