‘Pressing need’ for investments in energy infrastructure: GIC

[SINGAPORE] Sovereign wealth fund GIC sees a “pressing need” for investments in grid infrastructure and power equipment supply chains, as it bets on opportunities in the electrification of the economy.

GIC is “constructive” on regulated electric networks and utilities, as investing in their asset base can provide additional earnings growth, the fund said in its annual report released on Friday (Jul 25).

It especially favours assets in stable jurisdictions, with regulatory frameworks that “support high cashflow predictability by providing inflation and volume protection”.

“The world really needs all kinds of energy; I would say in a hurry as well, because especially with AI, the need for energy is just tremendous,” said GIC chief executive Lim Chow Kiat at a media briefing on Thursday.

He sees GIC being suited to provide the “large and long-term capital” that energy investments require.

In its report, the sovereign wealth fund said that it has backed a Europe-based company that designs and manufactures cable systems for energy and telecommunications, as well as a utilities company generating power across several markets in Asia-Pacific.

The utilities company used to be predominantly a coal power producer, but has gradually moved to greener sources through recent investments.

When looking at fossil fuel-related investments, GIC focuses on whether there is a plan to transition from brown to green fuels, said Bryan Yeo, its group chief investment officer.

“The transition theme is the overarching one for us. If we are able to find good opportunities, good company management who have a good plan, and we track their milestones… that actually creates long-term value,” said Yeo.

The focus on energy comes as multiple sectors are undergoing electrification, such as buildings – with the use of electric heat pumps – as well as transport – with the rise of electric vehicles.

Electrification is driven not by government subsidies and regulation, but by improving economics, as the cost of renewables declines, GIC noted.

As the share of renewables in the global energy mix rises, there is a need for solutions tackling the intermittency and distributed nature of sources such as solar and wind power.

Opportunities include dispatchable baseload generation and battery storage, which GIC noted are “integral” to tackling grid congestion.

Green fuels and energy efficiency

One of the long-term investment themes GIC is bullish on is the continued shift towards electrification, powered by emerging clean technologies to decarbonise the economy.

A second theme which offers attractive investment opportunities is the rising adoption of energy efficiency solutions which provide both economic and environmental benefits.

Clean technologies are needed for sectors that are difficult to decarbonise, such as industrials and heavy transport. Solutions include green fuels and long-duration energy storage.

“While these technologies have yet to reach maturity, GIC has backed companies with the right attributes to succeed, such as having a differentiated technological or cost advantage,” it said.

For instance, GIC has invested in green ammonia projects with access to cheap renewable electricity inputs or insourced supply chains. This makes them cost-competitive relative to their peers.

On the energy efficiency front, GIC sees grid optimisation solutions being essential to improve grid stability.

“The capex-intensive nature of grid investments, as well as supply chain and labour constraints, offer an opportunity for innovative solutions to ease grid congestion and improve efficiency of energy delivery,” it said.

One investment opportunity is electrical equipment companies that offer smart grid hardware and software to utility customers.

GIC has also invested in smart metering companies which help residential and commercial clients with energy monitoring and optimisation.

In addition, the state investor has backed companies that provide energy management and cooling solutions to data centres, and sees opportunities for similar solutions in other industries.

For example, in the construction sector, companies specialising in insulation could reduce power needs for heating and cooling.

“In the manufacturing sector, we see value in industry leaders in steam and compression technologies offering products that reduce customers’ total lifetime energy needs,” said GIC.

Natural gas persists

While the trends highlighted are “durable”, they are “increasingly fragmented” as governments respond differently to the need for energy security, GIC noted.

Even with the shift to renewables, GIC expects natural gas to continue to be part of the energy mix over the medium term. This is due to its low cost, provision of baseload power and cleaner emissions profile.

Natural gas “will continue to play a key role in the US over the medium term, but renewables remain well-positioned in Europe, China and India”, said Yeo.

With the complex energy landscape, “high-quality businesses with multiple pathways to win and strong pricing power are more valuable than ever”, said GIC.

Power and electrical equipment companies that are “agnostic to the energy supply mix in each market” are well-positioned, as they ride on growing energy demand regardless of supply dynamics.

“As evidence of their pricing power, some of these companies have also historically delivered resilient shareholder returns even amid varying economic conditions and volatile cost environments,” said GIC.

Beyond energy, solutions for adapting to climate change are another investment opportunity. These could include traditional solutions, such as climate-resistant building materials, or new innovations such as weather intelligence.

“We will continue to work to identify more investment opportunities within each adaptation solution category,” the fund said.