The role of infrastructure in decarbonization and sustainability
Infrastructure is arguably the true backbone of the global economy. It provides the foundation for the functioning of society, and is also front and center in the move toward decarbonization and the pursuit of global environmental sustainability. Given the importance of infrastructure in the global economy, it is not surprising that investors are seeking to understand its role in decarbonization and sustainability.
From the energy we consume to the transportation networks we rely on, we believe that sustainable infrastructure is well placed to help in delivering solutions that reduce global emissions. With this in mind, we believe that exposure to sustainable infrastructure in a multi–asset, diversified portfolio deserves ample consideration.
Amid this backdrop, we‘ve highlighted some of the key trends and initiatives across the global infrastructure ecosystem that are enabling progression toward the world’s climate and environmental goals.
1. Decarbonization of electricity
Across the electricity ecosystem, there is a material push toward decarbonization and sustainability. Driven by a supportive regulatory backdrop and declining cost curves for wind and solar power, the decarbonization of electricity is underway. And while renewables growth in the United States is still in its early stages, the U.S. Energy Information Administration expects that the share of renewables in the U.S. electricity generation mix will double from 21% in 2020 to 42% in 2050.1
In Canada, renewable energy sources provided about 16% of Canada's total energy supply in 2018. Wind and solar energy are the fastest–growth sources of electricity in the country. 2
According to the Canada Energy Regulator, domestic fossil fuel consumption will be 35% lower by 2050 than it was in 2019, while renewable and nuclear energy will grow by 31% in the same time period. By 2050 it estimates renewable and nuclear energy will represent 38% of the energy mix compared to 23.4% in 2019.3
The importance of decarbonizing electricity generation in reducing carbon emissions to net zero cannot be overlooked. The electricity sector is the largest source of carbon emissions around the world, with approximately 30%–40% of global carbon emissions coming from the consumption of fossil fuels to generate electricity.4
The regulatory environment for renewable energy today is very supportive, which has helped accelerate the transition to renewables in the electricity generation mix. Most of the utilities in the United States are actively expanding their renewable energy assets, with 30 states, Washington D.C., and some U.S. territories already enacting regulations that require utilities to supply a minimum percentage of their electricity demands from clean energy. Moreover, 74% of U.S. electricity generation is in states with green energy initiatives.5
The growth in renewables in the electricity generation mix is also helped by declining cost curves in solar and wind energy, to the point that their price (without subsidies) is now lower than traditional fossil fuels. Costs for solar and wind are expected to continue declining moving forward, which should further entrench both as low–cost energy providers.
2. Carbon management for airports
Airport Carbon Accreditation is a carbon management certification initiative for airports globally. It sets requirements for airports for measuring and reducing their carbon emissions, with the ultimate goal of becoming carbon neutral. It has been developed to encourage and enable airports to implement best practices in carbon management across their operational footprint and reduce emissions from airport activities such as:
- Airport controlled sources, i.e., ground support vehicles and equipment, de–icing substances and power generation
- Other sources related to airport activities, i.e., aircraft ground movements, passenger travel to the airport, water and waste management
- Purchased electricity, i.e., heating, cooling and lighting
Examples of initiatives undertaken by airports to reduce emissions include:
- Developing renewable energy sources
- Construction of low–energy buildings
- More efficient heating and cooling systems
- Replacing service vehicles with electric vehicles
- Reduction of aircraft taxi time
- Installation of LED* lighting
Ultimately, the program helps to ensure airport infrastructure supports a reduction in emissions in line with global efforts by governments and industry.
Since being launched in 2009 with a focus on European airports, the program has expanded to now include 334 airports in 74 countries across Europe, North America, Latin America and the Caribbean, Africa and the Asia–Pacific region. There are now 61 airports arounds the world that are certified as carbon neutral.6
3. Natural gas replacing coal for electricity generation
Liquid natural gas (LNG) is increasingly becoming an important component of the global energy system, particularly as it replaces coal for electricity generation. Given its lower emissions profile, we see it as a stepwise improvement along the road to decarbonization.
The continued development of LNG infrastructure, including pipelines, storage and shipping, provides greater access to LNG across the globe. A decade ago, just 23 countries had access to LNG, but by 2019, the number of LNG–importing countries had reached 43.7 This improved access has directly helped to facilitate reductions in air pollution and emissions.
According to data from the U.S. Energy Information Administration, 121 U.S. coal–fired power plants were repurposed to burn other types of fuels between 2011 and 2019. Of these, 103 were converted to or replaced by natural gas–fired plants, helping to reduce coal’s share of the nation's power needs.8
The growth in China’s coal consumption during the 2000s actually reversed in the decade that followed, with the 2010s logging a decline in coal consumption growth. This about–face occurred after 2013, when China stepped up efforts to diversify its energy mix and reduce reliance on coal as an energy source.9 Today, natural gas is a more important component of China’s energy mix than ever before, with the conversion of coal–fired furnaces to natural gas furnaces a high priority for Chinese authorities.
In the birthplace of the industrial revolution, the United Kingdom, coal–fired electricity has nearly disappeared and now only supplies 5% of power requirements. Today, the nation’s power needs are met predominately with natural gas and renewables.10
In December 2018, Canada announced regulations to phase–out coal–fired electricity by 2030 as well as greenhouse gas regulations for natural gas–fired electricity. In 2005, coal generated approvimately 16% of Canada's electricity; that number had dropped to 9% by 2016.11
The bottom line: Infrastructure investing rife with possibilities
Given infrastructure’s importance in the global economy, along with the focus of citizens, governments and corporations on reducing carbon emissions from the use of fossil fuels, the infrastructure ecosystem has demonstrated its willingness and ability to positively contribute to emissions reduction. Ultimately, infrastructure looks set to continue its important role in reducing carbon emissions and environmental sustainability in the coming decades, leading to a broad range of opportunities for investors along the way.
1 U.S. Energy Information Administration, "EIA Projects Renewables Share of U.S. Electricity Generation Mix Will Double By 2050," February 8, 2021
2 Source: https://www.nrcan.gc.ca/science-data/data-analysis/energy-data-analysis/energy-facts/renewable-energy-facts/20069
4 First Sentier Investors, Global Listed Infrastructure Net Zero, January 2021
5 Cohen & Steers, Data, Decarbonization and the Travel Recovery, January 2021
6 Airport Carbon Accreditation Interim Report 2019–2020, February 2021
7 The Future of Liquified Natural Gas: Opportunities for Growth, McKinsey & Company, September 2020
8 U.S. Energy Information Administration, August 5, 2020, https://www.eia.gov/todayinenergy/detail.php
9 IEA, What the Past Decade Can Tell Us About the Future of Coal, December 2020
10 Scientific American, Natural Gas Use Is Rising: Is that Good News or Bad News for the Climate?, January 2020
11 Source: Government of Canada, Environment and Climate Change Canada.
* light-emitting diode