Power plays – geopolitics, energy security and infrastructure opportunity

While the laws of physics state that energy can neither be created nor destroyed, the laws of geopolitics determine that it can certainly be manipulated and even withheld. And as these dynamics become more complex and risks intensify, energy security has become critical to ensuring nations’ strategic independence and sovereignty.

Energy has always been a fundamental need. But with technology now integral to the way we live and the competitiveness of our economies, secure and resilient sources have become critical. The infrastructure and solutions to deliver energy reliably and sustainably – through increased electrification and use of renewables – therefore provide a significant investment opportunity in private markets, in our view, stretching across three verticals: energy, technology and the consumer.

Energy security has become imperative for strategic independence

From heating, lighting, cooking and communication to transportation, industry, education and healthcare, energy is essential to almost every aspect of our daily lives. On a wider scale, it powers economic development, boosts social wellbeing and helps ensure national security.

Industrialised nations first became seriously concerned about securing sufficient affordable energy resources in the early 20th century. However, it was not until the 1973 Oil Embargo that the concept of energy security grew in strategic importance.

Given its lack of fossil-fuel resources, energy independence has been a long-term strategic aim for China, and it was the main driver of the post-2008 US shale-oil boom. In recent years, war in Ukraine has exposed the geopolitical implications of Europe’s reliance on Russian gas.

As geopolitical risk escalates, energy security is not only seen as essential for sustaining economic development and boosting productivity – it is also critical to protecting countries’ sovereignty.

Countries are achieving energy security in different ways

The pillars of energy-security strategy are the ‘four As’, which cover the common physical, financial and societal dynamics of energy access and usage.

FIG 1. Objectives and challenges for the ‘four As’ of energy security¹

Typically, energy security approaches will involve a combination of technological, policy and infrastructure strategies focussed on increasing domestic production, especially from renewable sources. However, the way individual nations are pursuing energy security varies depending on factors including the threats they perceive, the values and entities they want to protect, and the resources available to them. We cover key case studies below.

National and regional approaches to energy security

USA

• Aside from shale oil and natural gas, the US has sought strong growth in renewables, particularly through the clean energy incentives in the Biden-era Inflation Reduction Act
• Grid modernisation is also a key focus. (It should be noted, however, that the Trump administration is rolling back renewables subsidies and is openly hostile towards offshore wind).

China

• China’s approach to energy security has been highly strategic, with energy independence viewed as vital to its industrial strategy and the development of cutting-edge technologies
• While still the world’s biggest user of fossil fuels, China is pursuing a massive buildout of renewable resources, and dominates global markets in solar, electric vehicles, and battery technology, as well as battery raw materials.

European Union

• The EU’s energy independence strategy is multifaceted, aiming to address both short-term resilience and long-term sustainability
• REPowerEU promotes rapid deployment of renewables, electrification of transport and industry, diversification of energy imports and investment in energy efficiency and infrastructure
• The bloc is also developing green hydrogen, smart grids and energy storage, it is supporting less advanced regions to improve infrastructure, and strengthening external partnerships
• It seeks to support coordinated governance and robust investment through National Energy and Climate Plans, clean energy financing, an internal energy market and the leveraging of public funds to attract private investment.

Saudi Arabia

• Oil-rich Middle East nations are increasingly using fossil-fuel revenues to invest in building solar and wind farms to serve their domestic markets, reserving petroleum for exports
• To support its renewables buildout, Saudi Arabia’s national electricity company has awarded a number of contracts for energy storage to Chinese companies, including a deal with BYD² to partner in five sites totalling 12.5 GWh of capacity.

Clean electrification and AI: essential for resilient energy supply

The recent apagón on the Iberian Peninsula – which saw a major power blackout lasting for 10 hours across most of Spain and Portugal, affecting more than 50 million people – is a dramatic reminder of how vulnerable our societies have become to energy supply shocks.

This is compounded by the dependence of many countries on imported fossil fuels. As well as being an obstacle to addressing the escalating threat of climate change, this represents a fundamental weakness in terms of energy security. To address the issue, countries are focussing on the clean electrification of industry, infrastructure and transport to scale renewables and storage to ensure energy security and resilience.

Integrating AI with renewables is also instrumental in achieving energy independence, since it facilitates new ways of optimising, transforming, managing and safeguarding energy systems. Examples include:

• Smart grid optimisation: through load forecasting, real-time management of supply and demand, and predictive maintenance to avoid outages
• Renewable energy integration: weather forecasting for better wind and solar integration, and battery storage optimisation
• Energy efficiency: improving energy use in manufacturing and transportation, and enabling smart buildings, infrastructure and utilities. These would feature automated control via AI, sensors and the internet of things (IoT), real-time data monitoring, predictive maintenance and improved resource management. Also, AI can help capture behavioural insights and carry out advanced modelling to design incentives and policies
• Strategic resource management: managing use of rare earths and other raw materials, efficient system design, and improved cybersecurity for grids and generating infrastructure.

As governments and businesses pursue long-term, efficient and clean sources of energy, investors can connect to investment opportunities in private markets – particularly in infrastructure.

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Energy-security investment opportunities in private markets

As an investment theme, energy security opens up opportunities in projects that provide the potential for stable, inflation-linked, long-term revenue streams, according to our Global Infrastructure team.

In the energy sector, electrification and the greening of energy supply is a key theme. With electricity’s share of global final energy consumption expected to rise from 20% in 2023 to over 50% by 2050 under a net-zero scenario³, this will require major investment across generation, transmission and distribution – much of it focussed on renewables.

• Building wind, solar, hydro and nuclear generation. Solar and wind could grow from 13% of the global power supply to around 40% in 2030 – and up to 70% by 2050, especially under a net-zero scenario⁴
• Boosting transmission and distribution capacity. The rate of grid installations in the 2020s is expected to be double that of the previous decade
• Scaling up energy storage. Battery storage is expected to see a 15-fold increase this decade, up from 56 gigawatt hours (GWh) of global capacity in 2021 to as high as 1,194 GWh in 2030⁵, enough to power almost 300,000 EU homes for one year
• Ensuring grid resilience. Physical infrastructure improvements and digital energy management solutions are needed to ensure reliability of supply
• Rolling out low-carbon fuels and biofuels. Development, production and infrastructure buildout for less polluting alternatives to fossil fuels.

FIG 2. The need for energy security generates infrastructure investment opportunities across three key sectors¹

Energy

Core infrastructure opportunities across energy and renewables. Typically large transactions with co-investment opportunities on offer.

Technology

Digital infrastructure assets are expected to evolve over time into highly contractual assets with core characteristics.

Consumer

Electrification and the low-carbon transition will involve transportation verticals over different timelines.

In the technology sector, digital infrastructure enables greater efficiency in communication, energy usage and other areas. This helps drive innovation and growth while improving energy-system resilience.

• Data centres, data registers, fibre-optic networks and cell sites: physical infrastructure to harness AI and cloud-computing technologies that can improve energy efficiency through reduced wastage, usage optimisation and predictive maintenance
• Digital tools: can enable more efficient use of energy and materials, through additive manufacturing and AI-driven generative design within CAD software, and by pairing building management systems with IoT devices. They also underpin innovations in managing power supply and demand within renewables systems, like vehicle-to-grid charging.

If scaled significantly, digital tools could reduce emissions by 20% from the energy, materials and mobility sectors.⁶

In the consumer sector, electrified and low-carbon solutions in transport offer opportunities, along with the supply gap in water utilities and wastewater management.

• Electric vehicles: we anticipate global penetration to reach 47% of new car sales by 2030 (of which 16% are plug-in hybrids), with greater uptake of electrified heavy land transport to follow⁷
• Rail and intermodal: legislative changes and urbanisation in the developing world will drive an increase in demand
• Shipping: we expect steady growth in the use of ammonia and methanol as fuels in shipping from 2030, reducing the sector’s reliance on fossil fuels
• Aviation: decarbonisation of medium- and long-distance flights through a combination of sustainable aviation fuel, lightweight aircraft for improved fuel efficiency, and direct air capture of residual emissions
• Water supply and wastewater management: infrastructure must be adapted to address the impact of climate change and mitigate wastewater pollution.

Surge in investment

Amid heightened geopolitical risk, improved energy security built upon the four As of availability, accessibility, affordability and acceptability is essential for nations worldwide. For many countries, achieving this requires greater electrification – involving renewables and battery storage, with usage optimised by AI and digital tools. Within the infrastructure investment universe, this shift is generating core opportunities across the energy, technology and consumer themes.

Read more on rebalancing portfolios and securing strategic independence on LombardOdier.com: Defending the grid – renewables on the frontline as nations invest to build energy security