Explosions at Nord Stream pipelines exposed growing risk to power grids
Investing in infrastructure is increasingly risky. The explosions that damaged the Nord Stream gas pipelines linking Russia with Europe in September have alerted investors to the physical threats posed by volatile geopolitics to energy networks. Cyberattacks, which were already on the rise before President Vladimir Putin invaded Ukraine, have also intensified. As private investors rethink this, states will play a larger role.
Capital has poured into assets such as toll roads, telecommunications towers and power grids, as investors seek stable regulated investments that offer some protection against inflation. Private equity infrastructure funds attracted $121 billion globally in 2021, nearly 60% more than in 2017, according to PitchBook data. In Europe, these funds acquired assets worth 41.7 billion dollars in the first seven months of 2022 –more than double that of the previous year–, driven by operations such as the acquisition by Veolia of Suez, a French rival in water management and waste.
Even so, investors are increasingly selective when it comes to betting on infrastructures. The still unexplained explosions in the Baltic on September 26 exposed the fragility of marine infrastructure, bankers and high-level investors tell Breakingviews. TotalEnergies and Equinor stated in September that they had detected unusual drone activity near their offshore energy facilities. Corrosive seawater can quickly render an underwater pipeline unusable. And the damages caused by wars are not usually covered by insurance.
The rising cost of insurance against cyberattacks will also make telecommunications and electricity networks less attractive. According to a survey by the Council of Insurance Agents and Brokers, the premium for insuring commercial property against hackers increased 27% year-over-year in the second quarter of 2022, well above the median increase of 7% for all lines of insurance.
However, the need for infrastructure remains strong. The Macquarie fund declared in November that it had attracted 12.6 billion euros from investors to invest in basic infrastructure such as electricity networks, gas pipelines and water facilities.
The urgency to make the world a cleaner place involves building and modernizing electrical infrastructure in both developed and developing countries. Assets such as electricity networks, essential for the transition from fossil fuels to renewable energy, will continue to be attractive for investors and financiers.
However, they are also potentially exposed to sabotage, as demonstrated by the attacks against two electricity substations in North Carolina (United States) on December 4. More than 40,000 customers lost power in what local authorities described as a “targeted attack.”
The pressure to establish energy security at home also means that governments will want to own key infrastructure assets, regardless of financial incentives. Germany, for example, has taken over private Russian-owned gas storage facilities and is trying to gain control of the local subsidiary of Dutch power grid operator TenneT, Reuters reported on November 30. If private investors conclude that some infrastructure assets have lost their appeal, governments will step in.