The industrial transition strategies are finally here

The most enlightening bit of the Rumble Down Under – which saw a Brookfield-led consortium try, and so far fail, to acquire Australian giant AGL Energy – has been the glimpse it’s afforded into how a large-scale, industrial-focused energy transition strategy works.

It’s no secret that most energy transition vehicles have overwhelmingly concentrated on renewable energy generation, largely within the context of governments’ overarching decarbonisation plans – to the point where, as affiliate title Infrastructure Investor reported last July, LPs have got “quite fed-up” with pure renewable power funds or projects.

Slowly but steadily, though, a different kind of energy transition strategy has emerged, one focused on decarbonising businesses and, even, entire industries. We expect this more value-add approach to accelerate significantly going forward, so it’s interesting to spend some time looking at the largest such strategy on the market: Brookfield’s Global Transition Fund, targeting $15 billion.

For a while, it was unclear how a GTR deal would differ from a traditional energy transition infrastructure deal. That’s now clearer thanks to the consortium’s failed bid for AGL. Here’s what we’ve learned: the Brookfield-led team, which also included Australian private investment firm Grok Ventures, would spend A$8.5 billion ($6.3 billion; €5.8 billion) to take AGL private. It would then commit to investing a further A$10 billion to accelerate the closure of the energy giant’s coal-fired power stations, helping AGL reach net-zero emissions by 2035 – a full 12 years faster than the company’s current plan.

On paper, that is a powerful example of private capital’s ability to zero in on a business and significantly accelerate its decarbonisation. “We felt that helping to solve 10 percent of Australia’s emissions and creating value for shareholders alongside while we did that was an important thing to do,” Mark Carney, Brookfield’s head of transition, quipped at the Australian Financial Review’s 2022 Business Summit.

Of course, not everyone agreed, starting with AGL, which twice rejected the consortium’s bid for undervaluing the company. Tim Hannon, managing director of Australian manager Conrad Capital Group, was also sceptical. “The bid team apparently have a ‘decarbonisation’ plan that is faster and better than AGL’s. But so far there are no details – other than claims of a A$20 billion war chest to spend on renewables and batteries. Which hardly seems an innovative strategy,” he wrote in a LinkedIn post.

Hannon added that AGL “is already the largest renewable and battery storage company on the ASX” and concluded the consortium was “simply being opportunistic – trying to buy AGL after it is emerging from the most difficult period of its transition [to renewables]”.

Disagreements on AGL aside, Brookfield is not the only manager seeing value in helping businesses transition. Quinbrook Infrastructure Partners recently hired John Lucas, formerly Amazon Web Services’ head of renewables and energy procurement, Americas, to lead a new strategy focused on providing carbon-free energy solutions for data centres. For co-founder David Scaysbrook, data centres are the start of a larger play for Quinbrook. “Over time, I won’t say that we’ll only have a dedicated investment strategy for green data centres, though they are big enough and varied enough for that. But certainly, it would be more specialised, industrially focused funds,” he told us.

As Infrastructure Investor wrote last week, funds’ appetite for US utilities is on the up, partly for the yield these investments provide, partly because there is a genuine opportunity to help decarbonise them. And this week, Vincent Policard, KKR’s co-head of European infrastructure, made clear the firm’s $17 billion Fund IV was looking to invest in the energy transition slightly differently, focusing “more [on] brown-to-green opportunities, such as industrial opportunities”.

While others have been active in helping businesses and industries decarbonise over the years, this feels like an inflection point, which can only be good news in the fight against climate change. Importantly, these transition strategies are very much infrastructure plays – albeit value-add ones – confirming the asset class as the beating heart of the global energy transition.

This article first appeared in affiliate publication Infrastructure Investor