Energy disruption highlights the importance of the energy transition in value creation

The world has been paying close attention to the prices of oil and gas since the conflict in the Middle East started, and rightly so considering the impact it has on inflation and economic stability.

For investors, this volatility is a clear reminder of the fragility of global energy systems and the need to mitigate energy disruption within infrastructure portfolios. One of the most effective ways to achieve this is through investing in the energy transition.

The energy transition should not be viewed solely as a thematic allocation. When aligned with a disciplined approach to value creation, it can materially enhance resilience and enhance return targets, delivering clear economic, environmental and social benefits.

That being said, LPs should not take for granted that every GP’s approach takes a fully integrated approach in connecting the energy transition to other considerations like resilience.

LPs should use this situation to investigate whether managers are genuinely embedding the energy transition into their investment approach, and whether this is translating into tangible value creation.

Benefits on offer

As a leading mid-market infrastructure investor, we at Ancala firmly believe that the energy transition is a macro trend that influences the value creation plans for most infrastructure investments, no matter the sector.

In Europe, part of the opportunity that the energy transition offers investors comes from investment in renewable energy assets themselves. Chosen carefully, these can deliver the key infrastructure features that investors seek from the asset class – predictable cash flows, downside protection and inflation correlation. These assets can also benefit from regulatory tailwinds that support growth potential and opportunity – tailwinds in Europe that are likely to strengthen further if this latest wave of disruption sharpens policymakers’ focus on energy diversification and security.

The transition is not only about generation. It also relies on enabling infrastructure that allows energy systems to operate more efficiently and flexibly. Smart metering is a key example, supporting better demand management and integration of distributed energy sources across the grid.

Ancala was an early investor in the German smart metering market, backing a leading platform shortly after the government mandated a nationwide smart meter rollout by 2032. This infrastructure is playing a critical role in modernising the energy system, enabling more efficient consumption and supporting the integration of a broader mix of energy sources.

A comprehensive energy transition approach, one that makes the energy transition a key consideration of creating value in every investment, at every stage, also offers opportunity to build resilience into non-energy-generating assets too. These assets are likely to be most exposed to risks like fossil fuel price volatility.

One way to do this is by installing on-site renewables – such as solar – to non-energy-generating assets. This gives assets their own source of power to offset some, or even all, of their reliance on other fuel sources while also reducing energy costs from remaining grid charges. A mix of renewable sources can even be used to tackle renewables’ own intermittency considerations.

At Dragon LNG, a liquefied gas terminal, we installed a 10MW solar farm during our ownership. This opportunity was identified right from the start, as we were assessing the investment. We saw an opportunity to use on-site renewables to reduce energy costs, as well as to decarbonise Dragon’s site. The success of the project led to plans to install a 13MWp wind farm, supplying a significant part of the terminal’s demand for power with self-sufficient, renewable electricity and further reducing its energy costs. These initiatives supported a greater premium on exit in 2024 to a trade buyer.

Elements of success

Finding the right investments and delivering resilience-boosting operational improvements doesn’t happen by accident. It’s a matter of proactive sourcing and active asset management, which GPs can be assessed on.

There are several key elements to look out for.

Identifying energy-related risks and opportunities from the outset helps determine the interventions likely to deliver the most impact, and enables value creation to start as soon as an investment completes. This includes stress-testing against extreme but plausible scenarios, including sharp oil and gas price spikes, power price volatility, supply disruption, and changes in regulation or policy so that strategies aren’t wrongfooted by extraordinary events.

This kind of proactivity doesn’t stop at acquisition.

Measuring and managing objectives, such as energy sourcing, pricing and hedging, efficiency and supplier resilience, needs to happen across the lifecycle of each investment, just like any other value creation initiative. This can be supported by combining investment expertise with deep operational experience.

At Ancala, our Industry Partners – former leaders of major infrastructure businesses and subject matter experts that have deep industrial and operational expertise – play a central role in helping to co-develop value creation plans that factor in potential downside risks and identify opportunities for improvement throughout the investment lifecycle.

A good strategy can be significantly bolstered through follow-on investments. In the context of the energy transition, this could mean investing in energy efficiency measures, purchasing new electric fleets to reduce exposure to oil costs, or installing renewable energy generation on site – all steps that create value by lowering costs and strengthening resilience. We have provided our portfolio companies with more than 45% of the value of our initial investment capital in follow-on funding.

We funded and developed a comprehensive decarbonisation plan for Liverpool Airport. This involved the installation of solar power generation on site to cover circa 25% of the airport’s electricity requirements, more energy efficient consumption and control systems, LED lighting, and EV charging infrastructure to support the use of electric ground support vehicles.

As well as helping to reduce the airport’s emissions, these initiatives have helped the airport to reduce its power consumption by approximately 40%, in turn reducing costs, increasing profitability and enhancing energy resilience.

Stronger foundations

Times like these clearly highlight the value creation opportunities within the energy transition and the importance of its consideration and application across infrastructure portfolios. Greater resilience against fossil fuel price volatility is just one of the many ways that it can deliver this.

To maximise this value creation opportunity, however, requires a comprehensive, integrated, approach from managers – an approach that looks at every investment through this lens, and applies this view at every stage of an investment through to exit.

Interested to find out more about Ancala’s approach to investing in infrastructure? Register your interest, here.