Energy crisis creates new opportunities for institutional investors

Clean electricity is the new oil. Investment opportunities amid the energy crisis.

Europe is in the midst of its biggest energy crisis since the Second World War. Via long-term investment in energy infrastructure, institutional investors can nevertheless play their part in ensuring supply security.

Harbingers of the energy crisis

The current energy crisis is changing the dynamics within the sector. Many people see the origins of the crisis as being the war in Ukraine, but in truth it had already begun in the months prior to the onset of the fighting. As early as autumn 2021, electricity prices in Europe had climbed to three of four times their average level for the past ten years. "The fact that France had nearly exhausted its remaining electricity reserves in the run-up to Christmas was a warning sign," says Dr. Johannes Teyssen, Chairman of the Board of Directors at Alpiq.

When Russian troops invaded Ukraine in February 2022, the inevitable could no longer be contained: Having originally been confined to the electricity market, the crisis began to develop in other areas, too. This wider crisis – now seen as more of an oil and gas crisis – starkly highlights the one-sided dependence on Russian fossil fuels.

The triad of energy supply

"The cause of the current crisis lies in the shortcomings of the past," says Dr. Teyssen. Over recent decades, the triad of supply security, affordability, and the environmental impact of energy sources has been neglected – not only in Europe, but also in Switzerland. While supply security was considered an issue, the one-sided dependency on Russian energy was accepted due to the low prices. For too long, the focus was instead on the environmental impact – that is, renewable energy sources – rather than on upgrading and modernizing the overall energy system in a timely manner.

The net effect of these endeavors is likewise sobering. First, the energy density of renewable energy is modest compared with nuclear. "For wind energy to match the output of a nuclear power plant, you would need to carpet an area the size of Lake Constance with turbines," says Dr. Teyssen. Alongside the argument about the visual impact on the landscape, discussions on the potential drawbacks of fracking, photovoltaics, and geothermal energy time and time again put a brake on projects that were already at the planning stage.

In parallel, Swiss hydroelectricity and nuclear power plants that were constructed during the last major investment wave between 1950 and 1980 have continued to age. As a result, the renewable technologies that were actually implemented failed to offset the shortfall resulting from the withdrawal from nuclear power.

Investing in energy infrastructure is vital

The balance between supply security, affordability, and environmental impact needs to be restored. This is the only way to ensure the competitiveness of Swiss industry. Doing so, however, requires a fundamental structural transformation of the energy sector – because while oil was the leading energy source of the 20th century, clean electricity is set to take its place in the 21st.

The number-one priority is to guarantee supply security. Without that, any efforts on the climate impact and affordability front will be meaningless. In addition, the transformation will become too capital-intensive otherwise. Massive investments are needed for the expansion and renovation of the currently inadequate infrastructure.

"At EIP, we are focused on ensuring that the energy transition takes place in a smart, efficient manner, and that energy supply security is optimized. Our aim is to integrate renewables into energy systems without jeopardizing economic growth," explains Roland Dörig, founder and managing partner of Energy Infrastructure Partners AG.

Renovation of the energy infrastructure requires "smart money"

The "gold rush" – when investing in renewable energy was almost guaranteed to generate attractive returns – is over. "Smart money" is required for profitable investments in today's complex investment market. Investors need to be thoroughly familiar with the market and the risks involved. Roland Dörig therefore recommends that institutional investors work with asset managers who are specialized in the energy sector.

The asset class is likely to remain attractive to investors against this backdrop; the fact is, relative production costs are low and capital starts to flow back relatively quickly. Investment in renewable energy is also well placed in view of the political acceptability of regulatory intervention.

The issuer and manager of the CSA products is Credit Suisse Investment Foundation, Zurich. The custodian bank is Credit Suisse (Switzerland) AG, Zurich. The articles of association, regulations and investment guidelines, as well as the latest annual report and factsheets, can be obtained free of charge from Credit Suisse Investment Foundation. Only tax-exempt pension funds domiciled in Switzerland are admitted as direct investors.