Disruptive technologies will affect all facets of infrastructure, and investors need to be prepared for change. Florence Chong reports
Before we know it, advanced battery technology will become universally available, with householders able to store electricity in their garage to run their home for a day or two. They will buy the electricity at off-peak rates, and the more entrepreneurial will sell it back to smart grids at a higher rate at times of peak demand.
There will be greater availability of solar energy as the price of solar photovoltaics falls. Householders will be able to harness solar energy to store in their state-of-the-art batteries and then sell to smart grids, which are already being built in countries such as China, Canada, Australia and Austria.
Smart meters will tell householders when to run their washing machines as the Internet of Things becomes entrenched in technology’s ecosystem.
These are just glimpses of what the future holds for the infrastructure investor committed to power stations. Disruptive technologies will touch all facets of infrastructure at a varying pace, depending on the rate of take-up of new technologies.
The stakes are high when one considers the prices being paid for prized, monopolistic infrastructure assets. For example, the New South Wales government in Australia is privatising its remaining poles and wires business, from which it expects to raise more than AUD10bn (€6.7bn).
For investors, the thought of technologies disrupting existing business investment models and reducing the value of their assets is daunting.
Rather than leave it to chance, one of Australia’s largest infrastructure investors has commissioned the US firm Global Infra Consult to undertake a six-month review of emerging disruptive infrastructure technology.
Ross Israel, global head of infrastructure at QIC, has decided that to be forewarned is to be forearmed. The AUD78bn QIC – custodian and manager of the state pension plans of Queensland public emplyees – is responsible for AUD$7bn invested in airports, ports, toll roads, electricity networks and other infrastructure assets.
Israel chose Ryan Orr, formerly with Stanford University in California and a venture capitalist and entrepreneur who has been deeply involved with technology start-ups in Silicon Valley, to lead a team of researchers to review current and emerging technologies and how they can – and will – disrupt infrastructure.
Technology has disrupted the business models of infrastructure over the past 100 years, Orr says, but the pace of that change has been so much greater in the last 10 to 20 years. And it will further accelerate in future with the amount of investment going into start-ups today.
Airbnb and Uber were only founded in 2008 and 2009, respectively. In their short time in business they have started to revolutionise their respective industries.
Similarly, battery technology is evolving quickly. Today, companies are competing to bring out longer-lasting and faster-charging products to meet the needs of electric cars.
Ross Israel says widespread use of battery storage can disrupt the business model and value chains of energy companies as we know them today.
When they converge, battery storage, solar energy and smart grids can materially influence supply and demand, to the extent that they could potentially take away the need for utility companies to continue to increase capacity.
Orr singles out seven key themes for review: energy storage, solar energy, and smart grids for their impact on the energy sector; driverless cars and car sharing on transportation; membrane technologies on the water industry; and cloud computing and data centres on the internet and communications.
For historical guidance, the researchers look at shale oil technology and how it has disrupted the liquefied natural gas industry in the US. “Disruption by the shale gas revolution massively obviates import capacity,” according to the researchers. “The result is long-term financial losses for LNG [liquefied natural gas] terminal owners and a need for extensive structural adjustments to reorient LNG terminal towards exports.”
The QIC study asks three questions for infrastructure investors:
• Will infrastructure change from providing a central service to managing a decentralised service?
• Will dominant technology providers become infrastructure operators of the future?
• Will demand for infrastructure become more elastic as consumers have more alternatives for the same need?
Individually, says Israel, disruptive technologies will not keep infrastructure investors awake at night, but together and cumulatively, they could have a far-reaching impact on future asset values and returns.
“At the heart of this disruption is the risk for infrastructure investors of obsolescence in the assets they are acquiring,” he says. “One of the attractions of the asset class is long duration, which makes it very attractive to back long-term liabilities for pension funds. So if these technologies shorten the life of the asset – unless we recognise the risk – they will reduce returns.
“Our assets sit in value chains with linkages to the delivery of a service or commodity, whether we are talking about toll roads, airports, or ports. And technology and innovation can disrupt those value chains.”
Key takeaways from the QIC Report
• The increasingly rapid pace of technological change is transforming the commercial competitiveness of existing infrastructure businesses.
• In order to manage the complex, ever-changing risk of technological change, investors need to foster a deeper understanding of disruptive innovations and their potential impact on the asset class, and assets they may already own.
• Investment opportunities will emerge for investors who can scan the horizon, recognise trends early and are flexible enough to adopt business models to new circumstances.
• Monitoring technological innovation and formulating actionable response strategies to industry transformation is a prudent input to investment planning and the delivering of long-term value, given the duration of infrastructure assets.
Israel says: “It is easy to be complacent when you are an infrastructure investor and owner because these businesses typically have high barriers to entry, and wide moats around them. Owners of these infrastructure businesses could well feel that they are immune to disruption because the assets provide essential services – water, electricity and so on.”
There are some natural markers telling investors and owners that technology will have a bigger impact in the digital world than what might have been in an analogue world. And it is best to be aware of those markers, Israel says.
“Technology has disrupted the business models of infrastructure over the past 100 years, but the pace of that change has been so much greater in the last 10 to 20 years. And it will further accelerate in future with the amount of investment going into start-ups today”
It is not all downside. “On the positive side of this disruption there are obviously technologies that can be embedded into an infrastructure company to potentially improve the asset’s performance – providing efficiency and better use of that asset and, in turn, enhancing its return for investors.”
One such technology is ‘smart pigging’, which can collect data about gas pipes without needing to stop the flow of production. Israel says: “This technology can tell us a lot about the integrity of the asset. We will know when the pipes start to degrade and when we have to replace them.”
Infrastructure owners are able to use big data to monitor consumer behaviour so as to provide services to changing needs, remembering that consumers, too, will increasingly be empowered with the availability of information on the internet.
Israel says regulators and governments must have a good understanding of potential disruptions so that they can make policy in a changing environment. As to when the disruptions will hit, Israel says it impossible to know precisely.
He defers to Orr who quotes Bill Gates. “We overestimate what is going to happen in the next five years and we underestimate what is going to happen over 10 years’ time.”
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