Originally published: 8.9.2021
Climate scientist Michael Mann summarizes the latest findings in three basic points: 1. The “hockey stick” of rising global temperatures is continuing at unprecedented rates; 2. The impacts are now widespread, with more extreme weather events; and 3. It’s still not too late to do something to blunt the worst of the potential impacts.
None of this will come as a significant surprise to most professional infrastructure investors at this point. Many institutional investors I speak with are already keenly aware of the climate change megatrend affecting their markets, and it’s one reason so many institutions are shifting their investments from fossil fuel projects into renewables.
However, while that shift is highly visible in power generation project finance, investors need to also heed the warning from the IPCC on all their other categories of infrastructure as well. Because the rapidly-growing effects of climate change no longer allow investors to think about their long-term infrastructure assets in the same way.
One useful case study may be Iceland. The country is renowned for its past transition from a mostly fossil fuel powered electric grid, to one that is largely hydropower and geothermal powered. It’s held up as an example to policymakers. Major energy-intensive industries like aluminum smelting and now cryptocurrency mining have been shifting operations into Iceland because of its abundantly available low-cost, renewable electricity and geothermal heating. Iceland would appear to be in an advantaged position as the world shifts to more sustainable energy sources.
And yet, as I heard firsthand on a recent trip to the country, climate change is actually creating major threats to the country’s economy. The country’s famous glaciers, covering large portions of the island, are in full retreat. This is already impacting tourism to a small degree (it takes the tour operators significantly longer than even just a decade ago to reach glaciers for short trips), but would have a potentially major impact on tourism earnings over time.
The glacier melt is also having some less obvious impacts. As one article from two years ago described, even then the glacier melt was having operational impacts on the country’s fishing industry.
More directly relevant to infrastructure investors and anyone planning to rely longterm upon cheap, renewable electricity, the glacial melt is having significant impacts on hydropower. While geothermal power generation gets all the attention when people think of Iceland, it’s actually hydropower that provides the majority of the power. And the massive glacial melt is currently overwhelming the country’s hydrodams, so that they’re not able to fully utilize the potential power… and yet within a few decades the expectation is that the loss of glaciers will result in much LOWER levels of waterflow, threatening the available power supply. By 2200, the expectation is that all of the glaciers will be gone, and available hydropower capacity will be stuck at 1990 levels. Indeed, another study concluded that “the regression of their glaciers will render a multitude of Iceland’s hydroelectric power stations inert within the turn of the century, and decrease their total electric production by over 70%.” And of course, these projections came before today’s IPCC report and its indications of even more accelerated climate change than previously expected.
Thus, Iceland becomes a cautionary microcosm for infrastructure investors. First, in that the effects on power generation projects are not likely to be linear or easy to predict. What seems like an advantaged long-term project today may not be, even just a decade from now. Certainly over longer time periods, as most large power generation projects are planned for. Planning and projecting is now really difficult for such investments.
Secondly, all infrastructure, not just power generation projects, are going to face significant impacts from climate change. The above-mentioned impacts on ports are just one obvious example, but extreme weather events will also have an impact on any type of project. And just think about all the effort that has gone into relocating industrial operations to Iceland in search of cheap, renewable power, if the power is no longer cheap as hydropower resources melt away.
With fishing, tourism and cheap renewable power all under threat from climate change, Iceland no longer looks so advantaged in the shift to a more sustainable global economy.
One key takeaway for infrastructure investors is that flexibility and resiliency are going to be increasingly important. And that means smaller, more distributed infrastructure could be advantaged over the next few decades. Multi-decadal climate effects are going to be more easily dealt with by distributed generation than by big, 50-year centralized power plants. On an island like Iceland, it’s also more obvious how dependent their economy is on long supply chains (for food, fuel, etc), so efforts such as indoor agriculture can also provide resiliency.
What today’s IPCC report shows is that we’re already in a period where climate change is going to have rapid impacts on economies and infrastructure, and unfortunately this will be non-linear and difficult to predict. As Iceland’s example shows, this will have a significant impact on the infrastructure asset class, sometimes in counter-intuitive ways. Infrastructure investors need to make sure they are not thinking about this in a siloed way – climate change as strictly a powergen issue, with other infrastructure categories still business as usual as if they won’t also be impacted. And investors also should be thinking about ways their strategies and allocations could better incorporate distributed, flexible and resilient approaches.