Partner Insight: Power play - Building the case for infrastructure in 2025

The long-term case for listed infrastructure remains compelling and near-term catalysts could also drive performance in the short term
Infrastructure benefits from the necessary power demand from AI adoption, but the opportunity is broader, with trends like energy security and electrification driving investment
We believe nuclear and natural gas could benefit from investment spending in 2025, and valuations offer the potential for attractive upside

As an asset class, infrastructure has recently been commanding a great deal of attention due to its essential role in powering the AI revolution. It's true that AI consumes a significant amount of energy. For instance, a ChatGPT query uses about 10 times more electricity than a Google search. It's also true that infrastructure will continue to have a significant role in facilitating AI innovation and development. However, infrastructure is about more than AI. While AI-related power demand is important and is certainly responsible for a significant portion of power demand growth, major grid and power investment is required with or without AI. Put another way, AI may be the cherry on the cake, but it's not the cake.

This is because no economic advance is possible without the right infrastructure to facilitate it. Infrastructure has intrinsic exposure to the world's mega trends — as the world changes, our infrastructure has to change with it. AI is part of this story, but it's not the whole story — power demand growth is being driven by a confluence of long-term secular themes, such as electrification, energy security and connectivity — and AI.

In my view, these long-term drivers have the potential to translate into strong performance for an asset class associated with stability and defensiveness. While the long-term case for infrastructure — and its defensive properties — remain intact, we also see scope for prices to increase this year, particularly as valuations — especially for US utilities — look cheap compared to the broader equity market (Figure 1). Here are three shorter-term catalysts that I believe will drive infrastructure prices in 2025.

Society demands more today than ever before — more power, faster speeds, greater convenience. Demand for energy increased by more than 15% from 2013 to 2023.^[1] At the same time, we also want to do more with less, reducing our reliance on scarce resources like fossil fuels in favour of electricity. We're making progress on electrification — the International Energy Agency (IEA) has shown that over the last decade, the share of fossil fuels in the global energy mix has come down (from 82% in 2013 to 80% in 2023^[2]). However, because of the increase in total demand, we actually consume more fossil fuels on an absolute basis today than we did in 2013.^[3]

We believe the power demand problem represents a once-in-a-generation opportunity for infrastructure investors. The solution is a long-term shift from hydrocarbons to electrons, which will drive more demand for electricity as a proportion of our consumption. Electricity represents about 20% of the world's energy consumption today but is projected to grow significantly (Figure 2), potentially increasing to about 50% of our energy consumption.^[4] As investors, I believe we can benefit from the accelerating demand for electrification.

Part of this increase in demand is driven by AI, but much of it is driven by other long-term trends. For example, the more digitized and connected our lives become, the more data we generate and use. For example, an image uploaded to social media is stored and reproduced not once but multiple times on different servers around the world. The more popular an image is, the more extensive this process becomes. More data requires more storage space, which in turn demands more power — not at some point in the future but in the short term. To put this into context, in 2023, Ireland's data centres used more electricity than all of its urban households combined — an increase of 20% versus the previous year.[5]

Plugging into the electrification trend

Generating more electricity is one part of the puzzle, but I think a way to play this trend in 2025 could be to focus on the electrification of processes that currently rely on fossil fuels, as well as the broader electrification of the grid to distribute electricity. This means electric vehicles not internal combustion engines, electrified agricultural processes rather than their gas-intensive equivalents, and significant investment in modernizing the grid.

Questions have been asked about the trajectory of electricity demand if it emerges that AI models can be trained with less energy than envisaged. While lower energy intensity could lead to lower power demand growth, there is also the potential that improved efficiency could lead to greater demand. This effect — known as the Jevons Paradox — suggests that efficiency gains in AI could actually lead to more companies and industries using it, therefore increasing total demand for AI and, ultimately, power. It will, of course, take time for the full picture of AI's impact on power demand to materialize, but I think it's critical to note that trends around electrification and the energy transition remain strong and intact.

We think publicly listed electric network utilities could offer compelling value to access the electrification opportunity. In the US, regulated utilities are able to recover the cost of their capex investments along with a nominal return (essentially a profit margin), which is set by the regulator. The return is based on the rate base: the value of the assets on which the utility earns its return. If the utility invests in its grid infrastructure or invests to grow its assets to meet greater demand, the rate base increases, enabling the utility to increase its return.

A positive chain reaction for nuclear?

The secular theme around growing power demand dovetails with another increasingly attractive theme: energy security. Against a complex and volatile geopolitical environment, we have come to question the wisdom of relying on one country — or ideally any other country — for energy. As a result, energy independence is becoming a crucial goal for many countries around the world.

This is an especially important goal given the potential for relatively short-term geopolitical crises to impact long-term decarbonization and electrification goals. Prior to the Russia/Ukraine war, Germany was heavily reliant on Russian gas. When supply was cut off, Germany was initially forced to resort to coal — a bitter pill to swallow given its commitment to phase out coal by 2038 — but has since managed to improve its energy security through significant investment in liquefied natural gas (LNG) and renewable energy sources.

So should we just buy more renewables? There is no doubt that renewable power, primarily wind and solar, will continue growing in the coming decades. However, this growth and its related intermittency exposes weaknesses in grid infrastructure and increases the need for more reliable and flexible generation, such as hydro, nuclear, and natural gas, and battery storage. In essence, as renewable penetration increases, renewable power creates oversupply when it is windy and sunny, suppressing prices during those hours. On the converse, when it is neither sunny nor windy, the value of existing grid infrastructure, power storage, and flexible power generation increases, a trend we see continuing for decades to come as wind and solar continue to grow.

As a result, I am less interested in pure renewable developers but prefer instead those companies that have a larger, integrated portfolio of power assets.

Critically, renewables need to be paired with alternative fuel sources given these intermittency challenges. This creates an opportunity for nuclear. Nuclear energy can offer clean and reliable baseload power in a world of rising supply volatility, and I believe it could be a compelling investment opportunity. Many nuclear power plants shut down due to poor economics and safety concerns, but we are starting to see previously shuttered plants reopen on the back of a new wave of interest in nuclear energy contracts.

The nuclear option

I believe nuclear is well positioned to benefit from increased demand for clean energy. In 2025, I see nuclear retaining its importance in a Trump presidency, becoming an important piece of the US and global energy mosaic. I think this could bode well for utilities with exposure to nuclear power — both within the US and further afield — in the year ahead.

Natural gas: the lighter side of energy — with a potential Trump tailwind

Nuclear may be one solution to the world's complex energy needs but there is another potential solution, which may also accelerate in the year ahead. Natural gas is a fossil fuel, but it emits about half as much carbon dioxide as coal and 30% less than oil, as well as far fewer pollutants per unit of energy delivered.

In 2025, I think natural gas could see a boost under a Trump presidency through easier permitting and lifting of the LNG Export Moratorium. It could also receive a tailwind from any rollback in the Inflation Reduction Act (IRA) that slows solar and wind development.

From pumps to profit?

Within the utilities sector, I believe fully regulated natural gas utilities, particularly US small- and medium-sized gas utilities, could outperform. This is because they have no exposure to renewables or the risk of IRA repeal and additionally benefit indirectly from a potential slowdown in renewable build-out. Outside of utilities, I believe select North American midstream gas infrastructure companies could benefit from rising gas volumes, driven by both accelerated exports and strong domestic consumption. I expect these assets to become increasingly valuable due to natural gas's critical role in the energy transition and the challenges in constructing new gas infrastructure.

Bottom line

It's hard to see the world losing interest in digitalization, AI, or electrification, or to imagine societies demanding less rather than more over time. Infrastructure will remain essential and I believe the long-term trends supporting it are irreversible.

But long-term trends can speed up or slow down. I see 2025 as a year of acceleration for the trends that directly influence infrastructure and believe this could give sectors such as utilities, midstream energy, and nuclear an opportunity to catch other sectors up. Protectionism also has the potential to increase inflation volatility and catalyze a stagflationary environment (higher inflation, lower growth). Exposure to real assets tends to be beneficial in these environments, so layer on the inflation protection that infrastructure can offer to the potential catalysts discussed above, and listed infrastructure could offer the building blocks for a successful 2025.

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^[1]"World Energy Outlook 2024", International Energy Agency

^[2]"World Energy Outlook 2024", International Energy Agency

^[3]"2023 set records in global fossil fuel use and carbon dioxide emissions", Institute for Energy Research, 24 June 2024

^[4]"World Energy Outlook 2024", International Energy Agency

^[5]Central Statistics Office, Ireland, July 2024