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12 December 2022

Proximo's 2022 Festive Trends Round Up

Manufacturing & equipment, Metals and Mining, Oil & gas, Other, Power, Renewables, Social infrastructure, Telecoms and Communications, Transport, Waste and water
WATCH ON-DEMAND HERE. Original broadcast date: 19 December 2022. A look back at the key trends in the project, energy and infrastructure market in 2022, and a look ahead to what will shape 2023.

For many market participants, 2022 might feel like the long-awaited vindication of a decade of warnings. Low debt costs now look like they were not sustainable. Developed countries possibly did not invest enough in energy security. Decarbonising the world's energy networks will require unprecedented amounts of capital. War, terrorism and expropriation are still very real risks.

But this year certainly had a capacity to surprise. Old risks met new risks, and governments, lenders, strategic sponsors and financial sponsors had to work out how to allocate - and price - them sensibly. It will not be an easy period in time to summarise, and the future is as cloudy as ever. But someone has to try.

So, for the fourth year in a row, Proximo gathered its group of regulars and try and highlight the most important trends of the last year, and the most promising ones for the year to come.

Watch the replay here:

With thanks to our guest line-up:

Tom Nelthorpe, contributing editor, Proximo

Michael Whalen, managing director, Berkeley Research Group

Ian Cogswell, senior advisor, Portland Advisers, and founder, CCC Training

Jonathan Yellen, investment director, OGCI Climate Investments

The panel picked out the following key trends for 2022 and moving into 2023 (* denotes that the panel came up with the trend themselves, all other trends were selected by Proximo's editorial team)

1) Rising EPC and construction costs are becoming a huge challenge for developers. Ian, noted that all projects are struggling with construction costs that are not only hard to predict, but growing, though not yet exponentially. Developers that had already decided to phase projects are now finding that phase 1 is taking up the entire project budget. This has real impacts on affordability, and is as much a challenge for lenders as developers. There are doubts over how viable a classic fixed-price date certain EPC contract will be.

2) The IRA really has made every US renewables developer’s dreams come true. Jon generally agreed, and noted how good the act was not just for conventional renewables, but also for alternative fuels and CCS. The key challenge will be putting that legislation into practice. This was unexpected gift from the ordinarily sclerotic congress.

3) *From 2022 perspective, we may have experienced peak ESG. Michael noted that the push towards zero carbon is continuing. Lower natural gas use, carbon-based import duties, replacement of internal combustion engines by batteries will continue. But the stress in energy markets from Ukraine and pushback from US financial services firms points to a readjustment in priorities

4) The digital infrastructure boom continues to defy predictions of overbuilding. Tom noted huge levels of debt demand in Europe, and the large data centre acquisitions that look a lot like leveraged loans are now being pitched to banks. Demand for knowledge about financing digital assets 

5) Hydrogen will go mainstream in 2023. Ian noted that 2021's predictions ALSO pointed to a take off in this sector, but still thinks we are some way off. It is still not quite competitive in terms of costs, but the tipping points are starting to be met, and policy is aligning. The pipeline is growing and equipment suppliers are starting to observe backlogs.

6) Governments realise - belatedly - that midstream infrastructure is important to energy security. Jon noted that the Ukraine conflict has driven that home - not to mention improved power and renewables infrastructure. Extreme weather has also turned people's attention to security. Ian noted that the UK's realisation has been particularly acute, and it is reopening storage facilities it had previously mothballed. Michael added that US midstream still needs to make progress on permitting.

7) Larger sponsors - both strategic and financial - will be best placed to navigate unsettled debt markets. Michael noted the real challenges that smaller developers faced in 2022. Until recently, the environment was very favourable to smaller developers, given low interest rates and tame inflation. They now need to use much more creativity because cost inflation will hit them particularly hard.

8) If you are looking for opportunities in PPP, emerging markets now offer much more potential than Europe. Tom, noted the world now agrees with him that the UK is a bit of a basket case. But even Europe is quiet, and Canada has retreated into shorter-term structures. Latin America is busier - Paraguay's PPP market is more active than the UK's.

9) *Renewable jet fuels and diesel. Ian feels like these may offer more near-term potential than hydrogen. Their cost differential with conventional fuels has narrowed considerably.

10) *Methane emission reduction is finally getting its due,, thinks Jon. The market is going to continue to see a focus on that greenhouse gas. there's rightly a lot of attention paid to CO2, but methane - from oil and gas, agriculture and waste - is attracting meaningful pledges now, and the economics are good.

11) The debt pricing correction? Now in full swing. Michael noted that three-month Libor has increased from about 20bp at the start of the year to about 475bp today. There are issues with affordability and uncertainty, and a clear impact on volumes, particularly in refinancings.

12) *The commitments that governments have made to combat COVID, and now to keep a lid on energy prices, could be storing up future issues for all corners of the market. The UK is in this respect maybe a taste of things to come. Fiscal distress doesn't necessary feed through to PPP activity.

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