Earlier this year, Brattle was pleased to welcome Academic Affiliate Dr. Marco Percoco to the firm. Dr. Percoco is an Associate Professor of Applied Economics at Bocconi University and a Professor of Infrastructure Project Appraisal and Sustainable Mobility at SDA Bocconi School of Management in Milan. He is a leading voice on issues related to the economics of infrastructure, energy, transportation, regulation, and competition.
In this Q&A, Brattle Principal and Infrastructure Practice Leader Dr. Francesco Lo Passo interviews Dr. Percoco about current trends and questions related to energy infrastructure in Europe.
Dr. Lo Passo: As we are all well aware, Europe is experiencing various energy supply and demand issues. Given these issues, how do you approach cost-benefit analyses on energy infrastructure? What has changed for you in how you approach these questions in today’s evolving energy landscape?
Dr. Percoco: The selection and prioritization of investments is crucial for both the private and public sectors, and even more so at present, with considerable liquidity that faces severe uncertainty. Cost-benefit analysis complements standard financial analysis in providing a comprehensive evaluation of a project’s potential in terms of its capacity to generate both cash flows and social welfare. Energy infrastructure is then evaluated for the output produced and the quantity of emissions eventually avoided (with respect to the current energy mix), a feature that may favor investors and creditors.
In my opinion, the standard approach to cost-benefit analysis of energy projects currently faces two challenges:
- Given the economic turbulence generated by geopolitical instability in Eastern Europe, several eurozone countries are facing energy supply uncertainty. In this framework, project evaluation needs to be extended, both in terms of the assessment of the volatility of energy prices and especially in terms of contributions to country-level energy security.
- The environmental, social, and governance (ESG) revolution in financial markets is shaping investors’ strategies globally. This new trend is also starting to be evident in the equity and debt markets for infrastructure investment. By explicitly quantifying the variations in social welfare, cost-benefit analysis may prove to be a flexible and useful tool to communicate the community value of a project and then attract capital from impact investors.
Dr. Lo Passo: Shifting topics, what do you think the impact of electrification and decarbonization is on transportation in Europe?
Dr. Percoco: There is no doubt that Europe is embarking on a long journey towards the electrification of passenger – and, to a certain extent, freight – transportation. However, it is not yet clear what the concrete path will be and which tools need to be adopted to reach the ambitious objective set by the European Climate Law to achieve net zero carbon emissions by 2050. Nevertheless, electric vehicles will substantially increase their market share over the coming decades, posing several issues that should be considered a “call to action” for the business community. These issues include:
- The electrification of transportation will affect public transit operators, which will need to renew their fleets according to stricter environmental rules and indicators. The financial sustainability of such investment is far from being granted by current policy schemes. In my view, the integration of electric buses into energy grids – meaning the buses will store electricity during periods of non-usage – may generate additional revenues that may substantially shape the rate of return on investment in fleet renovations.
- The diffusion of electric vehicles will generate a surge in electricity demand in the coming decades, and the grids will need substantial investment in terms of capacity and reliability. The energy sector in general will be called upon to balance decarbonization objectives with the need for flexibility, which is not currently granted by renewable sources. In my opinion, investment in energy storage and the relative capacity market will develop substantially and will grant interesting rates of return to early investors.
- In the medium run, along with a reduction in the total cost of ownership of fuel cells, the diffusion of hydrogen may become a reality. This technology has the potential to shape market organization as well as vehicles’ profitability and costs, although it is yet to be assessed what its impact on large energy storage will be.
The European market is also interesting for international investors, as it is clearly a forerunner in the decarbonization of transportation, and this opens early investment opportunities with potentially interesting returns, although risks need to be properly assessed. But the correlation risk-return is part of the game.
Dr. Lo Passo: Brattle clients are particularly interested in the economic impacts of changes in energy infrastructure. What are the top three trends in this area that our clients should be aware of moving into 2023?
Dr. Percoco: Besides the challenges related to the electrification of transportation, I think the trends that are currently materializing are:
- In the short run, a cap on gas prices in Europe may shape investment timing and profitability. Jointly with the introduction of the unexpected taxation of so-called “extra-profits” of energy companies, such a policy may destabilize business strategies with undesirable social impacts that need to be evaluated carefully. In such a case, I think policymakers should evaluate the implications of such actions in the energy sector.
- In my view, there is great potential for new investment projects funded with equity and debt. Besides energy storage, I think bureaucracy will be made less intrusive for regasification infrastructure and renewable plants, so that – through a reduction in capital expenditure for construction delays – returns on investment will be interesting.
- European countries, but also globally, will value more energy independence, which may result in a renewed interest in onshore and offshore oil and gas fields. These may require investment – likely not for the exploration phase but to increase the extractive and carrying capacity to feed domestic markets.