Nordic energy transition is poised for growth

Nordic energy transition is poised for growth

The Nordic region is in a great position to work towards complete decarbonisation, but the focus now must be on scaling up local infrastructure, says Infranode’s investment director and head of sustainability Johan Tiselius

Where would you say the Nordic region is today in terms of its energy transition? Why is it an attractive market for deploying capital behind this mega-trend?

The Nordic region has solid foundations in place for a successful energy transition. It has a well-established renewable energy platform, with a lot of hydro and a lot of wind, as well as an extensive district heating network. 

However, moving forward, to be able to serve an almost complete electrification of industries, transport and buildings, and despite all potential efficiencies, we are going to need an energy system more than double its current size. In addition, we need to build the connected infrastructure required to ensure that this energy reaches end customers, and facilitates the decarbonisation of transport and industry, as well as buildings and facilities. This all means that we are very much in growth mode. 

The energy transition is also characterised by a marked shift away from the old centralised system of production and distribution, towards a new system where there will be a lot more decentralised points of production and consumption, which will put more pressure on the grid in terms of stabilising imbalances. 

Overall, I would say we are at a very interesting point in the journey, in a region that has been a global frontrunner in terms of the energy transition for many decades. 

Why is being local so important when it comes to the Nordic energy transition?

 We were founded to tackle the twin problem of the Nordic region’s ageing infrastructure – much of which was built in the 1960s and 1970s – along with the need to build significant new infrastructure to cater for the energy transition. It has long been evident to us that public finances alone will not suffice to tackle these challenges, and that it would be necessary to harness other sources of capital, such as private capital or pension fund capital in particular. 

To achieve this, we started by connecting Nordic institutional investors, who have historically been underweight in infrastructure, with that demand for financing the renovation and build-out of new infrastructure among Nordic governments and municipalities. 

That requires strong relationships with Nordic stakeholders, and in our case, it has led to us establishing offices in Stockholm, Helsinki, Oslo and Copenhagen. It undoubtedly pays to have teams on the ground, speaking the local languages, knowing the local market conditions, and meeting hundreds of market participants every year to discuss the opportunities and challenges they are facing. 

The importance of that local presence has only been accentuated by a geopolitical backdrop that prioritises local capital being invested in local energy systems. 

Against that backdrop, what are some of the most interesting investment opportunities you are seeing in the energy sector? 

The Nordics already have a strong base when it comes to a flexible, renewable energy system, but we need to scale up significantly. That will require between €300 billion and €400 billion of investment over the next decade, and up to €1 trillion if we are to reach net zero by 2050. 

We see extensive opportunities for building out renewable capacity in onshore and offshore wind, and both small- and large-scale solar, in addition to upgrading hydro plants. That all needs to happen quickly, if we are to sustain a just transition where electric vehicles on both land and sea, as well as industrial customers, are served with reasonable prices and good security of supply. 

We also see interesting opportunities to invest in the storage solutions that need to be installed in the system to support the grid as it expands. As we see more industrial and transport electrification, some local grid operators will need battery systems to help them balance their grids. The ability to offer that type of service on fixed-price contracts makes it more infrastructure-like and hence an interesting proposition for us as a firm. 

Bioenergy has been and will continue to be an important source of energy for the Nordics. Investing in, for example, the development, construction and operation of biomass and biogas plants – which can help industrial companies to decarbonise, while also producing electricity to help balance the grid – is something we have experience in and will continue to explore. 

Then, of course, there is huge need for investment to expand both the national, regional and local grids. The Nordic transmission system operators are government-owned, but there are opportunities to make local grid investments, and we have successfully forged partnerships with local municipalities as they expand their grids, helping ensure security of supply as well as weather proofing by digging cables into the ground. 

“The opportunities are becoming more and more infrastructure-like in nature” 

To what extent are you seeing opportunities to invest in the energy transition via other sectors as well? 

We are definitely seeing opportunities to invest in the decarbonisation of transport, industrials and buildings, including in charging infrastructure, the electrification of trucks, trains, ferries and related infrastructure, the utilisation of excess heat from industrial processes, building-related efficiencies like LED lighting, ventilation and heat pumps, the production and distribution of green fuels, sustainable food production, carbon capture solutions, and waste and recycling facilities. 

These are all ways in which we can both get the new electricity generated to the end customer and utilise the energy in the system in a more efficient and climate-friendly way. As the market for these sectors and technologies grows and the business models mature, the opportunities are becoming more and more infrastructure-like in nature – meaning, for example, that there will be opportunities to enter into long-term contracts related to the service or product offered, providing stable cashflow streams. 

We are also seeing opportunities to invest in the growing need for connectivity and computing power, via both fibre and data centres. When it comes to data centres in particular, there is an intersection here with the energy transition in terms of utilising excess heat flows and other circular business models to decarbonise industrial processes. For instance, we can sometimes feed excess heat back into the district heating system or use it as a heat source in greenhouses to assist in growing crops. These circular flows are something we are looking at more and more. 

“Public funding alone is not enough to meet the vast needs of the energy transition” 

What is your approach to origination? 

Our approach to origination has always been to be local and to invest locally. In terms of deal size, the Nordics is a small to mid-cap market, where you need to engage a lot of resources to make deals happen, which becomes quite a commitment for non-local investors. It is about knowing the local markets and working to build trust as a credible partner with a long-term approach to investment, as well as highlighting our contribution to wider society. You can view the Nordics as one market, but to be truly successful you need to recognise the local nuances of each market. 

One form this takes is that we often find ourselves discussing the needs of municipalities or businesses before they have reached the scale where they are attracting international capital. Our long-term mindset and partnership approach, in combination with our extensive local track record, means we are recognised as a trusted partner that wants to contribute to local communities. That’s something you can see in our investments in what was then the largest solar park in Sweden (together with Tekniska Verken), in district heating provider Hafslund Oslo Celsio in Norway, in the biogas platform in Denmark, and in energy company Loiste in Finland. 

Where does the Nordic region’s energy transition go from here, and what role do you see private capital playing in overcoming any hurdles? 

It all comes back to our need to more than double the size of the existing energy system, and the need to move from a centralised government-focused model to something that is significantly more decentralised, with more fragmented production and local consumption of electricity. It presents some challenges but also great opportunities for investments in scaling. 

Another hurdle to overcome is regulatory in nature. It relates to changes to permitting and the upgrading of regulatory frameworks and laws to cater for the roll-out of locally distributed infrastructure. There are a lot of positive things happening from a regulatory perspective, but there needs to be more of a push to ensure that the investment required to facilitate the energy transition can happen in a relatively seamless fashion and in a way that ensures that the transition is just and good. 

In terms of the role for private capital, it is clear that public funding alone is not enough to meet the vast needs of the energy transition. There is a huge opportunity for private capital to help build out new generation capacity, grid expansion and greater resilience, adding charging capabilities and circular heating models, as well as new resource efficiency solutions such as recycling. 

In many respects, the energy transition is in its infancy. There is a huge amount that still needs to be done, and it needs to be done quickly. The next decade will prove critical to our ability to transition successfully, but we are optimistic that we are going to get to where we need to be.