Companies and consumers are likely to feel the effects of “traffic jams” on the Dutch electricity grid for at least the next ten years. This was the conclusion of network energy distribution company Alliander when it published its annual figures in early March. Despite ongoing investments in renovation and expansion, the pace of change is struggling to keep up with demand. Also because large parts of the industry need to become more sustainable which requires new additional infrastructure. Senior Portfolio Manager in the Credit team, Michael Bosman explains how, on behalf of its clients, APG plays a role in financing this change by investing in the green bonds of Dutch transmission and distribution companies.
Published on:
15 April 2024
In summary
• The electricity grid is overburdened and will require significant investment in the short term if the energy transition is to be successful.
• Green bonds issued by transmission and distribution companies offer APG’s clients a way to help fund the necessary infrastructure.
• These investments offer diversification and risk-return benefits, while supporting our clients’ responsible investing objectives.
The Dutch system is complicated, admits Bosman. Transmission company TenneT is responsible for maintaining and upgrading the national electricity grid and ensuring connections. “This is basically, the electricity highway.” Distribution companies like Alliander, Stedin and Enexis (with a combined share of over 90%)* have a regional or local monopoly and their revenues and tariffs are regulated. “In the Netherlands, as (semi) government entities, these companies are not listed and so there is no equity for investors to hold. This is where we come in as a large bond investor. On behalf of our clients, APG can invest in the transition to a more robust and sustainable energy system, by supporting these transmission and distribution entities.”
Overloaded grid
At a press conference in mid-March, TenneT announced that it will increase its planned investments for the next decade by 44% from EUR 111 billion to EUR 160 billion. The funds will be used to expand and modernize its grid infrastructure in Germany (60%) and the Netherlands (40%). However, Bosman is also clear that more than just money is required. “Balancing demand and supply is key and rectifying the current imbalance will take time and requires a workforce that is not always easy to find in the current tight labor market. Capacity upgrades and more flexibility and reliability are required to accommodate increasing volumes. The network will need lots of bolstering if it is to be able to distribute all the residential solar power created by Dutch households and to connect the increasing number of new wind farms. The structure and the amount of regulation governing this segment also means that change cannot occur overnight. In the next decade we will continue to see a capex explosion as the major shift to sustainable energy solutions occurs.”
Issuers with a solid green bond pedigree
These transmission and distribution companies are not newcomers to the green bond market, explains Bosman. “They were early adopters of this method of financing. TenneT, for example, was the first issuer in the world to launch a green hybrid bond (a bond where a certain percentage of the issue value can be treated as equity, ed.). The use of proceeds of these green bonds target areas that are all well-established categories in the ICMA (International Capital Market Association) Green Bond Principles, like renewable energy, energy efficiency and green buildings. And as significant financing is required, the transmission and distribution companies are regular repeat issuers in the market. This works to our advantage as investors, because we have a long-term relationship with what amounts to a fairly small number of issuers, and we know these companies well.”
In it for the long term
APG is also well-acquainted with this market. “We are invested over the whole country in both the transmission and distribution segments on behalf of all of our pension fund clients. It is also an area we have been actively involved in since I started working at APG, seven years ago. Basically, we are pretty much always invested in these companies,” continues Bosman. “Maybe not in all of them all the time – sometimes other aspects may play a role in our investment decisions. For example, our existing exposure, the relative value, pricing of a new issue, and so on. But these investments give us access to a market segment that is hard to target through other asset classes, certainly in terms of the volume with which we are able to invest. As of end March 2024, our holdings on behalf of clients amounted to over EUR 300 million, more than half of which is invested in TenneT.
Supportive regulatory framework
These investments also tick a lot of boxes when it comes to APG’s clients’ financial and responsible investing ambitions. The government-related status of these businesses and the degree and quality of regulation mean that risk levels are transparent and credit ratings are good. “As a segment, these bonds also enhance the diversification of our bond portfolio, while matching our long-term investment horizon”, says Bosman. “Finally, they give us the opportunity to play a key role as reliable partners in funding the vital infrastructure required for the energy transition, something that resonates with our clients’ responsible investing objectives. When it comes to our pension fund client participants, these companies are also household names. They help ensure the power created by their solar panels gets on to the grid. So, these investments directly affect them, too.”
Looking ahead
Bosman: “What happens over the next decade will be crucial and the peak capex requirements are likely to occur within this period, as the transition gains momentum. Of course, financing requirements will continue after this period, although the volume may taper off. The new infrastructure will require maintenance so we feel sure there will still be opportunities to invest in this segment. In addition, the energy transition will spark a broader range of investment opportunities in technology that support the electricity grid. Like energy storage in the form of batteries and aggregators that regulate supply and demand, improving flexibility and making electricity cheaper. Also in these areas we expect future investment opportunities in the credit markets that could help APG’s clients to make a further positive contribution to the energy transition in the Netherlands.”
* Utilities Handbook 2023: Western Europe Regulated Power, S&P Global ratings