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:

1. 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.
2. 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:

1. 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.
2. 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.
3. 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:

1. 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.
2. 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.
3. 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.

The post Q&A: Energy Infrastructure in Europe appeared first on Brattle.

“Marco is a leading authority on the economics of infrastructure, transportation, regulation, and competition,” said Brattle Principal Francesco Lo Passo. “His academic expertise and experience as an advisor will make him a valuable asset to Brattle and our clients, in Europe and globally.”

An expert in transport and infrastructure economics as well as regulatory disputes, Dr. Percoco holds several academic appointments and is the founding director of Bocconi’s GREEN research center, which focuses on economic research related to geography, resources, the environment, energy, and networks. He is a former economic advisor to the office of the Italian Prime Minister as well as to several Italian ministries, the United Nations, the World Health Organization, the Organisation for Economic Cooperation and Development (OECD), the World Bank, the Inter-American Development Bank (IADB), and the European Investment Bank (EIB).

Dr. Percoco’s consulting experience includes working on various regulatory and competition matters across Europe, particularly in the energy, transport, infrastructure, and real estate sectors. He has provided expert opinions regarding concessions, regulation, and antitrust issues in both civil and administrative tribunals. He frequently consults on matters related to infrastructure valuation and regulation.

The post Marco Percoco Joins The Brattle Group as Academic Advisor appeared first on Brattle.

Principals Dan Harris and Fabricio Nuñez, and Senior Associate Ilinca Popescu, contributed “Country Risk,” a chapter about the political and economic risks that are associated with an asset’s geographic location that can significantly affect the asset’s value. The authors argue that country risk should play a larger role in damages analysis and discuss whether – and how – to account for risks protected under investment treaties versus unprotected risks.

Principals Richard Caldwell and Dr. Lucia Bazzucchi, Outside Expert Andy Ricover, and Research Associate Emily Murphy contributed a chapter on disputes in the transportation industry. In “Transportation Arbitrations and Complexities in Estimating Damages,” the authors provide an overview of different transportation-related arbitrations and their common features. They also explore why many disputes in the industry involve concession agreements for infrastructure.

The full chapters are available below.

View Country Risk Chapter

View Transportation Chapter  

The post Brattle Experts Contribute Chapters on Transportation-Related Arbitrations and Country Risk to New Book appeared first on Brattle.

Brattle was engaged to assist in regulatory due diligence for the sale. A Brattle team, led by Principal Dr. Francesco Lo Passo, provided support in advance of the sale, including  detailing the regulatory framework applicable to the company’s storage field and calculating the weighted average cost of capital. The Brattle team also reviewed the calculation of regulated revenues for Ital Gas Storage included in the financial model and assessed its compliance with applicable tariff regulation.

The agreement, reached in August 2021, provides for an initial sale of 51% of IGS by current owners Morgan Stanley Infrastructure Partners – through Sandstone Holding BV, a subsidiary of the fund North Haven Infrastructure Partners II – with 92.5% control of the company, and Whysol Investments, which controls 7.5% of the company.

The post Brattle Experts Provide Regulatory Support in F2i Acquisition of Ital Gas Storage appeared first on Brattle.

A new whitepaper by Brattle economists demonstrates that due to limited public funds available for infrastructure, private capital will play an important role in financing infrastructure projects over the coming years through Public-Private Partnership (PPP) contracts. Their design will allow low-cost financing from private counterparts and an efficient management of the assets when two conditions are met: (i) risks are allocated to the party best suited to bear them; and (ii) project cash flows are predictable and guarantee the proper compensation of realized investments at a fair market return. In the absence of a proper allocation of risks, private investors will ask for higher returns or be unwilling to invest.

“Our experience shows that successful infrastructure projects funded by private capital require robust contractual frameworks which minimize the degree of uncertainty and protect private investors and the public interests from undesired outcomes, such as, for example, a company default, or socially unsustainable levels of charges,” commented Brattle principal Francesco Lo Passo, co-author of the paper.

The paper applies economic analysis the authors have conducted on specific projects, describes the main lessons learned about contractual risk allocation in infrastructure projects, and highlights contractual conditions that are positively perceived by investors.

“Infrastructure, Private Investments and Allocation of Risks: An Economic Analysis of Lessons Learned,” is authored by Dr. Lo Passo and Senior Associate Lucia Bazzucchi.

View Whitepaper

The post Private Capital to Play Important Role in Financing Infrastructure Projects According to Brattle Economists appeared first on Brattle.

A new study by Brattle economists illustrates the trends in today’s rapidly growing P3 market, different incentive structures for successful long-term risk sharing, and highlights key questions for designing a viable P3.

Infrastructure P3 activity in the U.S. has taken off since 2015. Today more than 30 states are procuring at least one project as a P3 and over 200 projects are in the pipeline—well above prior levels of activity. Notably P3s are being deployed in sectors beyond transportation, with social infrastructure accounting for almost a quarter of the total.

The Number of U.S. P3s in the Pipeline Skyrocketed in 2015

The increase in P3 activity can be attributed to constrained public revenues and financing sources following the Great Recession and Global Financial Crisis, pent up demand for public infrastructure from past underinvestment and deferred maintenance, increasing government recognition of the merits of P3s, and growing interest among private sector investors and other potential private partners. Additionally, the Trump Administration’s recently released infrastructure plan invites an expanded role for P3s given that it calls for a $100 million Incentives Program of competitive grants where fully 70 percent weight would be placed on “securing and committing new, non-Federal revenue” for investment, operations, maintenance, and rehabilitation.

However, developing a robust U.S. P3 market will require the development of sustainable risk allocation mechanisms that ensure projects are successful for both investors and sponsoring governments. The Brattle paper outlines a menu of P3 options, all customizable to the specific objectives of the project and parties, from which public sector project sponsors can choose. The options include hybrid P3 arrangements—in between conventional procurement and a classic user-fee P3 structure—that can serve to fine-tune the sharing of risks and responsibilities between the public and private sectors. Regardless of the arrangement used, projects that enter P3 procurement must be carefully selected and contracted with a payment mechanism that allocates risks appropriately for the project and the procuring government’s needs. Avoiding financial failures and political backlash will be essential to encouraging state and local governments to bring more projects for P3 procurement.

“The number of new P3 projects in development today is unprecedented, more than seven times pre-2015 levels. The trend has been persistent so far, with recent growth in excess of 45% per year,” commented Elaine Buckberg, a Brattle principal and co-author of the paper. “Clearly, many state local governments are actively considering P3s to deliver large projects. P3s may now be poised to play a significant role in addressing the nation’s infrastructure crisis, offering government project sponsors a bigger toolbox for delivering projects.”

The paper, “Rising Tide of Next Generation U.S. P3s—and How to Sustain It,” is authored by Brattle Principals Elaine Buckberg and Robert Mudge and Research Analyst Hannah Sheffield.

View Whitepaper

The post Public-Private Partnerships Could Play Significant Role in Addressing the U.S. Infrastructure Crisis, According to Brattle Economists appeared first on Brattle.

The event gathered experts from the industry and representatives of European Airports.

Dr. Lo Passo discussed how methodological approaches of other regulated infrastructures are also relevant for airports. He mentioned case studies in the energy industry, in the toll road sector, in airports and telecom networks.

He presented the main findings of a study done with other colleagues for Directorate General for Communications Networks, Content and Technology “Review of approaches to estimate a reasonable rate of return for investments in telecoms networks in regulatory proceedings and options for EU harmonization.”

The post Francesco Lo Passo Presented at the ACI Europe Workshop appeared first on Brattle.

Hosted by The National Council for Public-Private Partnerships, the event will feature experts from the private and nonprofit sectors who will explore the rationale for the development of the infrastructure plan and the administration’s goals and objectives, and discuss ways to encourage states and localities to explore the use and feasibility of P3s, in part through the introduction of state enabling legislation. Participants will also share best practices and lessons learned from past and ongoing P3 projects that may inform decision makers.

To learn more, please visit P3Insight’s website.

The post Robert Mudge to Discuss U.S. Public Private Partnership Infrastructure Development at P3Insights Event appeared first on Brattle.

The event will explore the future of automated vehicles and discuss critical issues facing community and regional infrastructure planning and workforce development. Mr. Mudge will present during the session, “How Will We Pay for AV Infrastructure and Operations?”

To learn more, or to register, please visit the event website.

The post Robert Mudge to Present on Automated Vehicle Infrastructure at Pennsylvania Automated Vehicle Summit appeared first on Brattle.