Q&A - AIP Management: Where to bet big and where to hold back in energy investing

The energy landscape is changing fast. 2024 brought challenges for new technologies, with HH2E going into administration and big names like bp scaling back their hydrogen ambitions, focusing on 'value over volume'. Carbon capture and storage (CCS) also saw some progress, but its high costs and reliance on government support continue to create hurdles.

Amid these shifts, AIP Management attempts to stay grounded in the market fundamentals, with a strong focus on traditional renewable generation and a selection of newer technologies where it aids in achieving 'end-to-end decarbonisation'. 

To this end, in 2024, AIP made a notable investment in green steel. However, AIP remains sceptical about most applications of CCS and e-fuels, pointing to benchmark comparisons of direct renewable electrification. In this shifting landscape, inspiratia sat down with Greg Falzon, Partner and Co-head of Investments (pictured right), and Amanda Tonsgaard, Partner and Head of Investor Relations (pictured left), to discuss how AIP navigates these changes and makes decisions on where to invest and where to hold back.

Can you give us an overview of how AIP Management started in the energy transition space?

Tonsgaard: AIP Management has come a long way since its beginnings in Denmark in 2012. It started when PKA, a Danish pension fund for social and healthcare workers, took its first step into renewable energy by acquiring an offshore wind farm. That investment laid the foundation for AIP's focus on decarbonisation and electrification infrastructure.

What started as a Denmark-focused initiative has expanded across Europe and North America, investing in a wide range of infrastructure projects. While the core mission remains the same - supporting the energy transition - AIP's approach now includes renewable power generation, industrial decarbonisation, and energy storage.

Recent years have brought new milestones. In October 2024, AIP acquired a minority stake in VALOREM, and last summer, Norwegian financial group Storebrand became AIP's majority owner. Storebrand was their first international investor in AIP IV.

To date, AIP has invested over €7 billion (£5.8bn $7.2bn) in 25 assets across Europe and North America, all backed by a small group of institutional investors - without ever running a broad fundraising campaign. Today, AIP is an infrastructure platform with a team of 90 people.

What is AIP's overarching philosophy when it comes to the energy transition, and how do you see AIP's role in that process?

Falzon: At AIP, we focus on the fundamentals. That means looking at the core factors that determine an asset's long-term value: its essential role in society, competitive position, and barriers to entry. Before diving into deal specifics like asset quality, contracts, or regulations, we ask key questions: Is this asset essential to society? Will it be resilient in the future energy system? Could other technologies achieve the same outcome more efficiently? And does it play a critical role in decarbonisation?

Our goal is to deliver strong, risk-adjusted returns for our investors while ensuring the assets we invest in contribute meaningfully to decarbonisation.

Are there specific technologies that are currently keeping you busy?

Falzon: We cover energy storage, power generation, and industrial decarbonisation. Our investments span from energy generation (renewable power) to energy consumption (electrifying transport, industry, and heating). In between, we also invest in infrastructure that connects supply and demand, such as grids, networks, and battery storage.

Our pipeline is always evolving, but right now, we are in advanced discussions on renewable energy platforms with strong existing assets and development potential. We are also exploring large-scale energy storage projects and an interconnector.

Which regions are you currently focusing on?

Falzon: Our focus is on Europe and North America - two of the world's largest and most developed infrastructure markets. Both regions require significant investment to support the shift to more electrified and efficient energy systems.

Market attractiveness changes over time due to factors like policy shifts and competition. We stay mindful of these dynamics, but the bigger picture is clear: electrification is a global transition driven by long-term technical and economic factors that will play out regardless of short-term fluctuations.

Can you share details about the funds you are currently managing?

Tonsgaard: We are currently investing from AIP IV, a €4 billion fund launched in 2020. So far, we have made 12 investments, targeting key trends like the rising demand for affordable energy and the financing gap to meet that need.

For now, we are focused on managing our portfolio and continuing to deploy AIP IV. When we launch our next fund, it will follow the same strategy that has worked for us in the past.

How do you manage risk across various technologies? Do you focus more on traditional renewables like solar and wind or newer technologies?

Falzon: We look at end-to-end decarbonisation. So, while the majority of our investments will continue to be in the traditional renewable sectors, we are expanding into adjacent areas, particularly on the energy consumption side.

We made a significant investment into a green steel business last year [2024] and are actively exploring electrification for industrial heat.

We are quite sceptical about most applications of CCS. The technology is not new and has a very chequered past. Adding CCS to prolong the life of fossil fuel generation is questionable as it adds an enormous cost and energy overhead to capture, at best, 'some' of the CO2. In most cases, the economics do not compare favourably to simply investing in new solar and storage, which can provide more energy with lower emissions for the same cost. Unlike renewable electricity generation, the CCS service itself has no inherent commercial value that can be monetised other than via carbon taxes or a government income stream, so it is entirely dependent on regulation, which adds risk beyond any initial period of government support. For these reasons, we choose to avoid CCS investments.

E-fuels face similar challenges. Right now, they do not pass our fundamental investment criteria. The process of converting CO2 and water into liquid fuel using renewable energy is highly inefficient.

By the time that e-fuel has been through combustion in an engine, the amount of useful 'energy service' that is delivered as an output is more than 80% less than would have been the case if that same renewable energy had simply been used to electrify directly. That renewable energy loss in going down the e-fuels path is far better spent decarbonising the energy grid, transport, and industry. Perhaps in the future, if we reach a point where there is excess renewable energy, e-fuels could become more viable. But for now, biofuels from sustainable sources are a far more efficient way to produce liquid fuels for applications where electrification is not yet feasible.

What about green hydrogen?

Falzon: Green hydrogen is yet another investment minefield. For now, the 'no regret' use cases we have identified from our research are for use as a reducing agent in steel making and in the manufacture of fertilisers. Crucially, in each case, the green hydrogen is used as a chemical process agent rather than being burned as a fuel and, in each case, there is no other way to meaningfully decarbonise. For the green steel business we invested in last year [2024], the decarbonisation we hope to achieve using green hydrogen and an electric arc furnace is approximately 95% versus a traditional blast furnace.

Are you exploring opportunities to leverage debt funds in renewable technologies?

Falzon: Debt plays a significant role in financing renewable assets. At AIP, we take a nuanced approach to leverage. We do not automatically maximise debt just because it is available.

For stable, fully contracted assets, we do use leverage to enhance returns. But for riskier projects, such as those in the construction phase, we prefer to avoid leverage until completion to limit risk concentration. In some cases, we de-risk further by investing through high-yield debt instruments, leaving equity exposure to investors with a higher risk tolerance. This flexibility allows us to take on a broader range of projects while balancing risk and return.

How does AIP integrate ESG into your investment strategy, and what do you think about some banks and asset managers pulling back from ESG commitments?

Tonsgaard: As an investment manager, our goal is to deliver stable, long-term returns to our investors. Given the nature of the assets we invest in, you simply can not make a good investment without considering sustainability. These are long-term infrastructure assets, and their performance is closely tied to environmental, social, and governance factors. That's why responsible investment practices are fully integrated into our due diligence and decision-making processes. They are not a separate consideration. They are fundamental to assessing the long-term value and risks of any asset.

With energy markets changing so quickly, how do you balance the need for long-term stability with the desire for growth in new technologies?

Falzon: Energy markets and energy systems are evolving rapidly and, in that context, long-term investment is made more challenging but also much more interesting. Two of the key tools we lean on to deal with this are:

• Many of our investments have stable revenue streams locked in for 10-20 years, providing a strong foundation.
• We prioritise assets with intrinsic long-term value, not just short-term financial trends. Having a team with industrial, scientific, and engineering expertise, not just finance backgrounds, helps us assess technical risks and opportunities.

We also work with external experts to challenge our thinking, especially when entering new areas. That extra layer of scrutiny helps us make better long-term investment decisions.