A convergence of market trends is driving a surge in demand for new power generation in the United Sates unrivalled across the world's developed economies.
Collectively, an explosion in digital infrastructure, the energy transition, electrification of transport and heating, and increased onshoring of manufacturing are fuelling an estimated power demand growth of 2-2.5% CAGR between 2024 and 20301. This sits on top of the need to replace aging and carbon-intensive generation with renewable non-emitting sources. As the nation’s independent power sector ramps up to meet this demand, capital providers across the stack will have a wealth of opportunities to strategically deploy into capital-intensive, long-lived, essential assets. As an asset class, it exhibits extremely attractive risk and return characteristics for institutional investors.
Power generation is not a new area of focus for QIC’s private debt team or for infrastructure debt investors generally. Independent (i.e., non-utility-owned) power generation has likely been the largest opportunity set in the US infrastructure lending market for at least two decades. However, as the underlying drivers supporting various sectors shift and, just as importantly, capital flows reprioritize, we are seeing relative value in different areas. This is where our debt capital solutions play a crucial role – by offering structured, bespoke funding that not only meets the needs of borrowers but also secures a risk and return profile attractive to our investors and partners. Traditionally, our capital has been well suited for subordinate or HoldCo positions, but rising construction costs and longer timelines have created additional opportunities across the stack, including stretch senior and unitranche debt structures. This flexibility allows us to directly originate and tailor deals to realize untapped value.
We have a three-legged approach to value realisation in the power generation space, encompassing grid-connected solar and storage, grid-connected gas-fired generation, and behind-the-meter.
Grid-connected solar and storage
The energy transition opportunity is well understood, with renewables steadily replacing aging coal, nuclear and less efficient gas assets, and governments around the world incentivizing investments in the sector. But there's more to the story, especially for those investing over shorter-term horizons in the US.
Renewables, specifically solar, have been one of the hottest sectors for investment over the past few years. Power demand is surging, solar is at or below cost parity with other generation sources in many markets2, and there is a societal requirement to decarbonise our electricity grid.
While the fundamentals remain strong, uncertainty – including shifts in federal policy and adjustments to tax incentives under measures like the Inflation Reduction Act – introduces risk and makes it difficult to price these assets, complicating equity trading3. In this context, structured debt financing can step in to provide options to renewable companies that need capital to progress pipelines and meet growing demand. At QIC, we offer tailored solutions that can give renewable owners and developers certainty of capital to support projects that navigate these risks, while insulating us from those same risks.
Grid-connected gas-fired generation
While the US is taking significant steps to advance the energy transition, for now, renewables alone are not sufficient in terms of absolute generation capacity, nor do they alone provide the consistency required to maintain grid stability, even under a conservative view of demand growth4. Storage is helpful, but even with an aggressive rollout and continued cost and efficiency improvements, some new gas generation and other solutions remain essential in certain markets.
This is particularly the case when considering that the US does not have a nationwide grid. Without one, certain regions face distinct challenges and opportunities. West Texas is one of these regions. Traditionally the heart of US oil and gas production, the region is now attracting AI-driven data centers and has seen a surge of new intermittent generation capacity added to its grid over the past few years5. Meanwhile, upstream producers are increasingly committing to electrifying their operations and seeking productive uses for associated natural gas, reducing reliance on flaring6.
As investors, we must be cautious around financing fossil-burning assets. We recognize that these assets may not remain viable over the long-term, and if negative externalities (such as pollution or greenhouse gas emissions) are more aggressively tolled, the economic case becomes muddled. However, as debt providers, we can take a much shorter-term risk position than equity holders.
QIC takes a considered approach to these investments. In evaluating an investment in a greenfield gas-fired asset, for example, we assess several factors, including regional power demand, the sustainability pathway the asset offers and its overall economic viability. We analyze whether the asset provides a more sustainable path for gas, such as converting gas to power rather than flaring, and whether it can eventually incorporate carbon capture technology to offset emissions and support a pathway for sustainable power generation.
Behind-the-meter solutions
The behind-the-meter story is both old and new. (Behind-the-meter systems, installed on the consumer's side of the utility meter, allow energy to be produced or stored on-site and used directly by the consumer, bypassing the public electricity grid.) Residential, commercial and industrial solar generation have long been successful solutions for delivering cost-efficient, low-carbon power, and will continue to offer attractive investment opportunities as costs decline and storage becomes more economical and ubiquitous.
What is new is how the same behind-the-meter approach can be applied to hyperscale data centers. Hyperscale data centers handle vast amounts of data and therefore draw significant power – a demand that the grid sometimes struggles to meet7. Interconnection wait times, or the process of connecting a new data center to the electrical grid, have also become a bottleneck in satisfying the capacity demands of these hyperscale providers8.
Clever developers have recognized the opportunity to mitigate these challenges by building ‘behind-the-meter’ systems in the form of on-site gas generation. These smaller-scale engines can be installed and brought more quickly than traditional utility-scale solutions9 and allow the developer to maintain ownership of the generation assets. This way, they can secure a base return through long-term offtake contracts, while capturing upside potential by eventually connecting to the grid and providing peaking resources and ancillary services. At QIC, our tailored debt financing solutions are designed to quickly and directly access these opportunities, ensuring that our capital supports agile and innovative projects.
