Infrastructure has been one of the defining terms for the energy sector in 2011, and it is set to define the industry’s major financial and regulatory debates in the coming year.

Generating, transporting and delivering energy is by its nature an infrastructure-heavy operation, perhaps along with the linked sectors of water and transportation the most consistently infrastructure-intensive activity modern societies engage in.

But infrastructure is a long-term endeavor, and driven by cyclical investments that often precede and then lag broader economic development. At times of economic growth large infrastructure projects are commissioned and then markets live off their benefits for decades to come.

That leaves the US in a particular quandary at the end of 2011 and the beginning of the vital election year of 2012. Compounding decades of steady underinvestment in energy infrastructure amid incomplete deregulation and tinkering with incentives is a grinding recession entering its fifth year that has pushed off the infrastructure investment that the industry itself still needs.

Highwire Act For Existing Infrastructure

The American Society of Civil Engineers recently gave the US a “D” on its infrastructure as part of a series of reports highlighting the “deteriorating” state of infrastructure and its ability to weigh on total gross domestic product growth. Failure to invest in transportation infrastructure alone has the ability to slow the US economy by $897 billion over the next eight years the reports, conducted by the Economic Development Research Group, said.

Large firms that build energy infrastructure see the opportunity, but also note the problems.

“We have geared our business around megatrends, like infrastructure, to service the world’s greatest needs,” Siemens CEO, Infrastructure and Cities Sector U.S. Daryl Dulaney told Breaking Energy in December. “That’s why in October we announced our new Infrastructure and Cities sector that better aligns our portfolio to help cities make the necessary investments in infrastructure to make them more efficient and remain competitive in the long run.”

At the same time, Siemens has faced challenges building out energy infrastructure because of the underlying lack of basic infrastructure in the US.

“Siemens has been forced to do something in the US in recent years that we haven’t done in many of the other countries where we operate. To create jobs, we had to bring our out infrastructure,” Dulaney said.

He cited two major wind energy investments in Iowa and Kansas in recent years, but in both cases the company was forced to build rail or road infrastructure to support the new manufacturing capacity. Siemens was able to make the investments and was “glad to do so,” he said, but also recognizes that “not many other business can do the same.”

“This is why a commitment to public infrastructure investment is so important.”

New Solutions For Old Problems

But with the great builders of public and private energy infrastructure under financial strain as both customers and taxpayers continue to labor under the weight of years of both private and public debt, the question of how to pay for needed infrastructure that can support economic growth is getting new and often unexpected solutions.

The amounts of new spending involved could be staggering in aggregate, but they have long implementation periods that favor different approaches to financing. Total spending on the power sector and related infrastructure upgrades could hit $4 trillion over the next 20 years, according to the new president of the National Association of Regulatory Utility Commissioners.

The mix of large upfront financial needs, potential savings from new more-efficient infrastructure and long time lines has resulted in increased interest in the public sector in a form of public-private partnership called performance contracting. Companies make the upfront investment in new infrastructure while municipal bodies ranging in size from the federal government to individual cities or school districts take on the longer term debt. Meanwhile, the new infrastructure in place actually saves more than the cost of that debt in operating costs over the same period.

Siemens and smaller competing firms like Ameresco have increasingly used performance contracting to get projects financed. Siemens’ Dulaney cited a 2009 project the company had undertaken to replace Houston, Texas traffic lights with more efficient LEDs, a project that cut the city’s energy and operating costs by $19.5 million over ten years. Siemens signed a 30-year deal with the city.

“Upgrades yield direct savings to the government or the local community that can then be applied to pay back the financing on the upgrade,” Dulaney said. “Very simply put, it is a way for the government to make critical investments even when they are low on capital.”

The savings can be significant when appropriate energy infrastructure is set to replace aging and costly existing installations. A new biomass facility at the Department of Energy’s Savannah River Site could save the huge federal agency nearly $1 billion in fuel and operating costs, Ameresco said recently.

Policy Stays Paramount

At the same time, private energy infrastructure finance is in transition as new players replace banks focused on capital preservation and retreating governments completing paid-out stimulus packages passed more than two years ago.

Private equity infrastructure funds and increasingly large hedge funds have taken long positions in energy investments, despite earlier challenges with the regulatory and political risk in the space. With few options for their cash that provide regular, reliable returns and traditional bank players out of the picture, firms like KKR and Terra Firma are ramping up their positions in energy investments.

Even for private financiers, regulations at both the federal and state level remain paramount to both incentivizing new investment and prompting full use of existing infrastructure. In 2012 the energy sector will remain fixated on potential for any new action from the Federal Energy Regulatory Commission or the Environmental Protection Agency in the coming year,as well as some activity at the state public utility commission level, particularly on pending mergers and acquisitions.

For most of 2012, though, progress on both public and private deals is expected to be overshadowed by the presidential election campaign. With the degree of public financing uncertainty and opaque policy outlooks, the question of whether President Obama is reelected remains foremost for many in the energy business whether they are supporters or opponents. Candidates on both sides of the political spectrum have come out in support of energy infrastructure spending, but their mechanisms for paying for it are often starkly different. The devil for energy remains, as usual, in the policy details.