Institutional investors are voting with their feet. Over the past decade investment in the energy transition has enjoyed double-digit growth, while fossil fuels are becoming increasingly shunned by funds and asset managers. By 2026, global renewables capacity is projected to overtake traditional oil and gas for the first time.
Not even the pandemic has tempered demand. Last year, global energy transition investment hit $755 billion, a 27 percent annual surge, and more than $200 billion above levels achieved in 2019, according to BloombergNEF. China was the principal driver, and by a wide margin. Last year the Asian economic giant ploughed more than $250 billion into renewable energy, at least double that of any other country.
Transport was the sector that experienced the biggest swing in investment last year. The International Energy Agency estimates that the industry contributes around 24 percent of global CO2 emissions, making EVs and other decarbonisation technologies a crucial component in the drive to cut emissions.
The investment numbers showcase cause for optimism, and the industry is clearly heading in the right direction, but much more capital will be needed if global warming is to be limited to just 2 degrees above pre-industrial levels by 2100.
“While $755 billion was invested globally in the energy transition in 2021, BloombergNEF estimates that $4.5 trillion of annual investment will be required to achieve global net zero by 2050,” says Peter L Corsell, global infratech fund partner at manager I Squared Capital.
“This means annual investment must triple between 2022-25 and then double again between 2026-30.”
Pivoting away from Russia
The war in Ukraine has shone a spotlight on much of Europe’s deep dependence on Russian oil and gas supply, while shifting energy policy risks decarbonisation falling to the bottom of the agenda. “In the short term, we expect energy security concerns to trump net-zero considerations,” says Derwin Jenkinson, energy and infrastructure partner at law firm Paul Hastings.
“Annual investment must triple between 2022-25 and then double again between 2026-30”
Peter L Corsell
I Squared Capital
Despite governments promising to break with Russian energy supply, the transition will take time and renewables capacity is not yet mature enough to help fill the void. Many see natural gas as the most obvious bridging fuel to meet near-term energy security needs in the interim.
“The Ukraine conflict underscores the geopolitical importance of natural gas that will now be exported from North America to Europe,” argues Paul Buckley, managing partner at advisory firm FIRSTavenue. The US has pledged to send 15 billion cubic metres of LNG and wants to scale up to 50 billion cubic metres by 2030. But for that to take place, Europe would need to scale up its import terminal deficit.
“The constraint comes from Europe’s import capacity,” says Panos Ninios, managing partner and co-founder at infrastructure asset manager True Green Capital Management. “You are likely to see more LNG terminals, but this takes time and money.”
The pace of decarbonisation in Europe may inevitably take a short-term hit from the recent dramatic policy change, but ultimately many believe that the volatile price environment will kickstart greater investment in renewables regardless. “This has accelerated some existing trends,” stresses Luke Hyde-Smith, director at manager Waverton Investment Management.
“I think one of those will be an increased investment in renewables, certainly within Europe. How else are we going to wean off Russian-supplied gas and oil?”
Storing value for the future
The energy transition may be seen by some as simply a byword for accelerating renewables capacity and abandoning fossil fuels, but none of this can be achieved without scalable battery storage for when the sun is not shining or when wind speeds are low. “Until the storage of renewable energy is sufficient to meet our energy requirements, the energy transition will encompass the use of legacy fuels, primarily gas, where these are sufficiently flexible to manage the intermittency of renewable energy generation,” says Spence Clunie, founder and managing partner at infrastructure investment manager Ancala Partners.
Storage capacity is set for strong growth over the near term, especially with ambitious global renewables targets and the war in Ukraine forcing countries to look beyond traditional energy supplies. In 2020, the IEA estimates that total installed global capacity sat at 17GW and will jump to 148GW by 2025, before more than doubling to 585GW by 2030.
“We are adding about 300GW of wind and solar capacity each year globally,” says Sean McLoughlin, EMEA head of industrials research at HSBC. “We should ideally, on the run rate we have currently in today’s markets, be close to a 100GW energy storage market, instead of 5-10GW. There is clearly a growth opportunity.”
Equally, battery storage will have a role to play in stabilising the grid as the energy mix shifts towards intermittent renewables. The potential impact from climate change and extreme weather events will also increase the importance of scalable storage.
“Grid resiliency is clearly a hot topic, especially following the Texas winter freeze and also California’s wildfires in recent years,” says Alex Leung, director of infrastructure research and strategy at UBS.
“When there is a disaster or emergency event, the grid can draw electricity from a nearby energy storage project, rather than rely on electricity from generation facilities that could be hundreds of miles away, where transmission lines may have been compromised during the disaster.”
Revisiting nuclear energy
Over a decade since the Fukushima nuclear disaster, perceptions of nuclear energy have changed dramatically. Achieving the goals of the energy transition depends on scaling all forms of low-carbon energy, while the Russian invasion of Ukraine has forced policymakers to think long and hard about expanding nuclear energy.
“The role of nuclear in the energy transition is principally a solution to the problems associated with most renewables: namely, reliability and intermittency,” says Eoin Murray, head of investment at the international business of asset manager Federated Hermes.
The International Atomic Energy Agency (IAEA) estimates that global nuclear energy capacity could more than double to 792GW by 2050. In this scenario, nuclear power would represent roughly 12 percent of total global electricity production.
While Germany is set to close its last three nuclear power plants this year, the UK has already announced plans to expand capacity. “We get about half of our energy from low-carbon sources right now; to double it overall and make it all low carbon means we need to increase that by four times,” Declan Burke, director of nuclear projects and development for the UK government’s department for business, told attendees at Infrastructure Investor’s March Global Summit in Berlin.
“We need a diversified mix with sources of secure, firm low-carbon power as well. That is what nuclear plays well to.”
Traditionally, private investors have stayed clear of nuclear energy, deeming it too difficult, according to Stephen Vaughan, vice-chair of energy and power at Rothschild & Co. The long lead time in construction and high capital costs have been major factors in this trend.
But the Sizewell C venture in the UK, funded by the private sector, has shown that this may be shifting. “[The government] wants to get private money into nuclear, and that is a real departure from the past where traditionally this has been territory for government-owned or government-linked corporates. To get this majority-financed by private equity, and all of the debt coming from the private sector, is new,” added Vaughan in Berlin.
While appetite for renewables and low-carbon energy is clearly booming, and investment jumped 27 percent between 2020 and 2021, there are notable headwinds to further growth. The pandemic hit supply chains, particularly across China, and the war in Ukraine has only added to deglobalisation, inflation and rising costs.
“While the energy transition investment landscape has arguably never been stronger, a combination of regulatory-driven delays and acute supply chain challenges are presenting as significant barriers to continued momentum,” says Jake Erhard, partner and head of ESG at manager ArcLight.
“Interconnection queues and over-taxed siting approval processes are taking their toll on the pace of new infrastructure development, while supply chain issues and the industry’s reliance on a global supplier base are creating major cost and schedule challenges for solar, battery storage and electric vehicle deployment.”
Unsettled global supply chains are making renewable energy projects more expensive and capex has increased on average by 10-20 percent since 2020. Nevertheless, many asset managers remain bullish that the industry can still find ways around the problem, increasing renewables capacity and providing consistent returns.
Transport grew more than any other sector in 2021
Global climate tech equity investment in 2021
“The cost of solar and wind farm components has generally increased over the past few months due to various logistics and supply-chain issues, and also raw material pricing pressures, but these challenges are being offset by the increased efficiency per unit that we are seeing, as wind and solar technologies continue to improve over time,” argues Jenny-Li Holmström, head of ESG, investment manager and senior legal counsel at Taaleri Energia.
Olivier Laganiere, managing director at Northleaf Capital Partners, agrees: “We have seen strong double-digit growth in the level of investment going into energy transition over the last decade. We need to continue fostering an environment that will promote innovation, advancement and development of the technologies, supply chains and opportunities underpinning the energy transition to accelerate adoption and drive down levelised costs. The capital inflow will follow.”
Demand for EVs is surging and charging capacity will need to scale quickly to keep pace. Last year, the IEA estimated global EV sales at 6.6 million, more than tripling the number of consumers from 2019. EY projects that Europe alone will require nine million EV chargers by 2035.
Charlie Reid, managing director at BlackRock Real Assets, says that as a key trend in the energy transition, EV charging infrastructure will require $1 trillion of capital globally by 2030.
Global energy transition investment in 2021, up from $595bn in 2020
Solar installations were up around 40GW in 2021
But there remain challenges that could affect the pace of rollout. “In order to meet demand, we need to build more underlying charging infrastructure – this is currently a major bottleneck for scaling the rollout of EVs across Europe,” says Andreas Schwarzenbrunner, a partner with Speedinvest’s industrial tech investment team.
“We also have to factor in the differences between fast and slow charging, as well as the various locations where charging will take place. All these contexts require different types of charging infrastructure.”
Charging locations will also be a major factor in the smooth rollout of EVs. “The vast majority of EV charging stations are unprofitable today, partly due to the fact that they are not located where drivers need them most,” highlights Louis Fearn, investment associate at InMotion Ventures, a venture capital firm focusing on the smart transportation sector.
This point was reiterated at the Infrastructure Investor Global Summit in Berlin. “The asset that you are really buying is the real estate and the position of your chargers,” explained Massimo Resta, partner at infrastructure fund manager Zouk Capital. “What is important today is securing the right locations as there will be spots that demand a premium.”
Electrolysing the future
“Green hydrogen will be the next big trend – the ability to create a new green fuel through the pairing of renewables with electrolysers for the transportation and industrial sectors will be a game-changer,” says Barney Coles, managing director and co-head of clean energy at Capital Dynamics.
“A combination of regulatory-driven delays and acute supply chain challenges are presenting as significant barriers to continued momentum ”
This belief that hydrogen, and particularly green hydrogen, can complement both solar and wind is growing, particularly with the the need to diversify European energy supply. “To run a country like Germany mostly on wind and solar requires a massive amount of energy storage (roughly 48 hours of storage),” adds Renaud de Matharel, CEO and managing partner at Cube Infrastructure Managers. “We believe this is why hydrogen makes a lot of sense.”
Green hydrogen may have been widely touted as an alternative fuel source to coal and gas, but it also has the potential to aid conventional battery storage.
“Hydrogen is a way of storing excess energy from renewables, turning electricity into clean fuel at times when it isn’t needed on the grid and is therefore lowest cost,” says Dan Cheng, managing director in Brookfield’s renewable power and transition group.
Without green hydrogen
serving as a long-term storage option, the world will be forced to “rely on natural gas to meet peak demand or waste renewable power during periods of low demand”, cautions Jo Bamford, founder of UK hydrogen distributor Ryze Hydrogen.
So, there is plenty for the market to get to grips with, and plenty of capital looking to do just that.