The sense of urgency surrounding the energy transition has never been more palpable, as the quest for sustainability collides with a political awakening around the vulnerabilities of cross-border supply. “The move away from fossil fuels and towards renewables is accelerating,” says Dario Bertagna, co-head of Capital Dynamics’ clean energy team. “Importantly, that acceleration isn’t only being driven by net-zero objectives. There is also an increased focus on energy security in light of events in Ukraine.”

Indeed, the imperatives of reaching net zero have spurred momentous regulation on both sides of the Atlantic, with REPowerEU and the Inflation Reduction Act each channelling vast sums of capital into the energy transition sector. Critically, this regulation embraces solutions that go well beyond the traditional renewable generation technologies, and infrastructure investors are also expanding their remit when it comes to investing in a more sustainable planet.

40%+

Energy efficiency’s share of the emissions abatement needed by 2040

585GW

Total installed battery storage capacity in 2030 needs to grow from 148GW in 2025 to support a net-zero scenario

Energy efficiency plays, in particular, are deemed essential. Energy efficiency represents more than 40 percent of the emissions abatement needed by 2040, according to the International Energy Agency’s Sustainable Development Scenario.

Battery storage, required to smooth renewable generation intermittency and stabilise the grid, is another facet of the transition that is increasingly considered an investable proposition; while carbon capture and hydrogen have the potential to decarbonise hard-to-abate sectors such as heavy transportation and industry.

Meanwhile, infrastructure investors are also supporting innovative power generation processes including waste-to-energy, and are highly focused on greening legacy grey assets, including utilities. “Achieving net zero is about far more that just energy generation. We also need to focus on the decarbonisation of other forms of infrastructure including transport, buildings, water and waste management, as well as upgrading energy networks,” says Eurazeo’s infrastructure partner Laurent Chatelin.

The vision for the energy transition is broader and more ambitious in the face of looming net-zero deadlines and infrastructure investors are eagerly stepping up to the challenge.

1

Diversifying energy sources

Energy security has become a global priority, influencing the power systems of tomorrow

Investing for energy security is now a global imperative as gas prices soar. Governments and businesses are scrambling for alternative sources of supply in the short term and determined to develop sustainable domestic energy. “Despite the comeback of fossil fuels in the energy mix, the shift to low-carbon energy will only accelerate,” says Julien Bedin, senior lead investment research at Partners Group. “The need for energy security adds further impetus to develop indigenous renewables and low-carbon fuels in Europe and elsewhere.”

Indeed, REPowerEU commits the bloc to generating 45 percent of its power from renewable sources by 2030, up from 22 percent today. Nuclear energy may also have a role to play, particularly as it has been deemed a transitional activity under the EU Taxonomy. However, nuclear capacity takes time to build.

Homegrown renewables, therefore, are likely to be the big winner. The wind sector, in particular, is poised for rapid growth; REPowerEU is calling for wind capacity to increase from around 200GW today to 510GW by 2030. But the construction of large-scale wind farms is also time consuming, particularly given pervasive permitting problems in the sector. Distributed energy generation could, therefore, be an interesting angle.

“Our thesis is that a large slice of the power generation base will move to a distributed solar with batteries model,” says True Green Capital Management’s co-founder and managing partner Panos Ninios. “If we had to rebuild the power system from scratch today, we would never go down the centralised power generation route.”

2

Developing alternative fuels

The drive to decarbonise hard-to-abate sectors should push hydrogen into the mainstream

Green hydrogen production is on the cusp of transitioning from hype to reality as REPowerEU and the Inflation Reduction Act both back the technology, unleashing significant capital expenditure with the ability to bring previously prohibitive costs down.

Today’s energy crisis is only heightening the appeal, making green hydrogen competitive with gas in eight European markets. This development is particularly exciting due to green hydrogen’s potential to decarbonise hard-to-abate sectors, including heavy transportation, through the development of alternative green fuels.

This is important, because while decarbonisation efforts have historically focused on the power generation industry, power generation represents just 40 percent of global emissions, according to the IEA.

“To decarbonise the global economy, we need to address other sectors such as transportation, industry, buildings and agriculture,” says Prime Capital’s director sustainability, Janna Brokmann. “Some of this can be achieved through further electrification of processes, such as heat pumps and electric vehicles. But sometimes electrification is not possible.”

This is where renewables-based conversion technologies producing not only hydrogen but also other derivatives – so-called ‘power-to-x’ – come into play.

The green hydrogen value chain is still nascent, of course. Questions remain around viable use cases and competing technologies, and incentivisation methodologies are still unclear. Nonetheless, there has undoubtedly been a step change in interest. A number of specialist hydrogen infrastructure funds have been launched over the past 18 months, including a fund managed by Ardian and FiveT Hydrogen, which is targeting €1.5 billion.

3

Backing battery storage

Technologies are already proven, but the commercial models still need developing

The ability to store sufficient amounts of renewable energy to maintain grid reliability is critical to the energy transition. With renewable energy targets increasing, particularly in light of the ongoing energy crisis, demand for battery storage is also set to spike.

Indeed, data published by the IEA predicts that total installed capacity is likely to grow from 148GW in 2025 to 585GW in 2030, in order to support a net-zero scenario.

“Battery storage has grown tremendously and matured as an asset class in key markets including the US, UK, Australia and Japan,” says Partners Group’s Julien Bedin. “Around 20GW of utility-scale storage projects have now been installed globally, with another 5GW to 10GW added each year. The outlook is bright with renewable additions, thermal plant retirements and demand electrification from EVs, all accentuating the need for flexibility.”

The battery storage sector has been further bolstered by long-term cost reductions in the production of lithium-ion batteries – although batteries are facing short-term cost increases due to the price of raw materials. Lithium-ion batteries are now deemed a fully bankable technology, led by world-class providers such as Fluence and Tesla.

The key question for the future, however, is the bankability of the revenue model. Unlike wind and solar, batteries do not typically benefit from long-term secured revenues. “The infrastructure business case is very market-specific,” says Bedin, “with revenues generated from capacity markets, energy arbitrage, or grid services.”

Bedin adds that we have witnessed a scale-up in the past two years, however, with the average project size shifting towards 100-200MW and longer durations providing the opportunity to capture more arbitrage revenues.

4

Investing in energy efficiency

Backing energy efficiency solutions will have huge implications for the transition

Energy efficiency should play a vital role in meeting net-zero targets. But while energy intensity has improved by 1.3 percent a year over the past five years, this is down on 2.3 percent between 2006 and 2011 and remains well below the 4 percent described in the IEA’s Net Zero Emissions by 2050 Scenario.

War in Ukraine and spiralling energy prices should bump energy efficiency near the top of the political priority list, particularly since Europe faces the threat of outages over winter. Indeed, the EU is targeting a reduction in gas consumption of 30 percent by 2030, and gas consumption fell by 10 percent over the first eight months of 2022 alone.

“Energy efficiency is slated to be the single biggest contributor to emissions reduction, contributing as much as 40 percent towards greenhouse gas abatement efforts,” says Todd Bright, co-head of private infrastructure Americas at Partners Group. “It may not get the attention that renewable generation does, but it is an indispensable component of climate change mitigation.”

There is significant investor appetite for specialist energy transition solutions, ranging from retrofitting energy efficient lightbulbs to the reinvention of industrial processes.

Now, Internet of Things and cloud computing capabilities are paving the way for energy efficiency to move to the next level, with the creation of microgrids within sites that can then be wired together centrally and managed as a resource. “This means energy efficiency can also help with grid resilience because it becomes possible to reduce load on the system at times of peak demand,” says Bright.