As the debate around energy efficiencies and climate change continues to gain traction, the world’s push towards a low to zero carbon emissions future has become a multi-trillion dollar business.
Well worthy of carrying the status of an investment megatrend for 2024 and beyond, investment in the energy transition appears to be drawing in stakeholders of all makes and shapes.
Total spending on investments to install renewable energy, buy electric vehicles, build hydrogen production systems and deploy other cleantech rose 17% in 2023 to $1.8 trillion, according to BloombergNEF data.
Should investment allocations on clean energy supply chains as well as $900 billion in financing be included, the headline figure in 2023 hit $2.8 trillion. While there was considerable big ticket spending in the U.S., European Union and the U.K., BloombergNEF said China was the biggest spender pumping $700 billion into the market.
But if proponents of the clean energy transition are to be believed, there is still some way to go. The International Energy Agency (IEA) and the International Renewable Energy Agency (IRENA) both seem to suggest somewhere in the region of $6 trillion or more may be needed per year until 2030 for a successful energy transition and restricting global warming to 1.5 C above pre-industrial levels.
Electrify everything and do more with less
Many believe the trillions spent so far have largely been on vital but ultimately low hanging fruits such as renewable energy infrastructure and electric mobility.
At the recently concluded CERAWeek 2024, a major energy conference organized in Houston, Texas, U.S. by S&P Global, industrial software vendors, financiers and project sponsors appeared united in their belief that in order to lower carbon emissions, electrification needs to be stepped up by several multiples.
That too, in tandem with revisiting the wider industrial, mining and manufacturing chain – a critical part of the transition – and not just badger on about sources of energy supply.
“The world has understood that we have to lower carbon emissions. Investment is no longer predicated on how high [or low] energy prices are. So concentrating only on energy supply sources – be they traditional or renewable – is being somewhat short-sighted,” said Barbara Frei, Executive Vice President, Industrial Automation at Schneider Electric.
“The wider dynamic needs to be revisited in hard-to-abate segments of the industrial, mining and manufacturing sectors. The technologies needed do exist, whether we are talking hardware or digital enablers such as artificial intelligence and predictive analytics for improving throughput.”
Brandon Spencer, President, Energy Industries Division at ABB, said the common phrase “electrify everything” may appear very catchy and people, even seasoned investors, tend to identify it with electric transportation.
“While that matters, for us a key part of the “electrify everything” paradigm is the electrification of thermal processes at industries and refineries, and solutions for strengthening electricity grids to power them.”
That’s not lost on financiers and project sponsors, said Daniel Goldman, Co-founder and Managing Director of Clean Energy Ventures. “In 2022-23, we were instrumental in organizing around $1.2 trillion a year in spending on clean energy and climate related technology globally. We believe the focus must be on all aspects of the transition.
“Manufacturing and industrial heartlands in the global south is where the world has to decarbonize the most, and where near-term opportunities are going to emerge at a canter,” he added.
Dr Nikolas Meitanis, Executive Director, Strategy and Corporate Development at Masdar, noted that when people hear of trillion dollar opportunities and how the world needs to go further, it is a plea to examine wider energy megatrends.
“For me, not talking about grids or infrastructure for high voltage distribution in the same breath as building renewables projects is both a concern as well as an investment opportunity.”
The United Arab Emirates’ renewable energy company’s investment approach, Meitanis added, not only involves tapping into trillion dollar opportunities around wind and solar power generation, but having a holistic stake in localized opportunities for making wider infrastructural investments.
“Whether its our home market – the UAE – or internationally, Masdar’s approach is to examine opportunities across the energy transition value chain.”
Market and asset performance data is proving to be invaluable, said Rasha Hasaneen, Chief Product and Sustainability Officer at AspenTech. “Digitization and readily available performance data – both at pilot energy transition projects as well as commercially operating ones at brownfield and greenfield sites – help make a “real-time” case for what can be achieved with the right kind of investment.
“Digitization helps to demonstrate and amplify the case for investing in the energy transition and its not just about profitability. Investors’ and project sponsors’ attention can be turned to the possibility of building something sustainable from the ground up or how an existing asset can be operated more optimally to lower its footprint.”
Queuing up with a trillion or two
Whether investing in energy transition assets, products or ventures, those queuing up with a trillion or two have high expectations with very specific targets.
“Half of what we spent in 2022-23 was in China and that’s a very good thing because we are part of a decarbonization journey of a huge economic powerhouse with a lot of potential,” said Goldman of Clean Energy Ventures.
Masdar’s Meitanis noted: “For us, [solar and wind] projects must demonstrate how bankable they are. This has been our approach for 18 years. We believe not only in the premise of the energy transition for wider societal benefit but also its potential for sustainable financial returns.”
Industrial technology and software vendors have their own hawkish in-house venture funding arms on the look out too for the next big thing, albeit with very different approaches.
Spencer of ABB said: “Between 2020 and 2023, we made 26 venture investments in the areas of technology and digital, and aim for 5 to 10 small to mid-size bolt-on acquisitions per year.
“We have decentralized venture funding across ABB to our various divisions. Of course, our time horizon for investment is very different to say private equity or venture capital firms. We invest in a company to take it to scale and patiently nurture it.”
As does AspenTech’s Hasaneen who noted: “We rarely acquire on the basis of revenue. Our driver is intellectual property not money for an asset that we can subsequently incubate and scale up.”
And for Schneider Electric’s Frei, her company’s hunt for acquisitions must align with its headline message to “optimize, digitize and electrify” and, of course, scalability. Elsewhere, retail and private high net worth equity investors may also be more inclined to tap into the energy transition megatrend in 2024, said Nigel Green, CEO of DeVere Group.
“The enduring validity of the long-term investment perspective is underscored, with companies maintaining their dedication to environmental objectives, and governments worldwide offering financial backing to facilitate the transition.”
High interest rates and inflation may have held retail investors back in 2023, “but now the stage appears to be set” for an upward trajectory in energy transition investments, Green concluded.
Access to finance
But what of the banks, who despite having provided close to $1 trillion in energy transition finance in 2023, are still routinely castigated for being in bed with oil and gas majors. Many face pressures not to finance traditional energy firms, who still remain the biggest players in the wider global energy mix.
Flustered by the constant clamor to ditch oil and gas finance, JPMorgan CEO Jamie Dimon once famously shot back at a U.S. congressional hearing in 2022 that his bank would certainly not do so in the face of political pressure because “it would be the road to hell.”
More so, because many energy majors need access to capital to change their ways and optimize operations. Even advocates of net zero solutions think attacking the sources of finance is not a good idea.
“Adopting low to zero carbon solutions have cost implications,” said Joonas Rauramo, CEO of Coolbrook, an ABB-backed firm developing the concept of electric factories. “Traditional energy players are looking partner with us to lower their carbon footprint. But it is impractical to assume they can do so without access to finance.
“So pressurizing banks to end their partnerships with traditional energy players would prove counterproductive. Furthermore, it would be daft to blame global banks for the lack of progress on the energy transition front.”
Spencer of ABB noted: “We believe it’s an “and” not an “or” equation when it comes to traditional energy and renewable energy in the context of the transition. To cite an example, we help traditional energy companies with the electrification of their LNG trains which are substantial decarbonization undertakings.
“So if its about making the existing infrastructure cleaner, and developing cleaner infrastructure for the future, the finance community needs a wider non-polarized lens for its participation.”
Frei of Schneider Electric concurred: “When you talk about end-to-end perspectives, you will always need oil, natural gas and mining of certain raw materials for a stable energy transition.
“Our goal is, and has been for 20 years, to help those industries decarbonize and be more efficient. Not all costs incurred can come from traditional energy companies’ balance sheets and finance may be needed. Banks, pension funds, insurance funds, private equity and family offices – all have a balanced role to play.”
“This isn’t about a moral position,” insisted Hasaneen of AspenTech. “If at its core you deem the energy transition to be a point of change, an improvement on the status quo, my belief is to bring the finance community closer as a stakeholder in the green transition and not ask it to pick a side.”
Simply put, a trillion-dollar collaboration effort will need all the help it can get. If a megatrend has been set in motion, the list of stakeholders wanting in is only going to get bigger and more diverse.
