Capturing the momentum of energy transition
Svetlana Fathers, Producer of SuperReturn Energy Transtition, explores the when and how of a transition to a carbon-free future and what role private equity has to play
The answer to this is pretty clear: the transition is happening now, and it is unstoppable. But some may wonder: is it “too little, too late?” and how realistic is it for the international community to make up for the lost time?
Tracking the progress made on the global energy transition since COP28, the general consensus is that although progress had been made, it was nowhere near enough. The scale of system transformation required to achieve net-zero emissions appears simply too great to tackle within the prescribed timeline. Some go as far as to question the adequacy of the pace and scope of the transition, as well as the trajectory across all energy uses.
It is fair to say, however, that not all of it is “our” fault. Events of recent years have put the brakes on the anticipated speed of energy transition. With the crisis in Ukraine bringing new levels of concern and uncertainty, as well as the aftereffects of the global pandemic continuing to hamper recovery efforts, we have been significantly swayed off course and presented with a set of new challenges.
But not all hope is lost. The main focus of COP28 was identifying effective solutions to accelerate action across all areas and halving emissions by 2030. This includes a call on governments to speed up the transition away from fossil fuels to renewables in their next round of climate commitments. A wide range of policies and government initiatives are already in place and have been incorporated across all economic sectors to speed up the transition. The signs of a marginal decrease in fossil fuels demand are already there. According to IEA’s Stated Policies Scenario (STEPS), renewables are set to contribute 80% of new power capacity to 2030. We cannot argue that if this expectation comes to fruition, and with an efficient collaboration amongst governments, companies and the investment community, the 2050 pathway towards a new 100% carbon-free world can become less of a myth and more of a reality.
Energy transition features a myriad of technologies at vastly different stages of maturity. There are dozens of different predictions as to what trends will drive innovation in energy transition to bring us closer to our goal.
It was established in the World Economic Outlook 2023 that the universal strategy for the global community to tackle existing challenges and get back on track by 2030, five things need to happen.
Specifically: tripling global renewable capacity; doubling the rate of energy efficiency improvements; slashing methane emissions from fossil fuel operations by 75%; innovative, large-scale financing mechanisms to triple clean energy investments in emerging and developing economies; measures to ensure an orderly decline in the use of fossil fuels, including an end to new approvals of unabated coal-fired power plants.
Those are considered to be universally recognised priorities for 2030. If all of the above can be actioned, we’ll be halfway there. Now, what about the holy grail off absolute carbon-neutrality by 2050? According to IRENA, electrification and efficiency enabled by renewables, hydrogen, and sustainable biomass will be the key drivers of the energy transition and complete emission reduction by 2050. These reductions can be achieved through 6 key actions:
Significant increases in generation and direct uses of renewables-based electricity
Substantial improvements in energy efficiency
The electrification of end-use sectors (e.g. electric vehicles and heat pumps)
Clean hydrogen and its derivatives
Bioenergy coupled with carbon capture and storage; and
Last-mile use of carbon capture and storage
(Source: IRENA’s 1.5°C Scenario, set out in the World Energy Transitions Outlook report)
Of course, each of the above action points requires a colossal effort from absolutely every industry across all geographies.
However, in light to recent innovations, developments and achievements in the energy transition space, we can be quietly optimistic about winning the race.
Given an extensive push to decarbonize the energy industry, it is no wonder private equity didn’t hesitate to jump on the wagon and make its mark in the energy transition space. We can clearly see an abundance of investment opportunities for private equity, but as we know “with great power comes great responsibility” and a whole lot of challenges. With an increasing pressure on private equity firms to decarbonize their portfolios, the risks and opportunities within portfolios have become critical focus areas for fund managers. That coupled with ambiguity around the evolving definition of energy transition, the uncertainty surrounding regulations and the trajectory of the market shift raises many questions for GPs. Investors are tasked with overcoming massive hurdles related to geographical variables, politics, regulatory and macro and micro-economic uncertainty and other factors outside their control.
Despite the risks and challenges, the energy transition space continues to be very attractive to investors, with global investment hitting a record $1.8 trillion in 2023, climbing 17% from a year earlier, according to BloombergNEF. Electrified transport overtook renewable energy to be the largest driver of spending in 2023 at $634 billion, up 36% year-on-year. Renewable energy saw more modest momentum, rising 8% to $623 billion. There was also strong growth in emerging areas, with investment in hydrogen tripling year-on-year, carbon capture and storage nearly doubling, and energy storage jumping 76%. Some of the other sub-sectors that showed a strong investment growth include clean industry and power grids. Geographically, EMEA was the fastest-growing region in 2023, China remains the largest market for energy transition spending with the US being the second largest. The EU as a whole invested more in this space than the US with the UK’s $74 billion input signifying that together, in 2023 the US, EU and UK invested more than China (Source: BloombergNEF).
To get to grips with where and how to invest in this lucrative yet undeniably complex sector, it is crucial for investors to have insights into the unfolding concept of energy transition as it becomes increasingly central to the private equity asset class. Our upcoming SuperReturn Energy Transition Conference, taking place on 4 – 5 June in Berlin will provide a detailed analysis of fundraising, deals and investors’ sentiment including data of fund activity in the burgeoning energy transition space.
A range of timely and stimulating discussions will answer pressing questions, such as: “What is considered to be a more forward-thinking investment approach amongst investors to accelerate global decarbonisation at a sufficient pace?”, “What are the most reliable sources of financing energy transition projects?” amongst many others. Join these and many more thought-provoking discussions at our unmissable conference dedicated unlocking investment opportunities in energy transition.
