Humankind has enjoyed the production of energy since first mastering fire. Today, practically every task we perform is predicated on a deeply complex network of power production. Annual global energy consumption is estimated at 580 million terajoules – that’s equivalent to 13,865 million tonnes of oil. And demand for energy is only set to increase. Keeping those figures in mind, it will come as no surprise that energy supply is the biggest contributor to global greenhouse gas emissions. The sector is responsible for around 35 percent of total emissions, according to the Intergovernmental Panel on Climate Change.
These sobering statistics highlight the importance of moving away from harmful sources of energy like fossil fuels and finding alternative solutions. The good news is that the energy transition is on the agenda for most investors – global investment in the energy transition increased from $264 billion 10 years ago, to $755 billion last year, according to BloombergNEF figures. While things are moving in the right direction, even greater levels of investment are needed. BloombergNEF says annual investment in the energy transition must triple between 2022 and 2025, and then double again between 2026 and 2030 in order to meet vital climate change targets.
On top of that, geopolitical events are threatening to slow down progress, with energy security being top of mind, especially amid the war in Ukraine. As a result, there is a worry that energy security will overtake the energy transition in terms of priority. However, regardless of external factors, there are certain steps that need to be taken to carry out the energy transition, which we explore over the next few pages.
6. Invest in renewable energy generation and storage
Renewables are the key to the energy transition. Not only do they offer an alternative to fossil fuels, but they also increase energy security.
Tom Williams, partner and head of energy and infrastructure at investment manager Downing, argues that both of these factors have encouraged investment in renewable energy. “I first started talking to people seriously about investing in renewables in Europe back in 2010. In those days, one of the key reasons to invest in renewables, and one of the reasons why governments should shift their policies towards renewables, was energy security. But that has been a bit drowned out in the intervening period by a wave of discussion around the climate crisis.”
Alex Brierley, co-head of Octopus Renewables, adds: “Facilitating a successful transition to renewable energy is, in my view, the central pillar to achieving net-zero. Renewables infrastructure can present a compelling investment opportunity, targeting stable and predictable cashflows against a backdrop of heightened market volatility, along with attractive risk-adjusted returns.”
The International Energy Agency predicts that renewables capacity will match the power capacity of fossil fuels and nuclear combined by 2026. The move to renewables is also being accelerated by Russia’s invasion of Ukraine and the attempt to phase out the use of Russian fossil fuel imports.
However, despite being a ‘green’ energy source, investors also need to consider how to mitigate negative impacts from renewables. Vemund Olsen, a senior sustainable investment analyst at Storebrand, tells Responsible Investor that in certain areas renewables can be damaging for not only wildlife, as projects can destroy habitats, but also Indigenous peoples, whose homes will be impacted. “Right now there is a very strong push for increased renewable energy, as well as increased mining for metals and minerals, that are necessary for the green transition,” he says. “But I think investors are increasingly aware that we have to be really careful in terms of doing proper due diligence to make sure that we don’t have any unintended negative impacts on Indigenous peoples.”
Intermittency is another issue; there needs to be a way to store renewable energy for periods where renewables cannot generate enough. Cue the rise in investors interested in battery storage. According to IEA data, investment in battery storage surged by almost 40 percent year-over-year in 2020 to $5.5 billion. This rapid increase can be put down to innovations in technology as well as a reduction in the cost of battery storage systems.
“Renewable energy and storage can work hand-in-hand in a symbiotic relationship,” says Alex Leung, director of infrastructure research and strategy at UBS. “We often hear about how we need energy storage to absorb the oversupply of renewable generation. But on the other side of the equation, we also need more energy storage to support new solar and wind capacity. Energy storage is an enabler for higher renewable energy penetration.”
7. Improve energy efficiency
Prioritising energy efficiency is a vital, but often overlooked, step in meeting climate change targets.
“Energy efficiency solutions are not always the flashiest, but they are critical to achieving net-zero carbon emissions,” says Michael Albrecht, managing partner of Ridgewood Infrastructure. In line with Albrecht’s opinion, the IEA states that energy efficiency solutions are expected to be the most prominent way for companies to reduce their carbon footprints.
The label of ‘energy efficiency’ incorporates a wide range of different steps to enable residential and commercial buildings, as well as transport and industry to function while using less energy. Efficiency goes hand in hand with electrification – and often relies on digital technology to enable resources to be managed more effectively. Key priorities for energy efficiency range from improving insulation in buildings, to installing more efficient lighting systems, and making industrial processes such as steel production less energy intensive.
Adeline Morin further argues that efficiency is a catalyst for innovation. “Efficiency plays are where we see most innovation today. When you produce heat, you produce smoke, and we are now able to use the heat from that smoke to reheat the water within the network,” she says.
Governments also have a role to play in improving efficiency. Earlier this year, the Energy Efficiency Infrastructure Group in the UK called on the government to embrace efficiency within infrastructure as it addresses three pressing factors: the cost of living crisis, net zero and the ‘levelling up’ agenda. In addition, the EU Agency for the Cooperation of Energy Regulators urged its member states to adopt efficient energy practices.
8. Roll-out transmission infrastructure
Without transmission, there is no energy. Investing in the right infrastructure to bring renewable energy to consumers is critical.
According to figures from the IEA, a 50 percent rise in grid spending could be needed over the next decade if the world is to meet its sustainability goals. In particular, the IEA highlights the importance in investing in the nearly 7 million kilometres of transmission lines needed globally to deliver energy.
Chris Archer, co-head of EMEA for Macquarie Asset Management’s Green Investment Group, says: “There is no transition without transmission, and so regulatory authorities are thinking ahead, planning the multi-year investment programmes required in power grids to
ensure this infrastructure is fit for purpose in a net-zero energy system.”
Peter Schuemers, co-head of investments at Energy Infrastructure Partners, agrees: “Often forgotten, transmission infrastructure – for electricity and molecules – is inseparable from renewable generation. Being the indispensable condition for the operation of all these assets, it will remain highly attractive. Significant high price spreads between European countries, and even within those countries such as in the Nordic region, are an unmistakable sign that transmission capacity is lacking behind demand, thus inhibiting exchange of energy and mutual assistance in times of crisis.”
Transmission investment is particularly needed in less economically developed countries. For instance, 52 percent of people who live in sub-Saharan Africa currently live without access to electricity. Therefore, in these regions, investment in transmission and distribution infrastructure is vital to connect off-grid populations with new sources of electricity generation, which are often found in remote areas away from main population centres.
9. Scale up green hydrogen
There is much excitement about the potential for hydrogen to help replace natural gas; hydrogen is considered ‘green’ when electrolysis is powered by renewable energy. Green hydrogen could also serve as a form of energy storage, because it can be converted back into electricity when needed.
The IEA says that switching to green hydrogen would save the 830 million tonnes of CO2 that are emitted annually by the gas produced using fossil fuels. “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.
Barney Coles, managing director and co-head of clean energy at Capital Dynamics, agrees: “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.”
Bearing that in mind, governments are starting to take action towards hydrogen. For instance, in the US, the Department of Energy has set aside $8 billion to support eight to 10 hydrogen hubs. “Hydrogen energy has the power to slash emissions from multiple carbon-intensive sectors and open a world of economic opportunity to clean energy businesses and workers across the country,” Jennifer Granholm, the US energy secretary, said in June.
Sam Pyne, managing director at private equity investor Haddington Ventures, says further government support is vital. “The creation of a hydrogen economy is on the horizon. Nevertheless, the government needs to accelerate more projects in the US. A hydrogen production tax credit has been proposed [which would do this].”
Meanwhile, the EU published its REPowerEU plan in May 2022, as part of a wider hydrogen strategy. The plan outlines steps to accelerate renewable hydrogen to speed up the EU’s energy transition. Its goal is to produce 10 million tonnes of renewable hydrogen in the EU, and import a further 10 million tonnes, by 2030.
Renaud de Matharel, CEO and managing partner at Cube Infrastructure Managers, adds that hydrogen is a vital component when investing in renewables. “To run a country like Germany mostly on wind and solar requires a massive amount of energy storage (roughly 48 hours of storage),” he says. “We believe this is why hydrogen makes a lot of sense.”
Even though green hydrogen has huge benefits, it is still very much in its infancy, with few investors placing firm bets. Around 90 percent of hydrogen produced today involves fossil fuels. “While the hydrogen sector has huge potential, it is still very nascent,” argues Carsten Johansen, managing director at Impax Asset Management. “We have looked at some opportunities involving hydrogen co-located with solar and coupled with an industrial offtake, and we continue to evaluate the economic equation. I think it is likely that more government intervention will be required in order to make it more mainstream than it is today.”
10. Nuclear returns to the spotlight
Nuclear has long been a controversial energy source, with many viewing it as a ‘grey’ area when it comes to sustainability.
The main advantage of nuclear is that it provides a stable and predictable supply of electricity – unlike wind and solar, which are inherently intermittent. “Nuclear straddles sustainable development from both environmental and socioeconomic perspectives,” says Patrick Wood Uribe, chief executive of UK fintech firm Util. “It is widely affordable, available and reliable, insulating countries – or liberal democratic unions – from energy shortages and insecurity. And, unlike oil and gas or renewables, nuclear doesn’t demand and deplete natural resources.”
However, nuclear also presents a number of question marks around safety, waste and the overall benefit to the environment, including during the construction phase.
“The construction of a nuclear power station tends to be fairly heavy on cement, for example, and that is high emission and particularly hard to abate,” says Eoin Murray, head of investment at the international business of asset manager Federated Hermes. “We need to think about these things in a proper full lifecycle assessment way. And that means thinking about how you dispose of radioactive material and if the general populace is happy with how we do that.”
The mixed attitudes towards nuclear are reflected in a variable policy environment across the globe. Nuclear meets up to 70 percent of France’s electricity requirements, although over half of French reactors were offline during the summer because of water shortages and maintenance issues. Germany is seeking to ditch nuclear altogether, though it has postponed the closure of its last nuclear power stations amid the energy security crisis. Meanwhile the UK government has signalled its intent to invest in a new generation of nuclear power plants.
11. Time to develop carbon capture?
Carbon capture technology is in its early stages of development – and not everyone agrees that increased investment is welcome.
A recent Intergovernmental Panel on Climate Change (IPCC) report suggests that technologies such as carbon capture and storage are likely to be necessary if temperature increases can be kept below 1.5C. And with the climate crisis accelerating, advocates argue that investment is urgently needed to scale carbon capture technologies.
“Analysts project that over $100 trillion of investment between now and 2050 will be required,” says Raj Agrawal, global head of infrastructure at KKR. “We believe much of this will be in sectors where we are actively investing, such as renewable power generation, and in the scale up of newly proven technologies, such as battery storage and carbon capture, where we are spending a lot of time. In this way, growth in infrastructure investing is critical to the drive to
Nikki Reisch, climate and energy programme director at the Centre for International Environmental Law, disagrees. She argues that the only solution to the current crisis is to phase out harmful energy practices rather than rely on new tech.
“Only a rapid and equitable phaseout of fossil fuels can avoid overshooting 1.5C,” says Reisch. “Relying on speculative technologies that prolong the use of fossil fuels and purport to deliver emissions reductions… will cost lives and inflict further irreversible harm. Carbon capture and storage cannot make coal clean, turn gas green or render oil carbon-free.”