The global energy transition is a race like no other. The prize for countries that can reach net zero is not just avoiding catastrophic climate change, but foreign investment worth trillions of dollars. “Instead of going full steam ahead, however, the energy transition has reached a friction point,” says Pictet Wealth Management energy analyst Malik Zetchi. “Politicians are realising that the delivery of their net zero ambitions is facing reality on the ground.”
A number of offshore wind and solar projects have stalled as inflation pushed the price of steel up 160 per cent in the US and 270 per cent in Europe, forcing some energy companies to consider pulling out of projects unless they receive greater financial support from governments. Meanwhile, clashes between environmental factions are forcing local governments to postpone new projects. In May, the UK regulator delayed approval of a proposed 2.6GW wind farm until it could guarantee the developer could protect native seabirds – a decision that prompted the company’s CFO to suggest it may “see more value creation elsewhere”.
If these delays continue, renewable infrastructure will quickly run out of road. Analysis by Princeton University’s Zero Lab suggests that if permitting for renewable energy projects remains at current levels the US will only achieve about 20 per cent of the potential carbon reduction from the Inflation Reduction Act.
Removing the roadblocks
As the energy transition becomes a priority for governments, it may also present an exciting opportunity for private investors. Between August 2022 and June 2023, renewable energy production received nearly three times as much private investment as industrial decarbonisation and digital energy management combined.
This concentration of capital in energy production has created demand for investment in other areas of the energy transition. More than 150GW of wind and solar energy is waiting to be connected to grids across the UK, Spain and Italy, according to BloombergNEF, with a small number of trained engineers struggling to add these projects to outdated grids.
Getting renewable projects online requires major investment in smart grid technology because, unlike fossil fuels, which can be pumped through the grid as needed, wind and solar energy can only be generated when conditions are suitable. This fluctuation makes it tricky to balance the supply and demand of energy as the grid operator needs to determine how a drop in the wind or sudden cloud cover might affect energy production throughout the day.
Meanwhile, significant investment is also needed to manage people’s changing demand for electricity. Space cooling, for example, is already one of the biggest demands on the energy system, and with the number of air conditioners in use expected to double by 2030, the need for investment in digital distribution and monitoring technologies is growing.
Add electric vehicles into the energy mix and the complexity of energy distribution ratchets up another notch. To deal with it, investors are looking for new technologies that can manage the distribution of renewable energy in real time. Investment in the automation of substations, which convert electricity into different voltages before transmitting into our homes, offices or appliances, is expected to grow at a compound annual growth rate of roughly 6.7 per cent between 2023 and 2030, according to energy analyst Future Market Insights.
Where investment is needed also depends on the model of supply being pursued across different regions. While all major economic blocs are drawing from a similar financial toolkit – using tax credits, state-backed loans and other financial incentives – huge schemes such as America’s Inflation Reduction Act (IRA) and the European Green Deal have triggered a wave of investment in energy production.
Private equity firms have invested more than $100bn in America’s energy transition since the IRA was passed in 2022, the great majority of which has been in energy production. Energy storage, meanwhile, comprises just 7 per cent of planned clean power capital expenditure through 2030.
Balancing the flow of renewable energy requires greater investment in storage and transmission technologies. “At the moment a lot of this work is being done by lithium-ion batteries, which have been made significantly cheaper by the growth of the electric vehicle market,” says Nick Eyre, professor of Energy and Climate Policy at the University of Oxford. “These success stories have two things in common: small unit scales and mass manufacturing, which enable rapid learning and cost reductions; and targeted policy support, which combines ‘technology push’ to improve market readiness with ‘market pull’ to create stable demand.”
These success stories have two things in common: small unit scales and mass manufacturing, which enable rapid learning and cost reductions; and targeted policy support, which combines ‘technology push’ to improve market readiness with ‘market pull’ to create stable demand
Nick Eyre, professor of Energy and Climate Policy,
University of Oxford
Beyond the grid
As the electrification of global infrastructure picks up pace, new revenue-generating opportunities are likely to emerge in areas such as energy storage.
“Once you have electricity storage infrastructure, you can generate power price arbitrage opportunities,” says Zetchi, adding that it would then be possible to produce free renewable energy when the sun shines or wind blows, store it and then sell it when demand rises.
Once you have electricity storage infrastructure, you can generate power price arbitrage opportunities
Malik Zetchi, energy analyst, Pictet Wealth Management
As the global energy transition accelerates, the market for renewable energy is likely to grow. Some 80 per cent of grid investments made since 2015 have been focused on developed economies, but governments are starting to realise that reaching net zero requires a global approach. For example, at least half-a-dozen projects to transfer solar and wind energy between North Africa and Europe via undersea cables are currently under consideration.
Accelerating the energy transition requires solutions that can get more energy capacity online and manage its distribution to consumers with varying demands. Technology is key. Those who are able to find smart and simple solutions will be able to scale them around the world, accelerating the global energy transition and developing new revenue models as they go.
