The global energy transition accelerates and constantly evolves – as do the required investments into the underlying infrastructure. In addition to large-scale assets, much more capital is needed to support mid-sized clean energy companies that develop and deliver smaller projects across markets and technologies, which can then be aggregated into well-diversified portfolios. Investment strategies that evolve accordingly create attractive new opportunities for capital providers.
The energy transition – the decarbonisation of global energy production, distribution, and usage – is both inevitable and remains a complex and formidable global challenge. It also represents a vast investment opportunity given the capital requirements.
In 2023, and for the first time, investments into renewable energy generation no longer accounted for the largest share in energy transition investment. According to BloombergNEF, investments in transport electrification took the first place, mainly driven by global electric vehicle adoption. [1]
This development underlines the fast pace at which the energy transition has been evolving in recent years. Energy transition is finally understood to encompass a very wide range of themes and sectors beyond energy production, which also includes grids, storage, end use efficiency (industrial, C&I and residential), electrification of carbon-intensive sectors (e.g. transport, heat) and other customer-facing clean energy solutions.
Reassuringly, capital flows increasingly match that widened understanding given the investment opportunities on offer. This trend has to continue, at scale, to accelerate the much-needed transition. According to the International Renewable Energy Agency’s “1.5°C Scenario”, renewable energy will require the largest investment over the next 27 years, followed closely by energy efficiency measures and investments in grid, energy storage, and end-use electrification. And the amounts are staggering – IRENA estimates that USD 130 trillion will have to be invested until 2050, or an average of USD 4.8 trillion per year [2].
The vast majority of required energy transition investments exhibit classic infrastructure characteristics: they involve long-life, physical assets that require high upfront capital outlays but have relatively low operating costs, provide essential services to their users, produce visible and often contracted cash flows, and are resilient to macroeconomic swings or general market movements.
To make an obvious but often overlooked point: the energy transition is only furthered when new assets are developed, constructed, operated, and financed (or existing infrastructure is transformed); acquiring existing “clean” assets does not do much for global decarbonisation.
Considering the most active energy transition themes, a few trends emerge: individual projects are smaller, more decentralised, more numerous, and are realised by an increasing variety of involved partners and stakeholders. The large-scale renewable energy projects of the first energy transition wave required commensurate investment at scale. The emerging, more decentralised, and fragmented nature of the current trends however require much more nuance on the part of investors and the ability to aggregate small- and mid-sized projects into larger portfolios.
These developments have also reshaped the landscape for project developers, operators, and aggregators. Today, there are a great number of dedicated and ambitious mid-sized clean energy companies such as renewable energy or storage developers, energy service companies, and electric vehicle charge-point operators, among others, with very specific expertise that have the ability to develop and implement these projects and are able to churn out substantial project pipelines. They are locally rooted, well connected, generate proprietary and high-quality project pipelines, have a better understanding of – and appreciation for – the respective environmental and social impacts of projects, have closer links to end customers, and are thus well-positioned to advance these projects.
As the energy transition progresses and evolves, so should investment strategies. Capital is increasingly needed to fund the activities of mid-sized clean energy companies delivering comparatively smaller projects aggregated into well-diversified portfolios. Capital is required to finance construction of underlying assets and to support the growth plans of these companies by funding project and business development activities.
What is needed is infrastructure capital, at institutional scale, to both grow the asset base and the companies that deliver them.
Beyond financial support, these companies can significantly benefit from specialist, global expertise provided by financiers. This may include, for example, guidance on corporate governance, environmental and social considerations, realising synergies in procurement, implementing best practice processes including for sustainability practices, support in sourcing debt financing, and integrating these companies into a wider network of likeminded clean energy players. Specialised energy transition investment managers can thus help these companies with capital and expertise to grow sustainably while gaining access to proprietary deal flow and enabling investors to deploy capital at scale at attractive risk-adjusted returns into highly diversified real asset portfolios.
The resulting returns on investments are underpinned by underlying project returns, as for traditional infrastructure investments. Above and beyond that – and depending on the respective investment structure – these investments have significant upside potential from internalised development premia, the growth of the investee company (platform value), and the seizing of value-add opportunities by way of active portfolio management.
The energy transition remains one of the biggest and most dynamic investment opportunities of our time. While the field of opportunity expands rapidly, the high pace of change and the emergence of new technologies and energy solutions add further complexity to the ongoing fragmentation of the energy sector. Unlocking the full potential of the energy transition therefore requires capital and specialised expertise to deliver the growth infrastructure investments required.
This article was authored by Marco van Daele, CEO of SUSI Partners.
[1] BloombergNEF (2024), Energy Transition Investment Trends 2024.
[2] IRENA (2023), Energy Transitions Outlook 2023.
