The global energy transition, the historic shift to low-carbon emission economies, continues to gain traction as more and more countries proceed on the path to sustainable development in all its forms.   

Key challenges undoubtedly arise as a result of such a significant transformation. One challenge is the threat to the business models of incumbent energy companies; another is the substantial capital funding needed to ensure the success of the transition.  

These challenges present a wealth of opportunities, however. There are compelling investment opportunities in infrastructure and technology companies along the entire energy value chain and in interconnected sectors. This transition is profoundly remaking global energy markets with ramifications for every sector of the economy.

To gain greater insight into the global energy transition, it is worth identifying its three main macro drivers: decarbonisation, electrification, and digitisation. Below, we assess their impact and consider the investment opportunities each presents:

•    Decarbonisation

A total of 195 countries agreed in 2015 to limit the rise in global average temperature this century to well under 2°C, relative to pre-industrial levels, and to pursue efforts to limit the rise to 1.5°C. The deal, known as the Paris Agreement, was the result of six years of negotiations. Meeting the first target will require average annual investments in the energy sector of about USD 3.5 trillion between 2016 and 2050, according to the International Energy Agency.

A meaningful reduction in emissions is dependent on a combination of measures, including low-carbon electricity generation, low-emission transport, and more efficient residential and industrial energy usage.

To achieve this, funding is necessary both for the design and construction of real assets along the energy value chain, and for innovative companies whose technology is helping to facilitate the global energy transition. Opportunities for investment include upgrading or replacing existing infrastructure and assets, as well as increasing their efficiency by deploying new technologies and business models.

•    Electrification
 
The rising share of electricity in total energy consumption reflects a shift in consumer preferences towards a more efficient and cleaner source of energy at the point of use. This shift in primary energy consumption is further facilitated by new technologies and efficiency improvements across transport, heating, cooling, and industrial processes.

Potential investment opportunities in this area could include both real assets (e.g., efficient heating and cooling technologies or electric transport charging infrastructure) and corporate investments, which would provide growth capital to companies with innovative technologies or services.

•    Digitisation

Affordable information and communication technologies (ICTs) are digitising energy generation, distribution and consumption, offering significant operational efficiencies (e.g., energy savings).

In the context of the energy sector, the rapidly decreasing costs of ICT allow for: first, exponential growth of real-time data collection and exchange; second, the automation of certain processes and control systems; and third, data-driven strategies and decision-making, from the operation of assets to interaction with customers. The growth of renewable energy and the rise of small-scale, distributed energy resources − as well as the roll-out of smart meters, and other smart appliances − have resulted in a vast number of connected devices providing data across the entire value chain.

Specialist skills, which historically have not been widespread in the energy sector, open the door to investment opportunities driven by digitisation. One example is the provision of electricity system balancing services, which help energy consumers with flexible demand patterns to realise savings.

All three of these macro drivers share the need for significant amounts of financing, as well as the adoption of distinct and diverse funding approaches. Stakeholders will have to judiciously promote this historic global investment opportunity, while investors will need foresight to commit financial capital to the long-term projects that matter in our race to build a sustainable future for all.

Green finance and the global energy transition are two sides of the same coin. If green finance is about the disincentives that push companies away from high-carbon usage, the global energy transition is about the pull of attractive new technologies to achieve the same end. Ultimately, the transition’s success will rely on the willingness of investors to commit large amounts of capital.

To discuss on this in more detail, you can meet Exergy at WGES 2019, which takes place on October 20 and 21 at Dubai International Convention and Exhibition Centre.

About the author

Erich Becker is founder and managing partner of Exergy Capital Management, a London-based investment firm focusing on real assets, infrastructure and innovative companies throughout the energy value chain.