Investing in real assets for the energy transition
The global green energy transition is driving the formation of new real assets. This shift toward an asset-rich electric economy is here to stay — but investors need to look out for some pitfalls along the way.
The replacement of fossil fuels with clean energy is the most important element in the decarbonization of our economies. To stem the impacts of climate change, almost all power generation will have to come from renewable sources like wind and solar. This transition is already well under way. By 2030, more than half of the world’s electricity is expected to come from renewable or low-emission sources. Beyond 2030, clean energy is expected to meet all further growth in global demand. As a result, the next 25 years will see an investment boom in clean energy assets.
“The energy transition space is huge,” said Minesh Mashru, Global Head of Infrastructure Investing at Cambridge Associates. He estimates it will require investment outlays of USD1.7 trillion a year, with about USD700 billion to USD800 billion a year going to renewables. “Then there are also huge amounts of investment on other real assets that are transition-related,” he said.
But for decarbonization to be complete, energy-intensive sectors of the economy such as transport and heavy industry will also have to switch to cleaner fuels. This will require using new technologies that are still evolving, like clean hydrogen fuels, and business models that have yet to be proven. For real asset investors this amounts to a classic challenge: a once-in-an-era opportunity bound up with a host of uncertainties and risks.
Political risk — or political noise?
Political risk is part of that challenge, because energy transition is as much about public policy as it is about private investment. On some measures that political risk is rising. This factor is captured in the World Economic Forum’s Energy Transition Index, which tracks transition “momentum” — a combination of current pledges, public policies, and real-world energy transition investments. The Index shows that momentum remains positive, but has slowed significantly in the past two years as some governments and large companies have scaled back their carbon and fossil-fuel reduction targets.
Many investors counter that the shifting politics of energy transition are unlikely to disrupt the longer-term investment trend. What matters is the cost of alternative energy sources, because investors will back the lowest cost of generation, whatever the political mood.
“Regardless of what politicians say, their governments are still investing in transition,” said Vipul Shetty, Head of Energy Transition Solutions at global insurance broking firm Howden. “There’s massive funding in Europe and government support in Asia is starting to increase. The US is still going forward with many carbon capture and hydrogen projects, and Japanese developers are coming in with new technologies. This is all regardless of political changes.”
While politics may blow hot and cold, recent forecasts suggest that energy transition real asset formation will continue at an extraordinary rate. According to the International Renewable Energy Agency (IRENA), cumulative 2024–30 global investment in renewables and associated carbon-reduction technologies under the 1.5°C warming scenario set by the Paris Agreement will need to amount to USD47 trillion.