Investing in the energy transition

While we’ve arguably never lived in more uncertain times, one thing is clear: the energy transition is gathering pace and prominence – both as a topic of discussion and as an investment opportunity.

It’s impossible to predict exactly how capital allocation behaviour for power and renewables will develop over the next two decades. However, we can reasonably expect two things: that active investors will continue to take the lead in mobilising capital in the risk-on spectrum of energy transition infrastructure for the foreseeable future; and that these firms will continue to sell down assets to risk-off investors.

So, what do major investors need to know to capitalise on the opportunity offered by the energy transition over the coming decades? This report outlines six capital allocation principles to keep in mind.

1. Don’t underestimate the energy transition investment opportunity

Investors tend to underestimate the opportunity set as headline wind and solar spend numbers tend to look flat at around US$200-250 billion a year. However, flat headline total spend numbers are primarily a function of wind and solar cost per kW declines, rather than MW deployment reductions. Capital allocators should think about the cumulative installed base rather than the annual installed base.

The fragmentation of ownership in the power value chain means it’s also easy to forget that the energy transition narrative is about transmission and distribution (T&D) investments as well as generation. Allocators could capitalise on the opportunity in T&D since many markets, such as Brazil and Greece, offer authorised returns of 8-12%, which is better than contracted wind and solar in many OECD markets.