Beyond renewables: Investing in the global energy transition
The global push to decarbonise will require investment in a wide range of technologies and infrastructure, bringing a diverse array of potential opportunities for investors.
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Key takeaways:
- The global energy transition will require investment in a wide range of technologies alongside wind and solar.
- These technologies support both the reduction and mitigation of carbon emissions, as well as enabling renewable energy adoption and transmission.
- Investors seeking to capitalise on the energy transition should seek a diversified portfolio of these assets, technologies and opportunities, to mitigate specific risks and maximise potential upside.
As the world moves towards a more sustainable future, investing in the global energy transition has become increasingly appealing. The most established way to access this key thematic is by investing in renewable electricity generation, particularly in wind and solar assets. These assets offer proven track records and stable cash flows, which act as a key component of a well-diversified portfolio.
In addition to electricity generation, the transition to a low-carbon global economy will require substantial investment in a wide range of adjacent technologies and infrastructure. Specifically, achieving ambitions such as the European Union's net-zero target by 2050 will require development and adoption of technologies that support the evolution of next-generation energy solutions, and that upgrade the world’s energy infrastructure to enable a low-carbon future.
This article aims to provide a comprehensive overview of investment opportunities for infrastructure investors seeking to capitalise on the energy transition, focusing on these broader technologies and their role in the portfolio construction.
Next-Generation Energy Solutions
1. Enhance Battery Storage: Expand systems to support renewables
Investment in battery storage infrastructure is expected to play a crucial role in grid flexibility, reliability, and the wider adoption of renewable energy sources, which have faced criticism related to capacity volatility compared to conventional energy sources.
Battery energy storage systems offer more than just short-term renewable electricity storage – they can also serve as critical assets for grid stability and balancing, providing ancillary services to the electricity system (see chart). As renewable energy generation continues to grow, investment opportunities extend to both co-located and standalone battery storage projects.
Co-located projects involve integrating batteries with renewable energy generation assets, such as wind or solar farms. These projects enhance the value of renewable energy by enabling the storage of excess electricity during periods of low demand or high generation. When demand increases or generation decreases, stored electricity can be released back into the grid, helping to stabilise grid operations and maximise revenue potential.
Standalone storage projects, on the other hand, are independent facilities that provide grid services and participate in wholesale energy markets. These projects capitalise on the volatility of electricity prices, buying electricity when prices are low and selling it back to the grid when prices are high. Standalone storage projects can also support the integration of intermittent renewables by providing power during periods of low generation.
2. Boost Energy Efficiency: Smart solutions for demand-side management
Investments in energy efficiency focus on optimising energy consumption, and so reducing emissions, on the demand side. Smart solutions provide opportunities for enhancing energy efficiency in buildings, industrial processes, transportation, and other sectors.
A key opportunity within energy efficiency investment lies in the deployment of smart meters. Smart meters enable real-time monitoring of energy usage, providing consumers and companies with detailed information about their energy consumption patterns. This information empowers individuals and businesses to make informed decisions and adjust their energy use accordingly, leading to reduced waste and lower energy bills (see chart). Investment opportunities exist in the manufacturing and deployment of smart metering technologies, as well as the data analytics and software platforms that support energy management.
Efficient building solutions, such as insulation, energy-efficient lighting, and smart building management systems, also offer significant opportunities for investment. These solutions can reduce energy demand, enhance occupant comfort, and lower operational costs. Green building certifications and energy performance standards drive demand for energy-efficient building technologies and offer additional potential investment avenues.
Finally, investing in energy-efficient transportation solutions contributes to reducing carbon emissions from the transportation sector. Electric vehicle (EV) adoption is increasing rapidly, creating opportunities in particular in charging infrastructure (more on that in the next section), battery technology, and electric mobility services.
3. Develop Clean Fuels: Green hydrogen and alternatives
Investment in ‘green’ hydrogen infrastructure is particularly promising, as this clean fuel can serve multiple applications, such as fuelling ships or aircraft, providing high-temperature heat for industrial processes, manufacturing chemicals, and balancing intermittent renewable electricity generation. The production of green hydrogen through electrolysis, using renewable energy sources, has gained significant attention and investment due to its potential as a versatile and sustainable energy carrier which is carbon-free both in terms of production and utilisation. It is distinguished from ‘grey’ or ‘blue’ hydrogen, which still involve the use of fossil fuels in the extraction process.
Green hydrogen is an emerging area, but as the infrastructure expands investors can capitalise on opportunities in hydrogen production, storage, transportation, and the development of fuel cells. Substantial investment is required from both governments and the private sector to both increase the supply of green hydrogen, and to stimulate already rising demand. Financial returns are derived from sales of hydrogen into end markets, with risks related to the nascency of the technologies to enable demand typically offset by government subsidies and long-term contracts.
Investment opportunities in clean fuels extend beyond green hydrogen to derived alternatives such as eMethanol, ammonia and sustainable aviation fuel. These fuels offer low-carbon alternatives for various sectors, including transportation, industrial processes and power generation (see chart).
Investing in clean fuel production facilities, storage infrastructure and transportation networks can capture the growing demand for these fuels, as countries strive to decarbonise their economies. Moreover, the development of a ‘Bio CO2’ supply chain is crucial for the production of many clean fuels, providing additional investment opportunities. The image above illustrates how the flexibility of hydrogen allows for many useful end products.
Infrastructure for a Low-Carbon Future
1. Expand EV Charging Networks: Accelerate transportation electrification
The transition to EVs will play a transformative role in decarbonising the transportation sector. Investment opportunities in EV charging infrastructure are driven by the need to support the increasing adoption of EVs and ensure convenient charging options for EV users, which will in turn stimulate further EV demand and contribute to reducing greenhouse gas emissions and promoting sustainable transportation solutions.
Investments in EV charging infrastructure involve the development, installation and operation of charging stations. This includes both public charging stations in commercial areas and along highways, as well as private charging solutions for residential and commercial properties. Investment in fast-charging networks along major transportation corridors is crucial for enabling long-distance travel with EVs.
EV charging infrastructure investments are influenced by government policies, regulations and initiatives aimed at promoting EV adoption. Collaboration with governments, utilities, and transportation companies can also create investment opportunities in EV infrastructure deployment.
2. Decarbonise Heating Systems: Retrofit residential and commercial properties
Investment opportunities in heating technologies are driven by the need to decarbonise residential and commercial properties. Heat pumps, which extract renewable heat from the air, ground or water sources, offer an efficient and environmentally-friendly alternative to traditional heating systems. These systems provide both space heating and hot water, reducing carbon emissions and energy consumption.
Heat pumps can be deployed in various settings, including single-family homes, apartment buildings and commercial properties. As governments and institutions set ambitious targets to reduce greenhouse gas emissions, incentives and support schemes are being introduced to promote the adoption of heat pumps. This creates investment opportunities in manufacturing, installation, and for service companies within the heat pump ecosystem.
Investment opportunities in heating also lie in the growth of district heating systems. District heating involves the central production and distribution of heat to multiple buildings or areas. Heat sources can include renewable technologies such as biomass, geothermal or waste heat recovery. Investments in district heating infrastructure support the decarbonisation of heat, enhance energy efficiency, and provide long-term, reliable heat supply to communities.
3. Modernise Transmission and Distribution: Strengthen grid infrastructure
As renewable energy generation continues to expand, upgrades to transmission and distribution infrastructure become essential. These upgrades facilitate the efficient and reliable transportation of electricity from generation sources to end consumers. Investment opportunities in grid infrastructure include the construction of new transmission lines, upgrading of existing infrastructure, and the development of interconnectors.
With the increasing penetration of renewable energy, local electrical grids require substantial upgrades to accommodate growing generation capacity. Grid investments aim to address the intermittent nature of renewable generation and optimise the integration of renewable energy sources into the existing grid system.
Interconnectors, which connect different regional grids, are crucial for transporting renewable energy from areas with high generation potential to areas with high demand. These large-scale infrastructure projects enable the efficient transmission of electricity, support cross-border energy trading, and enhance grid resilience.
Investments in grid infrastructure are underpinned by regulatory frameworks, government policies and incentives. They provide opportunities for long-term, stable returns while contributing to the decarbonisation and modernisation of the electricity grid.
4. Advance Carbon Capture Technologies: Invest in emissions reduction
Investments in carbon capture, utilisation and storage (CCUS) technologies play a vital role in mitigating carbon dioxide (CO2) emissions from various industries, especially those that are challenging to fully electrify or to transition to renewable energy sources. CCUS involves capturing, and then utilising or storing, CO2 emissions from power plants, industrial processes and other emission sources.
Investment opportunities in CCUS include the development of capture technologies, transportation infrastructure for captured CO2, and geological storage sites. Captured CO2 can be used in the production of chemicals, materials and fuels, contributing to a circular and low-carbon economy. Investments in novel carbon utilisation technologies and facilities enable the conversion of CO2 into valuable products, reducing reliance on fossil fuels and creating economic value from captured emissions.
Government policies, subsidy programs, and long-term agreements for CO2 off-take influence investment opportunities in CCUS projects, which are a critical tool to help countries achieve net-zero targets.
Opportunities across the energy transition: Portfolio construction
While there are exciting investment opportunities in the range of adjacent technologies across energy transition sectors, as noted above the majority of the current scale in this area remains in electricity generation through wind and solar assets. Based on data from Aurora Energy Research, the European and North American wind and solar market is expected to reach a value of $2 trillion by the end of the decade alone.
However, the long-term shift to a low-carbon global economy will require a substantial increase in investment across a broader range of solutions and technologies (see chart below). Many of these technologies will be critical to achieving global net-zero goals, presenting significant complementary investment opportunities over the long term.
In constructing an energy transition investment portfolio, recognising green electricity as a vital input for many energy transition technologies is crucial. By investing across the energy supply chain, investors can gain a competitive edge in acquiring, operating and understanding energy transition assets. Engaging in both electricity production and consumption also creates opportunities to generate contracted cash flows, which help manage the substantial electricity costs that can impact the operating expenses of many energy transition projects.
More broadly, diversification across technologies and sub-sectors is essential to provide stability and mitigate idiosyncratic risks associated with specific sub-sectors. A well-rounded portfolio should therefore include both wind and solar assets due to their established cash flows, with diversified exposure to a wider range of adjacent technologies providing valuable potential for additional upside.
Early-stage investments in emerging technologies and sectors often benefit from government support schemes, which can enhance income certainty and reduce risks. However, the wider energy transition landscape is still evolving, with fewer operating assets compared to more established sectors. Many opportunities carry greenfield risk, which can present higher growth potential but also increased uncertainty. Investors should carefully assess these risks and consider the expertise of their investment managers in navigating this dynamic environment.
At Schroders Greencoat, we construct our energy transition portfolios by carefully integrating these principles. Our approach emphasises diversification across various technologies and sub-sectors, ensuring that we capture a wide range of revenue streams while managing risk effectively. By focusing on established assets like wind and solar, alongside emerging sectors, we aim to position our portfolios for sustainable growth. Our commitment to understanding unique risks and leveraging government support schemes further enhances income generation and stability. Ultimately, we believe this approach offers strong potential to both deliver attractive returns, as well as contribute to the broader goal of a low-carbon economy.
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