Financing the energy transition

The 'decade of deployment' is no longer in the future – it is already underway. The clearest way to see this change in action is in the hundreds of billions of dollars in direct investments and capital market transactions this year.

The energy transition is being advanced by an unprecedented level of investment in projects, innovation and new technologies. Focusing on energy transition financing further reinforces the tremendous complexity and uncertainty on the path to net zero. In the details of the deals, however, we can start to see what will shape the "decade of deployment," which kicked off with the passage of the 2022 Inflation Reduction Act in the US.

The deployment decade is already looking different from what policymakers and technologists who have advocated for changes in the economy linked to emissions goals had forecasted.

What is clear is that the energy transition will not be linear. Capital is reshaping the landscape and geopolitical shifts are driving market transformation. In some cases, this is expediting clean technology adoption; in others, it is reframing the focus on energy security and affordability. In many parts of the global economy, the tradeoffs between technology maturity, cost dynamics and emissions outlooks remain challenging for capital allocators and investors.

Public equity markets and banks, still the predominant source of capital, along with rapidly expanding private markets, are helping move billions of dollars into energy transition projects.

More than $500 billion was invested in energy transition during 2023. But the figures do not capture the full impact of this historic acceleration in activity. Private capital funds have raised roughly $200 billion since August 2022 for new funds and have already invested roughly half of that amount, much of it into renewable power production and for assets that are often considered to be early stage or emerging technology. This has the potential to change what we traditionally think of as the ownership profile of power sector utilities.

Across the board, new participants are entering energy markets, with technology firms and real estate owners playing important and evolving roles. The addition of batteries, electric vehicle charging stations and distributed solar generation as part of upgrades to commercial property have been a major part of post-COVID development and redevelopment trends. Estimates for the low-carbon power required for new data centers associated with artificial intelligence mean the sector's demand could run as high as 21% of current installed global electricity capacity, according to the Massachusetts Institute of Technology. Large natural resource companies, midstream firms and energy consumers are affected by new counterparties, new revenue streams and evolving mandates for electrification and digitalization from investors and regulators.

With over half a trillion dollars in investment deployed over the last 18 months, and significantly more announced investments still filling out the sector's capital stack, energy transition financing has firmly shifted in scale and speed even as supply chains, permitting and regulators struggle to keep up with the growing queue of both financed and planned projects.

Capital influx is leading certain areas to advance more quickly than others. Battery deployment and manufacturing are accelerating sharply, while areas like carbon capture and storage still lag on a relative basis.

A recent S&P Global Commodity Insights analysis of transaction data showed that 82% of private capital energy transition investment was in electrification and the associated deployment of renewable power between August 2022 and August 2023, while only 18% was in decarbonization technologies for heavy industry. These varying levels of investment may bring about other effects, lead to price volatility and obstruct certain trajectories while displacing established business models.

The IRA is the US's approach to combatting climate change through a series of tax incentives, grants and loans for clean energy. While the incentives in the IRA have been transformational for the world's largest economy, private capital has also played a major role in energy transition investing globally. Approximately 60% of all private equity investment in energy transition in 2023 has been made outside of the US. Taken together, global incentives came into a market where solar, wind and battery technologies were already getting cheaper, thanks to compounding efficiency gains. They also aligned with industrial-infrastructure renewal projects, as part of economies competing in manufacturing and supply chains.

Capital is flowing unevenly across economies and regions. Investment has been highly concentrated in Global North economies, even as higher growth rates and existing shortfalls in energy supply make the potential impact of clean energy investment in the Global South more impactful. The annual global gap in renewable energy investing may be as high as $700 billion, according to the latest S&P Global reference forecast. With $8 of every $10 of current renewable energy investment going to projects in developed economies plus China, a majority of the world's population is being left behind even as Global North countries accelerate both private and public sector investment.

Despite the renewable power and electrification-of-everything initiatives, the energy transition investment that is visible in S&P Global data has yet to be fully felt in energy markets. Adding enormous amounts of very low-cost solar and batteries to grids and new manufacturing will take time to appear in existing business models and infrastructure that were built to capture changes in supply fundamentals.

As these changes are absorbed, energy market investors, companies and traders are finding that with money available and demand in place, they can rely on many of their existing skills and toolsets for making investment decisions about energy transition opportunities. The work of matching emerging supply with shifting demand is the role of energy and commodity markets and is highly relevant for clean technologies as well.

Staying close to market fundamentals, and using thoughtful and transparent pricing methodologies, energy financiers and institutional investors have been able to match longer-duration capital with bigger bets on earlier stage technologies set to deploy later this decade, including hydrogen and carbon capture, utilization and storage.

New investment, enduring expertise

In energy transition investing, as in established energy markets, the details matter. S&P Global is putting resources to work early by providing price indications for early-stage technologies and providing price assessments and benchmarks for markets poised for disruption. The real differentiation comes from understanding the pace at which various energy segments are evolving because the race is on to identify optimal pathways that companies can adopt to meet their net-zero goals.

This is a natural next step for businesses with a strong legacy of providing energy markets with new tools, expanded data and more actionable insights. S&P Global remains committed to expanding our coverage of areas including transition metals insights, power and renewable energy project data and portfolio tools, and price assessments for carbon markets and low carbon commodities.

This energy transition transformation is different in scope and scale from major energy market reshaping events of recent decades, such as the Shale Revolution or the collapse of the Soviet Union. But the tools required to understand and adapt to it – transparency, reliable data and actionable insight – are fundamentally the same, both for legacy hydrocarbons and for those parts of the energy market where risks and opportunities are just beginning to emerge.

This article first appeared in the December edition of Commodity Insights Magazine .