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Market participants are seeking solutions to navigate the energy trilemma of balancing the need for energy affordability, security, and sustainability—and private capital is emerging as a key investment engine driving this transition. As investors increasingly allocate capital across private markets, evolving macro and financial conditions may require a need for greater transparency.

Industry leaders from public and private markets convened in Texas this month for CERAWeek 2024 (https://ceraweek.com/index.html), by S&P Global, to explore strategies for a multidimensional, multispeed, and multifuel energy transition. In this edition of Private Markets Monthly, Global Head of Private Markets Analytics Ruth Yang interviews Peter Gardett, executive director for financial and capital markets at S&P Global Commodity Insights, about the key takeaways from the premiere energy conference on the convergence of the energy transition and capital transition as market dynamics evolve.

Peter leads a dedicated research team that provides integrated energy transition advisory research to the financial sector. He has more than 20 years of experience in energy and commodities markets as a journalist, analyst, entrepreneur, and executive. Peter holds a degree from the University of St. Andrews in Scotland and lives in New York City.

The focus for CERAWeek this year was centralized on the multidimensional energy transition: "as a multispeed, multifueled, and multi-technology transition with different road maps and end points for different countries." Given the plethora of possibilities within this and the primary role of public markets in fueling climate commitments, how are market participants engaging with private capital to finance their respective transition projects?

Peter Gardett, Financial & Capital Markets Executive Director at S&P Global Commodity Insights:  While CERAWeek has historically focused on oil and gas, its sessions have increasingly expanded across a myriad of energy transition aspects and innovation—and this year's event (which took place in Houston, Texas, from March 18-22) zeroed in on the "Multidimensional Energy Transition: Markets, Climate, Technology, and Geopolitics," with record attendance. Attendees from around the world spanning international oil companies, cleantech firms, government officials, financial market participants, and beyond were eager to explore the "capital transition" funding the energy transition, meaning the collective of global investments and transactions committed to decarbonization in this new business model where capital has really migrated toward earlier stage, more technological-oriented and disruptive players.

Energy has reemerged as a great driving force in finance, unlocking capital for the sector and underpinning rising investment. In this newly competitive environment where both legacy fossil fuel and new cleantech assets are being funded despite higher interest rates, energy is attracting significant interest from investors. I was confident going into CERAWeek about the availability of public and private capital for existing and emerging technologies—but was sincerely struck by the level of conviction from market participants on the ground about the power of private markets. There was remarkable representation from private equity, private placement and infrastructure, and private debt stakeholders at CERAWeek 2024.

When we look at individual deals, we often see a combination of private-public financing. Different parties are taking different parts of the capital stack, not just banks but to also private debt players, and vice versa. The takeaway is that growth companies are accessing capital markets via private players, and at the same time private players are also increasingly integrating with traditional participants.

Most notably, clean technology and engineering growth companies repeatedly volunteered that they aren't even talking to traditional lenders or investors. These companies are billion-dollar unicorns in double-digit, rapid-growth stages who often feature artificial intelligence (AI) or data center-led business models—and they were explicitly clear in their desire to stay in private markets for as long as possible. We asked them outright: "Are you asking banks for financing?" And they told us explicitly that the banks aren't even on their radars; they have no real plans to approach or turn to commercial or traditional lenders and are talking to private equity and private debt only.

How are legacy energy players responding to these growth companies that are disrupting and investing in the energy transition with capital accessed through private markets?

Peter Gardett:  The growth of new technologies and innovations is slower than anticipated but still steady, whether from hydrogen's road to realization that's taking longer than expected or the expanding uptake of electric vehicles that isn't yet matching super enthusiastic forecasts. But these developments are strong, and might have truly disruptive effects on the midstream, refinery, and fuel sectors. Even a small shift in adoption toward more mainstream clean and green energy sources can affect the underlying economics of huge investments.

New energy technologies are increasingly substituting for legacy assets. But even with this as the landscape, the classic oil and gas conglomerates appear very committed to their legacy businesses. This may be surprising considering they have tremendous engineering talent and would be the leaders of new technologies if they made the investments and redefined what it means for them to operate in a changing world. Yet as the energy industry has endured the serious shocks of the last five years from the COVID-19 pandemic and geopolitical conflicts, these technologies have reached commercial scale without large legacy players. Prior to, and at, CERAWeek, the traditional oil companies have affirmed that they are focused on and sticking with their core business even in the context of decarbonization.

Discussions at CERAWeek with S&P Global Ratings President Martina Cheung explored how the energy transition creates new kinds of risks for financial markets to adapt to—and price. In what direction and shape are capital markets moving to keep pace with the evolution of energy markets here?

Peter Gardett:  The multidimensional energy transition brings a different kind of risk. Sizing and scaling up new projects brings new risks when the market needs to move from funding first, second, or third of a kind of singular strategic project type to a place where standardization is achieved and financing can flow more freely. This creates two choices: capital markets can find ways to finely slice and price the risk to sell it to those who actually want it, or wait for the energy transition to mature. And the former is materializing. Risk is being packaged in different securities and pricing, reflective of where capital markets are moving. Volatility in oil and gas markets has done little to meaningfully dissuade investors or limit capital availability to those firms as energy demand growth has proved resilient.

Facing this technological, regulatory, and geopolitical dislocation that has been unparalleled in the modern energy economy, capital and financial providers have responded with creativity and skill in providing solutions. By partnering with industry, technologists, and regulators, new risks have been priced and new structures have unleashed investment. From the rapid expansion of tagged bonds as a source of debt capital to equity-intensive private capital solutions and new kinds of state balance-sheet support, the experiences of the opening years of the 2020s have lessons for the remainder of the decade.

What is a meaningful trend to watch in a fractured global energy market?

Peter Gardett:  Divergences between electrification and industrial decarbonization will be interesting to watch take shape.

On the one hand, the electric vehicle market will likely end up moving faster in the latter half of this decade because this is a big market where investors are interested in writing big checks—there's also the requirements for the built environment matching with low-cost renewable power, their pollution-minimizing effects, and public policy support incentivizing long-term financing opportunities with tax incentives.

On the other hand, industrial is where we're only beginning to see private markets make an appearance, via debt, because in many places these are large, fixed assets and encompass everything you can't decarbonize by electrifying it. Private firms are hoping to be able to take on this big opportunity: at least 60% of the emissions' journey to get to net-zero is in hard to abate sectors.

Hydrogen production, for example, can easily require 90% debt financing. Hydrogen supply and demand dynamics have become disjointed in the last few years as steadily rising usage of the molecule meets highly uneven supply additions. Low carbon hydrogen supply outlooks have surged because of the global race among governments to demonstrate policy commitments to the "future fuel."

And because scale at the point of production is essential to sector economics, megaprojects are dominating the project pipeline for low-carbon hydrogen. Without tonnage and term demand commitments from offtakers, even generous government incentives struggle to create the cash flow required for debt raises. Higher capital costs only intensify this issue of scale, especially as interest-rate shifts in the last 36 months have significantly reworked overall hydrogen project economics. This sets the stage for another potential opportunity for private capital to be able to step in and take risks that other capital providers might avoid.

Writer: Molly Mintz