Investing in The Energy Transition | Chief Investment Officer

CIO’s recent Investing in The Energy Transition webinar, during which experts in the field discussed trends, research and global developments in the sector of which investors should be aware.

Webinar speakers included Deborah Byers, retired partner at EY, John DiMarco, managing director of Igneo Infrastructure Partners, and Bruce Usher, professor at Columbia Business School and Columbia Climate School, all individuals with expertise in energy, and was moderated by CIO Executive Editor Amy Resnick.

Where Investors Should Focus

Investors should be wary of multi-decade forecasts for emerging energy sources’ costs. Usher offered the example of solar energy, and how it was a very miniscule source of energy in the early 2000s but grew exponentially over the next two decades.

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“If you added up all the solar power on the planet back in 2001, [it] totaled the output of about one coal fired power plant, and the price was about $5 or more per watt,” Usher said. He noted that globally, around 200 to 300 coal plants worth of solar were added in a single year in 2023, with a cost as low as 20 cents per watt. “No one forecasted that two decades ago. I certainly didn’t, so I think we have to be cautious about forecasting.”

DiMarco pointed to other examples, such as battery storage, which was not on investors’ radars seven years ago, but is now on the top of mind of investors when thinking about decarbonization and transitioning the power grid.

“So, we don’t know when other technologies are going to have their day, but it does mean to the extent that you’re investing in them now, you really do need to think about the risks associated with those and be compensated accordingly,” DiMarco said.

Decarbonization efforts, and the growing use of electricity overall, means energy consumption will increase across all facets of the economy, especially driven by the growth of artificial intelligence services, which demand a lot of power “Now, [AI] is very much driving the data center business, and the data center business is very much driving the power business and the power business is driven by renewables,” DiMarco said.

Energy transition investments fall into two buckets, according to Usher. The first are commercially viable businesses that offer products at scale, this category includes renewables like wind and solar. The challenge for investments in this category, according to DiMarco and Usher, is that returns are low. “It’s very challenging to get any sort of outperformance in those buckets,” Usher said. Risk is low as well.

The other bucket, according to Usher, are proven technologies, but ones that are not built out at scale or are commercially competitive. These are niche and emerging technologies, but they have the potential to have higher returns. This bucket includes hydrogen power, carbon capture and other less-developed technologies.

“Those technologies offer very attractive potential returns, but the risks are really high,” Usher said of these emerging technologies.

Global Policy

There are many different regulatory and disclosure regimes coming out across the world, regulating things from carbon emissions to ensuring that portfolios are net zero by a certain date. The panel agreed that there are many ways to take advantage of regulatory requirements related to climate and energy.

Large corporations are increasingly interested in what their carbon footprints are, especially over the last five years, DiMarco said.

The panel agreed that attitudes toward climate change and climate reporting vary by geography. In Europe, it is a core focus of many companies and regulators, but in the U.S., things are choppier.

The panel also agreed that consumers are not willing to pay a premium to use green power sources. In many cases, many emerging technologies in climate transition were propped up by government tax credits and other supports, Byers said. “Solar and wind [have] become quite economic without the credit, but that was instrumental in getting it there.”

Climate reporting transparency is important, Usher said, but it is not as important as people think, for two reasons. “It doesn’t change behavior a lot knowing what the emissions are for various businesses,” Usher said. The second reason is that there is controversy around reporting standards like Scope 3, and the possibility that some metrics may not be accurate. Scope 3 emissions result from companies’ supply chains and are not directly controlled by the companies that disclose them.

The panel agreed that one major factor that explains why the energy transition is so difficult, at least in the U.S., is local zoning and permitting. “Try building things in America today. It is really hard to get permitting, really hard to get interconnection with the local laws, state laws, the regulations you need to get through over and over again,” Usher said.

As a result, projects get delayed, and a delayed project means delayed investor returns. DiMarco brought up an example of a power transmission project that was approved in the past two years, but was first proposed in 2006. “Not only do you need extremely high returns to justify that risk, but you need to be comfortable with putting capital out the door … and then maybe not seeing any fruits of that for a decade.”