Energy Transition Investment: $21 Billion Bet on Future Growth

The Resilience of the Energy Transition

Recent political actions, including the revocation of clean energy tax credits by congressional Republicans and potential grant cancellations under a future administration, have created the impression that the energy transition is facing significant challenges.

However, indicators suggest that the situation may not be as dire as initial reports indicate.

Strong Investor Confidence

Investor confidence, as evidenced by the substantial size of newly established funds, remains robust. Furthermore, an increasing number of entrepreneurs are entering this dynamic sector. Essentially, both financial resources and human capital are being allocated with the expectation that the shift towards sustainable energy will persist.

Brookfield, a prominent Canadian infrastructure and asset management firm, recently announced the successful raising of $20 billion for its second energy transition fund. A significant $5 billion from this fund has already been invested in renewable energy projects, specifically those centered around solar, wind, and battery storage technologies.

Notably, this latest fund is 33% larger than Brookfield’s inaugural transition fund from 2021. The earlier fund was raised during a period of exceptionally low interest rates and economic exuberance, prompting speculation about a potential bubble in the clean energy market. The success of this larger fund, secured in a more cautious economic climate, suggests that investors anticipate sustained growth in this area.

Venture Capital Inflows

Energy Impact Partners (EIP) also revealed this week the closing of its third flagship fund, securing $1.36 billion in commitments. This represents a 40% increase compared to its previous fund.

EIP operates as a venture fund, focusing its investments on startups that have already demonstrated initial success. According to PitchBook, the median investment size for EIP is $26 million.

The climate tech sector has experienced a surge in new founder activity over the past five years, largely driven by the increasingly undeniable impacts of a changing climate. While not all startups will succeed, enough have proven viable to attract further investment in their continued development.

EIP has already allocated approximately 25% of its new fund to companies such as GridBeyond, which specializes in managing distributed energy resources, and Quilt, a manufacturer of consumer-grade heat pumps.

Long-Term Investment Trends

Investment patterns established over the past decade continue to hold strong. Since 2014, substantial limited partners, including pension funds and endowments, have committed close to $1 trillion to the energy transition.

While climate tech venture capitalists are projected to raise a similar amount of capital as last year, they are currently exceeding the performance of the broader venture capital market, capturing a larger share of overall commitments. This year, they have secured 3.8% of all venture capital, nearly doubling their share from 2020, as reported by PitchBook.

Headwinds and Global Outlook

Despite these positive trends, the U.S. faces near-term obstacles.

A future administration has expressed open opposition to the energy transition and is actively working to reverse existing progress. Consequently, the International Energy Agency (IEA) has lowered its forecast for renewable energy adoption in the U.S., predicting a 45% reduction in rollout between now and 2030 compared to last year’s projections.

However, global renewable capacity is still anticipated to double by 2030, primarily fueled by solar installations in China, India, the European Union, and Sub-Saharan Africa.

The IEA is not alone in its optimistic outlook. Analysts at DNV predict that renewables will supply 65% of the world’s electricity by 2040 and nearly 100% by 2060.

While achieving net-zero carbon emissions by 2050 may require further acceleration, DNV acknowledges that transitions inevitably encounter challenges. The current momentum, however, strongly suggests a future with increased, rather than diminished, reliance on renewable energy sources.