Alex Brierley, co-head of Octopus Energy Generation’s fund management team, underscores the investment potential in the green energy shift and the role of institutional investors in driving a sustainable future.
The need to shift to a greener, cheaper, and fairer energy system couldn’t be more urgent. The impact of expensive fossil fuels, climate change and extreme weather events are becoming increasingly familiar front-page stories.
There’s no doubt the solution is to shift the global energy system to 100% renewables. The International Energy Agency’s (IEA) latest forecasts show the tipping point in favour of net zero is here. The IEA projects that consumption of three major fossil fuels – oil, natural gas and coal – will all peak before 2030 and start to decline. This is a massive opportunity which will require colossal investment.
Global investment in the low-carbon energy transition totalled $1.1 trillion in 2022, according to Bloomberg New Energy Finance. McKinsey forecasts that $9.2 trillion is required to spend alone on renewable energy projects a year globally, underscoring just how much more capital is needed to reach net-zero emissions by 2050. There’s massive untapped potential for institutional investors to be catalysts turbocharging the investment needed for this transition.
Green infrastructure opportunities
Traditional renewables like solar and wind farms are helping unlock this green future. Alongside this, there’s also a rapidly growing range of technologies facilitating the energy transition outside of these traditional assets.
From heat pumps to replace polluting gas boilers to alternative fuels like green hydrogen for industrial businesses that are hard to electrify, electric vehicle (EV) charge point infrastructure, and much more.
These clean technologies are needed to help economies decarbonise – and in many ways, they’re only at the start of the massive role they will play as homes and businesses start to wean themselves off fossil fuels.
The rise in innovative clean energy projects is creating abundant investment opportunities. Investors are increasingly seeing opportunities to achieve inflation-linked returns from green energy infrastructure projects, and by supporting this infrastructure, they are contributing to greening the grid.
Transformational energy transition tech
Energy transition technologies are being developed by companies focusing on green solutions that contribute to the goal of achieving net zero emissions. From the inception of their projects, these companies have worked on innovative approaches to green energy.
For instance, HYRO, a collaboration between Octopus Energy Generation and RES, is exploring green hydrogen solutions to aid industrial businesses in reducing carbon emissions in scenarios where electrification isn’t feasible. Meanwhile, the Kensa Group is working towards a target of setting up 50,000 ground-source heat pumps annually by 2030 in the UK, which aims to decrease the costs associated with heat pumps and lessen the dependence on gas boilers.
Additionally, Manchester’s Be.EV public EV charging network is in the process of adding 1,000 new EV charging stations across the northern UK.
Different institutional investor strategies
Importantly, there’s no one-size-fits-all approach to investment in the energy transition.Historically, pension funds have looked to long-term, low-risk infrastructure assets to provide steady and reliable returns and inflation protection. However, each institutional investor has different needs that change over time, and the broad spread of green opportunities has huge potential to facilitate this.
For example, mature Defined Benefit pension schemes may favour the long-term, predictable cash flows and inflation protection that characterise operational infrastructure assets like wind and solar farms.
Meanwhile, Defined Contribution pension schemes with younger members may seek predictable cash yield and inflation protection as well as higher growth, which can be driven by greater exposure to investments in innovative, fast-growth businesses enabling the energy transition.
Net zero opportunities
The pace of net zero-related innovation is increasing, and there is a massive opportunity for investors to tap into everything the energy transition offers and make a truly positive impact with their money.
Wind and solar power will continue to play an integral role within this, alongside an increasing number of green technologies helping decarbonise areas of the economy like big industry, heating and transport.
Considering the multi-trillion dollar investment opportunity needed to help realise net zero, there are undoubtedly opportunities for institutional investors of all shapes and sizes – whether the objective is growth, income, inflation protection, capital preservation or something else entirely.
This is a fast-moving space. And there’s ample opportunity for institutional investors to lead the charge and back innovative solutions combating the key issue of our time: how we shift towards a clean and secure energy system.
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