As the need to decarbonize clashes with soaring energy demands, the world faces an unprecedented energy challenge requiring a vast amount of capital.
And private investors are poised to play a pivotal role in supplying the money.
In the UK, this energy conundrum is particularly acute for the newly seated Labour government, which intends to bolster the nation’s energy security while fulfilling its own climate-policy pledges, all the while facing a yawning £22 billion (about $28 billion) hole in its budget.
Even before new finance minister Rachel Reeves recently acknowledged that the UK’s finances were “worse than expected,” she made it clear that the government would lean on private investors to reach its development goals. The UK alone is estimated to need about £900 billion in capital outlays to hit its net-zero target by 2050.
The UK is almost a microcosm of a worldwide energy transition quandary—where the amount of investment needed, globally, is closer to $125 trillion. While each market faces its unique set of circumstances and advantages, the same structural trends and questions remain: Where do we get the money?
That dilemma can be seen in two ways. First, there’s the question of how to fund new sources of renewable energy and build the accompanying storage infrastructure to support those new sources. Second, the world must modernize power grids to handle more demand stemming from things like the proliferation of electric vehicle charging networks and power-hungry data centers fueling digitalization and AI adoption.
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Take Ireland, where a boom in data centers is putting urgent pressure on the power grids and renewable power sources can’t be built fast enough.
“There is a big imbalance in energy needs,” said Alex O’Cinneide, founder and CEO of Gore Street Capital. “We continue to build energy storage to keep the grid in balance but the problem is the speed with which we can bring assets onto the grid.”
And then there are data centers, which make up some 2.5% of global electricity consumption (a figure that’s only going to climb), according to Benn Mikula, CEO of Cordiant Capital. Networks for transmitting data add another 1.5% percent.
“You’re talking about consumption of electricity that dwarfs some basic industries by quite a margin,” Mikula said. “And the growth rates are only going to be accelerated by AI.”
For governments across the world, the hope is to unlock even more capital to fund projects. We have already seen this in the US with the Inflation Reduction Act, which introduced tax incentives for energy transition projects. In the European Union, meanwhile, there is the Green Deal Industrial Plan, a regulatory framework aimed at speeding up approvals for clean energy projects and simplifying the process for granting aid.
In the UK, the government has launched Great British Energy, a state investment body that will work with the energy department and a new National Wealth Fund, which has been allocated £7.3 billion in funding from the UK Infrastructure Bank, a state-owned development bank.
Private capital has already honed in on the world’s growing energy need, with several of the largest managers launching strategies targeting energy infrastructure. For example, KKR is currently in the market with a $7 billion fund targeting energy transition investments. As of April, Blackstone had raised $1 billion for its latest energy transition vehicle.
While fundraising activity has dipped in the past year, infrastructure investors are sitting on about $334 billion of dry powder. PitchBook data shows that the total capital raised by infrastructure funds reached a peak in 2022 with about $138.5 billion raised across 122 globally. The previous year, 2021, saw a peak in the total number of fund closes, with 146 closing on $132.7 billion.
Two of the largest fundraising hauls came at the end of the 2023, with Brookfield Asset Management gathering $28 billion for its fifth infrastructure fund in December. Around the same time, the United Arab Emirates announced $30 billion vehicle with the backing of BlackRock, TPG and Brookfield.
Looking at the PE investment trends for the past few years, PitchBook data shows that while 2022 was a recent peak in terms of PE investment in energy companies in the infrastructure vertical, last year was a recent nadir in terms of both number of deals and the total capital invested, with just under $10 billion invested across 38 deals. This has recovered somewhat this year with over $11 billion invested across 19 deals.
“In 2023, we have indeed observed a deceleration in infrastructure deal volume, but this was less about investor appetite and more about the scarcity of traditional, large-cap deals coming to market,” said Jack Paris, CEO at InfraRed Capital Partners. “However, deal volume in the mid-market has remained undeterred, with core-plus and value-added segments thriving on the back of digital and energy revolutions, particularly for transactions characterized by smaller ticket sizes around the €150 million mark.”
Part of the reason for the dearth of large-cap deals has been higher interest rates making it harder to secure deal financing—a trend that has been seen across the broader deal market. However, with interest rates expected to come down, that is changing. Indeed, there have been some more big ticket deals this year. Two that took place in Q2 were Brookfield’s €6.1 billion acquisition of French solar and wind power developer Neoen and Energy Capital Partners’ $2.55 billion purchase of global energy infrastructure company Atlantica Sustainable Infrastructure.
Looking forward, Cordiant’s Mikula says the main role of government will be less about providing capital than about building a regulatory framework conducive for private capital investment.
“Society depends on a digital economy and it wants very clearly an economy where energy is abundant and cleaner, and this creates great investment opportunities,” he said. “The private capital sector is extremely well positioned to meet those demands and the government’s role is not to fund it, but to put the right playing field in place.”
Featured image by Joey Schaffer/PitchBook News
