Private capital topping $1 trillion sits on the sidelines, awaiting transition investment opportunities: IHS Markit

At least a trillion dollars in private capital is waiting on the sidelines to back clean energy and climate risk solutions.

However, IHS Markit clean energy and finance analysts say those funds will not be fully deployed until investors can justify that the financial returns on renewable energy production and other clean energy technologies are high enough to attract more active investment.

The challenge for investors is to find projects that will meet dual goals of adding value for shareholders, while meeting clean energy goals, Roger Diwan, IHS Markit vice president for energy research for financial services, said during a 10 February webinar.

IHS Markit Climate and Cleantech Executive Editor Peter Gardett and Diwan discussed the prospects for financing the transition of the fossil-rich energy sector as a prelude to more in-depth sessions at the upcoming IHS Markit by CERAWeek conference, which is set to run from 7 March to 11 March in Houston.

They noted that all of the elements needed for investment in decarbonizing the energy sector are in play now.

As of January 2022, there is at least $272 billion in untapped and unallocated private equity fund money targeting cleantech investment and another $732 billion of infrastructure capital sitting among institutional investors awaiting deployment, Gardett said, citing Bank of International Settlement figures and his own research.

Green bonds come into their own

Gardett's own analysis of green bonds "fitted" to climate-risk reduction and cleantech projects revealed that the cleantech sector outraised the oil and natural gas sector in North America in 2021. As of November 2021, IHS Markit analysis found the North American cleantech sector had raised $29.2 billion compared with the $27.9 billion raised by the region's oil and gas sector.

Between March and December 2021, IHS Markit's Climate and Cleantech research team said more than 250 green or sustainable bonds were issued globally, representing roughly $300 billion in new fixed income debt. And global investment giant BlackRock held positions in 74 of those bonds.

Moreover, Gardett said all new funds that were launched in 2021 in Europe and North America factored in the risk posed by climate-fueled events.

A report released by Morningstar 31 January showed the total investment pot of sustainability funds globally reached $2.74 trillion at the end of December, an all-time high, up 9% quarter on quarter, and 53% year on year.

Of the 10 funds attracting the most money in the October-December period, four were marketed under BlackRock's iShares brand. Morningstar estimated their inflows totaled $3.86 billion.

Morningstar also said the number of sustainable investment funds globally reached 5,932 at the end of last year, including 266 new launches in the fourth quarter.

These include the Zurich-based FiveT Hydrogen fund launched in April by FiveT Capital with an initial investment of €290 million ($345.07 million). In October, FiveT Hydrogen joined forces with Paris-based investment firm Ardian to create a €1.5-billion ($1.7 billion) fund known as Hy24 that will be dedicated to accelerating large-scale clean hydrogen projects and infrastructure.

Financing stars align

With all the financing stars aligning, the key question on Diwan's mind and that of asset managers is allocating this capital where it will return a value for shareholders. Is it in renewables or is it in technologies that will support decarbonization, and what do recent trends in financing indicate?

According to Diwan, the energy sector is ripe for investment and change as it is "under stress" from dealing with increasingly intense and frequent effects of climate change in the form of droughts, wildfires, and polar vortex conditions.

Although electrification of energy consumption, especially in the power and transport sectors, and decarbonization of the fossil fuel industry have been identified as potential avenues for clean energy investment, the corresponding level of commitment in terms of renewable energy has been "relatively low," Gardett said.

Not even a quarter of institutional investors have renewable energy funding commitments in their current portfolio, he added.

Hydrogen, storage viable investments

Hydrogen and energy storage are two areas where both decarbonization and renewables have a role to play and where investors can expect to see value, Gardett said.

In particular, he said, hydrogen is viewed as a viable investment because it can displace natural gas in many applications and can be produced by renewable power in the case of green hydrogen.

"The large capital expenditure requirements of hydrogen investments, the commodity's similarity to existing fuel use cases and the capacity to decarbonize existing processes using the gas all appeal to energy transition investors," Gardett told Net-Zero Business Daily 14 February.

In April 2021, IHS Markit anticipated capital spending of up to $265 billion in low-carbon hydrogen production by 2030, and expects that figure to have grown since then given the global interest. At the time, IHS Markit said electrolyzers using renewable power to split water molecules to form green hydrogen will take the lion's share at $165 billion, with $100 billion going towards steam methane reformers at gas plants equipped with carbon capture to produce blue hydrogen.

At CERAWeek, IHS Markit will have a Hydrogen Hub where energy ministers from 45 countries, company CEOs, financiers, technology developers, and engineers will have the opportunity to discuss the avenues and obstacles open to this emerging technology.

"We plan on discussing how to move the investment needle from millions to billions, the impact that scale has on cost, and the emergence of end-use sectors," Alex Klaessig, director of IHS Markit's Hydrogen and Renewable Gas Forum, told Net-Zero Business Daily 15 February.

During a 3 February webinar to preview CERAWeek discussions on hydrogen's role, Shankari Srinavasan, who heads the global gas and low-carbon gas research team at IHS Markit, joined her colleagues to discuss whether hydrogen will deliver as a viable alternative to fossil fuels in the energy sector.

"We're really moving away from talking to walking," Srinavasan said, pointing to the pipeline of green and blue hydrogen projects.

Moving towards gigawatt-sized projects

The falling cost of renewable power has caused the cost of green hydrogen to plummet and projects to increase in size from 5 MW to 20 MW, noted Catherine Robinson, executive director and head of IHS Markit hydrogen and low-carbon research.

Indeed, Srinavasan agreed, "we are at an inflection point."

From a total of 250 MW of green hydrogen projects today, Srinavasan said "we will start to see gigawatt-electrolyzer capacities." She pointed to a 100-MW electrolyzer commissioned in China this year as an example.

Infrastructure and financing will need to accompany falling renewable energy costs to drive greater hydrogen penetration, Klaessig said.

The US government, he said, has already discussed the prospect of developing four separate hydrogen hubs to facilitate greater growth of this industry. Shared infrastructure could either serve hydrogen production like hydrogen pipelines, or it could be CO2 infrastructure that would take hydrogen or CO2 away from hydrogen production plants if they were using the blue process, Klaessig added.

The White House announced a major decarbonization initiative on 15 February that includes $8 billion for Regional Clean Hydrogen Hubs to expand use of clean hydrogen in the industrial sector and beyond; $1 billion for a Clean Hydrogen Electrolysis Program to reduce costs of hydrogen produced from clean electricity; and $500 million for Clean Hydrogen Manufacturing and Recycling Initiatives to support equipment manufacturing and strong domestic supply chains.

Apart from the US, Robinson noted that hydrogen hubs are being planned in Europe, in Russia, and in Australia as well, where the goal is to decarbonize entire industrial clusters—refining, petrochemical, power generation, steel, and cement manufacturing—using a shared infrastructure.

And last, yet equally important, Klaessig said, is that "companies really want to know that there is a future in their investments if they're going to plunk down billions of dollars into production plants."

Posted 15 February 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst