Joe Zidle: Opportunities in Energy Investment and Decarbonization

Today, a new set of forces has energy investment rising to address the energy shortfall, bolster energy security and accelerate the energy transition. If war in Ukraine adds urgency to the need for investment in renewable, transitional and traditional energy investment, the Inflation Reduction Act of 2022 is a catalyst for inducing that investment.

Historic government action positive for energy The $369 billion Inflation Reduction Act (IRA) is the largest investment in climate and energy in US history. ^{[ 7 ]} It’s estimated that private investment, which “unlocks” various tax credits and incentives in the IRA, will tally up to multiples of that figure. ^{[ 8 ]} Elsewhere, the REPowerEU plan seeks to help Europe become independent of Russian energy while accelerating the green transition. The incentives and influx of capital are trends that will likely benefit key sectors such as pipelines, processing and export facilities. They are also likely to spur new opportunities in clean power generation and battery storage, energy infrastructure and decarbonized transport.

Importantly, the second- and third-order effects of these trends are supportive of domestic manufacturing more broadly, given that the IRA largely requires that manufacturing and components come from the US in order for companies to qualify for the tax credits. Since the passing of the IRA, there has already been a flood of announcements of new US facilities for producing electric vehicles (EVs), batteries and solar panels. In addition, the US government has invoked the Defense Production Act to encourage domestic production of battery metals, highlighting the need to invest in EV supply chains as a matter of national importance.

Opportunities for private capital Government investments and incentives for the private sector are groundbreaking and a step in the right direction for energy, but they are just down payments. In our view, the momentum that these investments create for additional capital to enter the energy space and advance the energy transition may give rise to a lasting legacy. Supply is short, but demand for all forms of energy will continue to grow, requiring more capital.

As the government incentivizes new technologies, the effect is two-fold. First, advancements in these sectors may help drive cost reductions and commercialization, the latter of which makes these technologies more mainstream. This cycle was evident in the solar and wind categories under the Obama administration. A similar dynamic might play out now for technologies related to hydrogen, carbon capture and others. The second effect is that as technologies are made mainstream (e.g., in solar and wind), government incentives improve the economics of these sectors, which helps drive further market penetration and lowers costs.

These dynamics create excellent fundamentals in the power space, and private capital has an opportunity to play a part. This high-conviction theme is one that Blackstone has been leaning into in recent years as one of the firm’s “good neighborhoods.” The energy transition is a secular trend, not one that will be reversed by a cyclical economic slowdown. It’s a sector that could exhibit relatively high growth (i.e., faster than the overall economy) and could continue to perform well despite broader uncertainty.

by Jean Rogers, Global Head of ESG, Blackstone

Leaders from around the world will soon travel to Sharm El Sheikh, Egypt for COP 27, the United Nations’ annual conference on climate change. Their conversations will likely center on the implementation of country-level net zero commitments, adaptation and climate finance. Dozens of governments made commitments after last year’s gathering in Glasgow, Scotland, and these commitments now cover 83% of global emissions, 91% of GDP and 80% of the world’s population. ^{[ 9 ]}

It’s an urgent dialogue. These commitments are commendable, but they aren’t backed by a market mechanism to enforce them. Just 23% of global emissions are priced, leaving businesses with little regulatory impetus to act on an externality. ^{[ 10 ]}

Governments might not be pricing carbon, but the planet is. In the US alone, 338 weather and climate disasters since 1980 have cost $1 billion or more for fire suppression costs, physical damages and time element losses, among other costs.^{[ 11 ]} All told, these 338 events cost more than $2.275 trillion, an estimate that does not account for natural capital or environmental degradation, mental or physical healthcare-related costs, the value of a statistical life (VSL), or supply chain and contingent business interruption costs. ^{[ 12 ]} Of course, damage from natural disasters—and its associated costs—will always be inevitable to some extent, but the scientific consensus is that carbon emissions are the main driver of climate change, which in turn plays a significant role in intensifying specific weather and climate events. ^{[ 13 ]} So even if investors and businesses might not pay governments for the carbon they emit, they may ultimately pay for it by other means.

Fortunately, a path forward exists, one that allows the private sector to reduce these costs by accelerating their net zero commitments and government targets. The path starts with low- or no-cost energy efficiency measures, and then moves to deploying renewable energy at scale.

Experts estimate that it will cost $100 trillion through 2050 to decarbonize the global economy ^{[ 14 ]} Governments cannot meet this target on their own, nor do they have the industry-specific expertise to decarbonize businesses. Private capital at scale and private sector insight are critical for investment in the energy transition and navigating a greener economy.

Divestment isn’t a comprehensive solution Confronted with the decarbonization challenge, many investors opt for a divestment strategy, withdrawing from the highest-emitting and hardest-to-abate sectors. However, research increasingly shows the limits of this approach. A recent study from scholars at the Federal Reserve and the Universities of Virginia and Geneva suggests that divestment simply kicks the can down the road and pushes the problem of decarbonization on to the asset’s next owner. In other words, divestment decarbonizes your portfolio but doesn’t contribute to decarbonizing the economy. Divesting from high-emitters and investing in low-emitters, while certainly important, cannot be an investor’s sole strategy.

Active decarbonization is a value-creation strategy, and we believe asset managers and operators have a key role to play. Through active decarbonization, they can increase the efficiency and competitiveness of their companies and assets, and deliver greater value for their investors.

Start simply with energy efficiency At Blackstone, we aim to start the active decarbonization process by helping certain companies use energy more efficiently. This commonsensical approach can deliver efficiencies quickly and build internal support through a commitment to deep decarbonization. Critically, this approach can generate cost-savings that provide capital to finance the next, more sustained phase of transformation: switching to renewable energy at scale and cost parity.

Reduce costs Renewable energy is increasingly cheaper. The cost of renewables dropped significantly over the past decade, with photovoltaic (PV) solar power electricity costs dropping 88%, onshore wind 68% and offshore wind 60%.

Tax incentives These cost figures don’t even consider the incentives for renewable energy included in the Inflation Reduction Act. The bill provides $369 billion in climate and clean energy spending, much of it allocated to tax credits for renewables.^{[ 15 ]} These credits can help investors offset the costs of choosing renewables over conventional energy in the remaining instances where renewables are more expensive.

Buy in bulk Cost-savings opportunities should be incentive enough on their own, but additional opportunities to reduce energy expenditures exist. Buying renewable energy at scale drives down unit costs even more. So the more investors choose renewables, the less they’re ultimately paying for them.