New white paper concludes that Paris Agreement, climate risk mitigation, and technology innovation call for shift in portfolio strategy from asset managers and private investors
Without a change in thinking, investors stand to miss out on a market for electricity products and services that could reach $6 trillion by 2030
Due to a growing need for capital to fund transformative energy companies and projects, investors face an unprecedented opportunity to reduce exposure to outdated systems and maximize returns, according to a new white paper from Navigant’s (NCI) global Energy practice.
The rapid decline of renewable energy costs has shifted customer preferences, and energy markets are becoming more sophisticated and digital in nature (in what Navigant refers to as Energy Cloud 4.0). Concurrently, a coordinated global effort by national governments to meet the energy transformation requirements of the United Nations Paris Agreement creates a large need for ongoing investments in energy production, transmission, and management systems. In order to avoid losses on outdated assets, Navigant’s paper suggests that investors need to shift their outlook away from conventional energy sources such as combined cycle gas turbines, which will no longer be reliable drivers of revenue.
The Navigant white paper anticipates this disruption will affect the financial valuation of energy assets over the next 10 years, as more value will be created in the distribution, supply, and customer components of the energy system. The total market for electricity products and services — assuming increased penetration of distributed energy resources (DER), high electrification of transportation, and an accelerated digital transformation — could reach $6 trillion by 2030. Given the assumptions and conditions outlined in the white paper, investors may realize an average return of low double digits from investing in emergent technologies.
“This is a call to action for every investment player — from pension fund managers and venture capital principals to insurance underwriters and asset managers,” said Jan Vrins, leader of Navigant’s global Energy practice. “Investors remain focused on the downside of risk, and not enough on the upside of opportunity.”
The private energy transformation already underway complements the decarbonization provisions of the Paris Agreement, but there are many other drivers, Navigant notes. Among them are the falling costs of renewables and battery storage, increasing awareness of the need for action on climate change, and growing consumer demand for greener alternatives. Potential legislative initiatives on green energy in the United States and elsewhere could accelerate opportunities and reduce the cost of capital. However, Navigant’s research indicates these opportunities are reliable even without increased government subsidies or green-friendly regulation.
“A key challenge for investors is the sheer number of opportunities within the Energy Cloud given the diverse array of business models and monetization strategies,” says Jan-Willem Bode, director with Navigant. “Investors need to understand the changing energy landscape and which assets will remain profitable. Banks, venture capitalists, public pensions, and private equity all have a role to play based on their risk profiles – and all could deliver superior returns to their shareholders under the right strategy.”
According to the Navigant paper, in the era of the Energy Cloud, three major trends will influence valuation and the market growth of investees active in energy transformation:
- Growth and diversification of the renewable industry: As the risks of renewable energy projects and assets become better understood, pension funds and institutional investors are looking to further expand their portfolios with new technologies and business models. Investors with an appetite for merchant risk are now pursuing grid-scale energy storage systems and renewable assets financed using different types of corporate power purchase agreements structured to secure a project’s long-term income.
- Expansion, modernization, and digitization of energy grids:Vastly more capital will be needed to modernize the energy grid that will manage a more complex set of (distributed) assets and infrastructure and enable the move to a low carbon economy. A blend of financial instruments will be employed to fund the interconnection of large-scale renewable energy, grid reinforcement programs, and the integration of distributed energy resources like microgrid systems. The companies focused on building and operating the grid of the future have significant growth potential and offer great investment opportunities with interesting returns.
- Network orchestration and platforms: Moving to a more sustainable, highly digitized, and dynamic energy system results in a growing number of services and value creation for customers. E-mobility, building energy management, microgrid control, and demand response software solutions, for example, offer a compelling investment opportunity and offer higher risk-adjusted returns than investments in physical assets and infrastructure. Venture capital and private equity managers can recognize the medium-term value creation from such platforms and support their growth in new markets.
The Navigant paper notes that investors will also need to understand key differences in opportunities in the United States and those in Europe and the Middle East. Opportunities may be smaller and less scalable in emerging markets, although some technologies may be more applicable in those areas.
To learn more, download Navigant’s latest white paper, Financing the Energy Transformation: Capitalizing on New Investment Opportunities, and join the social media conversation through #Finance2Climate.
With over 600 consultants, Navigant’s global Energy practice is the largest energy and sustainability consulting team in the industry. We collaborate with utilities and energy companies, governments and NGOs, large corporations, product manufacturers, tech vendors, and investors to help them thrive in a rapidly changing energy environment. Our clients include the world’s 60 largest electric, water, and gas utilities; the 20 largest independent power generators; and the 20 largest gas distribution and pipeline companies. Navigant’s seasoned professionals and highly skilled specialists form exceptional teams to help clients transform their businesses, manage complexity and accelerate operational performance, meet compliance requirements, and transform organizations and systems to address upcoming changes as the energy transition accelerates.
Navigant Consulting, Inc. (NCI) is a specialized, global professional services firm that helps clients take control of their future. Navigant’s professionals apply deep industry knowledge, substantive technical expertise, and an enterprising approach to help clients build, manage, and/or protect their business interests. With a focus on markets and clients facing transformational change and significant regulatory or legal pressures, the firm primarily serves clients in the healthcare, energy, and financial services industries. Across a range of advisory, consulting, outsourcing, and technology/analytics services, Navigant’s practitioners bring sharp insight that pinpoints opportunities and delivers powerful results. More information about Navigant can be found at navigant.com.