Joe Zidle: Opportunities in Energy Investment and Decarbonization
Inflation in the post-COVID world has been a story of imbalances: a stimulus-induced boom in demand went face-to-face with long-term disinvestment in supply. The effect is generationally high inflation and the most coordinated interest rate tightening cycle in history. The need for long-term investment has been laid bare in critical parts of the US and global economies ranging from energy and food to supply chain capacity. Sadly, war in Ukraine adds urgency to the investment case, and the ongoing risk of energy disruptions threatens to exacerbate the cost-of-living crisis.
Just as COVID accelerated so many trends, the current macroeconomic situation presents an opportunity for investment in energy supply and the energy transition. Recent catalysts for new investment can help address these challenges. In this month’s essay, we highlight some trends and opportunities in sectors related to the energy transition, before welcoming Dr. Jean Rogers, Blackstone’s Global Head of ESG, to share her thoughts on how Blackstone is analyzing these themes.
Secular shortfall in investment Globally, investment in energy supply had been lackluster in the years leading up to COVID. According to the International Energy Agency (IEA), global investment in energy supply declined, on average, by 1% annually from 2015 to 2019.1 Investment in upstream oil and gas capex declined over 4% per year during this period, before declining a further 27% in 2020.2 The numbers weren’t much better for investment in clean energy supply, which grew by an annual average of just 2% from 2015 to 2019.
Now, clean energy supply investment is rising by an average of 12% per annum, but the IEA report indicates that this is still well short of what is required to hit international climate goals, and calls for a balanced approach of investment in natural gas along with ongoing transition efforts.3 Furthermore, inflationary pressures aren’t sparing investment, either, with the IEA estimating that half of the overall investment growth in 2022 will be a result of higher costs, rather than bringing about new supply.
Shortfalls are both macro and micro On the macro side, as we have noted in recent essays, there has been a secular decline in domestic investment in capacity, driven by a number of factors. One is that the US and other advanced economies moved away from domestic production and increasingly outsourced it to countries with lower production and labor costs. That led to the second factor, which was that capacity utilization never reached prior peaks, so there was little need for domestic investment to increase capacity.
Divestment became a movement Another set of powerful forces exerted downward pressure on energy investment at the sector level. Following vicious boom and bust cycles in recent years, investors demanded discipline from energy companies, prioritizing return of capital rather than investment. Meanwhile, just north of Portland, Maine, the energy divestment movement was born on the campus of Unity College in 2012. Unity’s board of trustees voted to divest its portfolio from investments in the top 200 fossil fuel companies, the first such move for an institution of higher learning in the US.
The movement now includes more than one thousand institutions, representing trillions of dollars of assets.4 This divestment has been one of the headwinds for energy company share prices, which have recovered this year but remain below prior peaks. To wit, at several points in 2020 and 2021, technology giant Meta, the parent company of Facebook, had on its own a larger market cap than the entire S&P 500 energy sector.5
Relatively slow economic growth meant the effects of low traditional energy investment were not immediately recognized. Renewables continued to grow and capture incremental investment dollars, but the industry still hadn’t exceeded 5% of the total share of global energy generation by the time the effects of the COVID-era stimulus struck.6
Emergent Geopolitical and Policy Catalysts
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.
The Planet is Pricing Carbon. Here’s What Businesses Can Do to Avoid Paying.
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.
Innovation with the Private Sector
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.
Buy High (Carbon), Sell Low (Carbon)
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.
Blackstone’s Decarbonization Platform
We view active decarbonization as a clear cost-savings, value-creation opportunity that exemplifies the Blackstone approach. We believe that our scale gives us a unique part to play in accelerating a decarbonized economy, and we’ve invested in a platform of companies whose expertise we believe will enable us to fulfill that role.
Portfolio companies powering our platform Invenergy is the largest private renewable energy developer in North America. Our $3 billion investment will help Invenergy accelerate its impressive renewable energy activities, such as renewable energy generation projects powering the equivalent of 8.5 million homes and developed projects offsetting carbon emissions approximately equivalent to the annual emissions of the state of New York.
Our platform also includes Legence, a company formed by integrating RE Tech Advisors, a sustainability consulting firm, with Therma Holdings, a mechanical, electrical and controls services company. RE Tech specializes in building efficiency, and to date it has delivered more than $200 million of utility cost reductions through 10,000 energy efficiency measures distributed across 3,000-plus assets.
These investments comprise just a portion of this platform. We’ve also backed Altus Power (solar energy), Sphera (ESG software, data and consulting), Onyx (greenfield solar and wind development), ClearGen (sustainable infrastructure assets), Xpansiv (environmental commodities trading platform), and Esdec (solar racking and mounting systems).
Active decarb, driven by ambitious targets Our investment in these companies not only enables them to grow their business but also allows us to apply their expertise to advance on our 15% emissions-reduction target. This ambitious, three-year aggregate goal applies to most new investments where we control energy usage.
Much opportunity, but more to come We believe active decarbonization can position asset managers and operators to make significant headway on strengthening their own companies and assets. However, we recognize that they are not, on their own, sufficient to decarbonize the planet. For instance, we believe decarbonization will require investments to transition major infrastructure, utility and transportation networks.
Seeing an opportunity, we built Blackstone Credit’s Sustainable Resources Platform to invest in and lend to renewable energy companies and those supporting the energy transition among our many other energy transition focused activities across the firm. More broadly, we see an opportunity to invest $100 billion in energy transition and climate change solutions across our businesses within the next decade. Our goal is to create lasting value for our investors through contributing to global decarbonization.
We’re excited about Blackstone’s path ahead, and we hope that the strategic deployment of our unique scale inspires other investors to see what’s possible.
With data and analysis by Taylor Becker.
- IEA, World Energy Investment 2022, as of 6/22/2022.
- Morgan Stanley and Rystad Energy, as of 1/6/2022.
- IEA, World Energy Outlook 2022, as of 10/27/2022.
- Politico, as of 9/28/2021.
- Bloomberg, as of 12/31/2021.
- BP, Statistical Review of World Energy 2022, as of 6/28/2022.
- US Department of Energy, as of 9/15/2022.
- Senate Democrats (as of 9/2/2022) and REPEAT Project (as of 8/4/2022).
- Forbes (as of 4/18/2022), The Net Zero Tracker (as of 10/31/2022) and United Nations Environment Programme (as of 10/26/2021).
- World Bank Carbon Pricing Dashboard, represents latest data available, as of 10/31/2022.
- NOAA National Centers for Environmental Information (NCEI), represents latest data available, as of 10/31/2022.
- NOAA National Centers for Environmental Information (NCEI), represents latest data available, as of 10/31/2022.
- Intergovernmental Panel on Climate Change (IPCC) Report, as of 9/9/2021.
- IEA, Net Zero by 2050, as of 5/11/2021.
- Nature, as of 8/16/2022.
The views expressed in this commentary are the personal views of Joe Zidle and Jean Rogers do not necessarily reflect the views of Blackstone Inc. (together with its affiliates, “Blackstone”). The views expressed reflect the current views of Joe Zidle and Jean Rogers as of the date hereof, and none of Joe Zidle, Jean Rogers or Blackstone undertake any responsibility to advise you of any changes in the views expressed herein.
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