In his column for Climate & Capital, New Energy Nexus CEO Danny Kennedy shines a light on climate investment trends and inspiring companies to watch.
No doubt about it, 2021 was a banner year for clean energy. The International Energy Agency (IEA) was projecting a new record of renewable installations globally –– a whopping 290 gigawatts or enough to power over 200 million houses. One study stated that solar photovoltaics alone added more gigs to the electric power grid than all coal and gas additions so far this century! Shine on indeed …
According to the American Council on Renewable Energy (ACORE), renewable energy is expected to account for 95% of increases in global power capacity through 2026, with solar playing an outsized role.
But a word of caution to kick off my first 2022 Climate & Capital Media column for our readers, who are, no doubt, keen to think that climate solutions will now flow easily from our capital markets. Sadly, we ain’t “got this” because of some numbers and rhetoric from Wall Street. There was a lot of hype coming off a frothy end of 2021 regarding “climate tech” investing about the tide turning. There are a few reasons to suspect that the requisite allocation of funds to solutions is not necessarily going to just occur. The strong pressure of social movements and state actors will be necessary to see real speed and progress.
Case in point one: The trillions of dollars committed to be divested from fossil fuels by the end of last year –– a truly impressive $40 trillion –– are now not able to go into fossil fuels through various institutional investors. However, the amount flowing into clean energy and climate tech has not matched the $40 trillion pledged for divestment. I know people were excited about a new peak of $50 billion in venture funding to climate tech solutions in 2021, but that’s not a lot in the investment world. Compare it to Mark Carney’s Glasgow Financial Alliance for Net Zero (GFANZ) coalition announcement of $140 trillion pledged to be net zero by 2050. That money is yet to move into the climate solutions market.
The trillions of dollars committed to be divested from fossil fuels by the end of last year –– a truly impressive $40 trillion –– are now not able to go into fossil fuels through various institutional investors.
Truth is, it’s just not happening soon enough. The amount flowing into early-stage financing is but a rounding error of the $40 trillion in planned fossil fuel divestments and the $140 trillion supposedly moving into clean energy and technologies “soon” through efforts like GFANZ. If we want to be optimistic, let’s pretend the wave of climate tech venture capital will continue at the present rates of $50 billion annually –– knowing that this is not a realistic assumption given the fickle nature of our VC friends! If so, we would end up with $500 billion invested in early-stage climate and cleantech by 2030 or about 1% of all funds that are moving out of fossil fuels. It’s clear that markets aren’t allocating sufficiently to the solutions … yet.
Case in point two: What limited investment capital there is, is not being effectively allocated. Consider this interesting study by PwC of climate tech venture investments since 2013. It shows a real mismatch of the funding received by sector versus the relative emissions by sector.
The reality is, market players need specific direction to allocate the available capital to the varied sources of our climate change problem. Incentives, ratings, investment leaders? It’s going to take some creative finance ideas to encourage faster investment, first in the low-hanging fruit options and then in the more challenging areas.
Now for the good news. Despite the small equity flows coming into climate tech, more debt than ever is coming into clean energy deployment. And the price is right! Goldman Sachs reports that the cost of capital for renewable project developers averaged at around 4% in 2021, whereas for oil it was 20% and for LNG 12%. It was all but impossible to finance new coal developments.
As I noted in my last column, I like seeing smaller insurgents in the energy transition winning against the incumbents. One example in late 2021 was the story of a “pre-payment bond issue” from East Bay Community Energy (EBCE) and what are called Community Choice Aggregragators, or CCAs.
These AA-rated companies are California-based community-owned electricity serving companies that are pioneering 100% local clean energy at an impressive rate. CCAs in California have contracted 10GWs of renewables and migrated hundreds of thousands of customers to 100% clean energy. EBCE and CCA are now two of the three largest suppliers of renewable energy in California.
Compare that to California’s PG&E, the hidebound, 100-year-old behemoth that opposed the CCAs formation and is now working to stifle solar at the California Public Utilities Commission (CPUC). Last I looked, PG&E’s private bond issues were rated at BB. There are many reasons for this, but being on the right side of credit history is helping CCA projects become more viable investments.
Startup deal of the month
Finally, my favorite news! Investment in a great new Indonesian “pay-as-you-save” business model in energy efficiency solutions was announced on Christmas eve. The Singapore-based Asia Clean Energy Facility (SEACEF) and Clime Capital have committed an undisclosed amount of development funding to Synergy Energy Solutions (SES), an Indonesian energy efficiency provider. Funding will support SES’ implementation of shared-savings energy efficiency projects in Indonesia.
For full disclosure, my organization New Energy Nexus‘ Indonesia One Fund participated in the project set up as we have accelerated SES through our startup program. It’s great to see an energy efficiency solution company getting some early-stage investment in the region. As a counterpoint to my negativism above, money can and is flowing to built environment innovation. SES is a great example of investment in low-hanging climate solutions fruit in a region that greatly needs it. Indonesia is the largest consumer of energy in Southeast Asia and there is much value to be gained from companies like SES ramping up to make Indonesian buildings more energy and cost-efficient.