Executives eye new bets on energy transition; inflation darkens funding outlook

With governments and businesses increasingly focused on cutting carbon emissions, energy executives have zeroed-in on battery storage and hydrogen as the most appealing investment and growth opportunities at this point in the energy transition, according to a December survey by the law firm Womble Bond Dickinson.

"There was not nearly as much focus on what had been the flagship renewable resource" such as wind and solar power, Belton Zeigler, a partner at Womble Bond Dickinson, said in an interview Dec. 12. "Some of that's understandable because those are more mature technologies. But you don't get the sense the industry is rushing to double down on those."

The survey of 170 executives and investors from across the energy industry, including from the utility, fossil fuel and renewable energy sectors, found broad support for President Joe Biden's efforts to decarbonize the U.S. economy and little concern about capital availability.

"I think the industry is happy to see that the direction of change is being set out" by the administration, Zeigler said, even if many respondents doubt that emissions can be cut as quickly as Biden has called for.

Still, Zeigler said, "It's clear the industry is confident about its ability to make the transition, to lead the transition, to survive the transition, to profit from the transition."

Transition 'in full swing'

While energy executives appear captivated by the prospects for batteries and hydrogen, investment continues to pour into more established green energy technologies, especially solar power.

The International Energy Agency said in a December report that it anticipates America's installed capacity of renewable energy increasing 65%, or by more than 200 GW, from 2021 to 2026 with solar accounting for more than three-quarters of that growth. Globally, solar deployments between 2021 and 2026 are expected to almost double from the previous five-year period, with the technology accounting for nearly 60% of renewable energy capacity installed worldwide, the agency said.

"[We're] really looking at robust capital markets, robust tax equity markets" for renewable energy, Jeffrey Chester, global co-head of energy project finance at Greenberg Traurig LLP, said during a December webinar. "[The] energy transition is in full swing and heading in our direction."

In the debt market, the Climate Bonds Initiative has said it expects green bond investment to reach $1 trillion for the first time ever by the end of 2022.

"The debt market is looking pretty darn good. It's a bit of a frenzy," Beth Waters, a managing director at Mitsubishi UFJ Financial Group Inc., said on the December webinar. "ESG is the buzz word of the year, last year and, I think, years to come," Waters added, referring to environmental, social and governance issues.

Against that backdrop, energy executives "don't see capital as being a problem," Zeigler said.

Inflation warning: 'It's going to be a significant issue'

Supply chain disruptions and rising input costs have started to cloud the investment outlook, however.

According to the IEA, higher commodity and freight prices could raise investment costs by $70 billion for solar between 2021 and 2026 and by $35 billion for onshore wind, which could slow the pace of project development.

Zeigler said his firm's survey did not address those headwinds.

Further complicating the investment outlook, at the same time that the financing needs of project developers look set to increase, inflation across the economy is poised to push up the cost of funding for renewable energy projects. The Federal Reserve in mid-December signaled that it could raise interest rates three times in 2022.

"I think it's going to be a significant issue," Mark Williams, a managing director in structured finance at The PNC Financial Services Group Inc., said at a renewable energy conference in early December, referring to the threat posed by inflation and higher interest rates.