What counts as an “energy transition” investment?
Imagine it is 1920 or so, and you have raised an “automotive transition” private equity fund1. Your investors (“limited partners”) are tired of their slow, plodding horses, and want to accelerate the adoption of cars. Ford has been producing the Model T for over a decade, and there are 7.5 million cars on the roads, but there is still perhaps a decade to go before cars become truly dominant. Will you invest in car factories, roads and fuelling stations? Or are you backing the manufacturers of hub cabs, windscreen wipers and hood ornaments?
$1.8 trillion was invested in the “energy transition” in 2023 according to Bloomberg, who include transport electrification and renewable power as the two largest categories (one third each). These investors are paying to install new technology that will change the way we use energy, including the “retail investment” of someone purchasing an electric car.
The portfolio companies of some “energy transition” funds tell a different story.
Blackstone Energy Transition Partners (disclosure: I used to work at Blackstone) announced a deal this week in Europe to buy SEVES, a company that makes the insulation for electricity grids. They have previously invested in Enstall, a solar panel mount manufacturer. These investments have an energy theme but will not necessarily decarbonise energy, versus investing directly in grid upgrades and solar farms.
To be clear, it is not a problem to invest in these companies. They make strong returns for Blackstone and their LPs (Blackstone’s Energy funds have performed well historically), and robust supply chains are important for any industry. LPs also want an energy transition or climate change product, so much so that Blackstone rebranded the existing “Blackstone Energy Partners,” which still holds gas and coal assets. But investors might be disappointed if their goal is to contribute capital to emissions reduction, and not just suppliers riding the wave of a growing market.
Fund managers sometimes scornfully refer to firms like Just Climate, which explicitly invests in technology for sectors where emissions are hard to abate. Why tackle the emissions that are most difficult, when you can pick the low hanging fruit and make the same money? I’ve also heard disdain for investors who choose to back renewable projects, because there is relatively low risk, and correspondingly low returns. These deals aren’t deemed as exciting, even if they are more transformational for the power sector.
This matters because LPs may reasonably believe that they are actively contributing to the energy transition by investing in an energy transition fund. This potentially diverts funding away from investing in solar and wind projects, or electric car manufacturing, which would change the energy system faster.
Investors in the automotive supply chain probably made money as the sector grew, but the transformation primarily happened from backing cars themselves, and the underlying infrastructure that enabled driving. Directly supporting emissions-reduction technologies and their deployment seems like a better use of limited “energy transition” capital than funding the suppliers of small component parts.
PE firms didn’t really exist then, but hopefully you get the analogy