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Energy decarbonization will require massive, global investment

26 May 2021 Kevin Adler

One of the big takeaways from the International Energy Agency's (IEA) recently published net-zero "roadmap" is that public and private institutions will have to rapidly and substantially increase clean energy investments if the world is to reach carbon-neutral energy production and use.

"Net Zero by 2050: A Roadmap for the Global Energy Sector" laid bare the gap between the commitments that governments have been making to reach net zero by 2050 and the actions taken to date. It outlined comprehensive strategies that could close that gap, such as a halt this year to all investment in expansion of coal mines, construction of unabated coal-fired power plants, and exploration of new oil and natural gas fields.

Speaking at the Columbia Global Energy Summit on 19 May, Fatih Birol, executive director of the IEA, said global investment in energy production today is about $2 trillion per year, with about $800 billion of that going toward fossil fuels and $1.2 billion on clean energy. Investment will need to rise to about $5 trillion per year by 2050, almost all of which needs to be devoted to clean energy, Birol said. "The key is mobilizing the investments," he said.

"There are technologies that are under development today, such as advanced batteries, hydrogen, direct air capture—and we have to push the button of innovation," Birol said.

"Now, is it possible?" he asked. "When I look at the global capital that's available, I believe it is possible."

Speaking 20 May during another session of the Columbia University summit, venture capitalist Carmichael Roberts, managing partner of Material Impact and investment co-leader at Breakthrough Energy, agreed wholeheartedly. "Financing [presents] a phenomenal opportunity to aggregate the resources you need for breakthrough energy," he said.

"Public and private investment are both critical; they need to work synergistically," Carmichael said. "On the private side now, every category [of investor] is participating in overall climate funding. Seed funds, venture capital firms, hedge funds, Fidelity Investments, T. Rowe Price, Barclays, Goldman Sachs. All of a sudden, we have [special purpose acquisition companies] that allow companies to go public and people to own a share" of the energy transition.

Venture capitalists bring an entrepreneurial mindset to the energy transition. "There's almost a revolution going on from a VC perspective that climate has become, arguably, the most exciting thing to invest in ... if you look at dollars and the number of firms directly or indirectly investing in climate change [solutions]. And I will go on record that this won't change for the next two or three years. We see entrepreneurs leaving other industries and coming over to clean energy ... [chasing] amazing opportunities to solve problems," Carmichael said.

On the public side of the energy transition, governments can play two critical investment roles, Carmichael said. First, they can directly support companies in the early stages of testing and demonstrating a technology. The US Department of Energy's ARPA-E program is a prime example of successful collaboration, he said. ARPA-E is the US Department of Energy's Advanced Research Projects Agency-Energy, which funds early-stage energy, energy distribution, and energy efficiency technologies.

Second, governments can create the environment for those technologies to thrive, such as clear regulations and consistent policies. "I am depending on policies to be smart. At the least, they may slow you down, but at the worst they can eliminate the ability of technology to reach the masses," he said.

Birol agreed that governments can provide the "framework" that signals to investors where they should put their money. "Capital goes where it feels it will make profit," he said.

While investors' actions show that they see clean energy profits in the US and Europe, Birol said hesitancy to invest in the developing world remains significant. It's a mismatch of where dollars are attracted and where they are most needed. "The issue is what will happen in India, what will happen in Indonesia, what will happen in Africa. The bulk of emissions growth will come from those countries, not from Switzerland, the UK, or Canada," he said.

China, India, and Indonesia have 45% of the world's population, and they depend on coal for 60% of their power generation, Birol said. Helping them decarbonize is critical, but they can't simply abandon coal use. External funds for carbon capture and storage and direct-air capture technology will be needed beyond the sums that developing countries already are providing, according to the IEA roadmap.

Securing external funding for these efforts will be taken up in a new paper that IEA is writing with the World Bank and World Economic Forum, Birol said. Due to be released on 9 June, it's titled "Financing Clean Energy Transitions in the Emerging World."

G20 governments must drive investors' decisions, Birol said. "They should give an unmistakable signal to the investors, 'You investor, if you invest in clean energy options, this is a lucrative option for you'.... And they should also give an unmistakable signal to investors that you [need to] be careful [if] you are investing in a technology which is working against climate change. You are taking a big risk that you will lose money," Birol said.

Carmichael concluded by reminding the conference's audience that there can be a virtue to the urgency that venture capitalists and entrepreneurs bring to the table. "We're out of time in terms of climate change, so the term patience can be misconstrued," he said. "The entrepreneurs who run these cleantech companies are not patient. They are hungry and purposeful."

This speed-oriented mindset can pay off with solutions, Carmichael said. While acknowledging that targets for net zero are three decades away, he said that in terms of clean energy development, "the entrepreneurs are there, the money is there, the public sector is behind it, and so are the large [energy] companies. All that's missing is the chef [who] you need to combine those ingredients. They're not going to pop up and change the climate by themselves. But as we see their products adopted on global basis, you begin to realize, 'We can do this,'" he concluded.

Posted 26 May 2021 by Kevin Adler, Editor, Climate & Sustainability Group, IHS Markit

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