Although last year, climate investments matched fossil fuel investments for the first time in history, the level of climate infrastructure investments needs to quintuple to reach net zero by 2050, BlackRock’s Charlie Reid says
Last year, for the first time in history, climate infrastructure assets attracted as much capital as new fossil fuel investments. But the amount of capital needs to be increased by at least five times, if the world is going to meet the required level of investment to fund the energy transition, according to BlackRock.
Based on figures by BloombergNEF, the global energy transition will cost around US$200 trillion, which is about US$7 trillion a year, a figure that we are nowhere near.
“Last year was a benchmark year, and it was the first year that the amount of investment into what we call climate infrastructure was equal to the level of global investment in fossil fuel infrastructure, but that was only $1.4 trillion,” Charlie Reid, Managing Director and APAC Co-Head of Climate Infrastructure at BlackRock says in an interview with [i3] Insights.
“So essentially, we need to take that $1.4 trillion of investment into climate infrastructure to $4 – 6 trillion over the next few years, he says.
Challenges and Opportunities in Australia
BlackRock established its climate infrastructure business in 2012 and Reid joined the company in March that year. He sees a wide spectrum of assets that could assist with the energy transition, including in energy generation assets such as wind, solar and geothermal, but also in energy storage and electric vehicle charging infrastructure.
“It’s actually quite a broad investment remit that we define as climate infrastructure,” he says.
Reid and his team invest globally and although some countries are further advanced in the transition than others, he sees good opportunities in a wide range of markets.
New Zealand, for example, has an 83 per cent renewable energy penetration rate, but a transition to a 100 per cent will require another NZ$42 billion (AU$39 billion) in renewable power generation and distribution, as well as battery storage to ensure network reliability.
And although New Zealand is ahead of most countries in the world in terms of renewable penetration, it’s actually behind where Australia is in terms of utility scale solar, battery storage and offshore wind, and so the country still has some work to do in terms of a full transition.
“Australia is likely to go through a much more volatile energy transition (than New Zealand), going from what was 90 per cent fossil fuel to 82 per cent renewables by 2030, but we see very significant opportunities in the Australian market,” Reid says.
“The largest subset of opportunities we’re seeing at the moment is in battery storage, where through our portfolio company, Akaysha Energy, we’re building the Waratah super battery, 100 kilometres outside of Sydney, a billion-dollar asset.
What I would say about the Australian market, and it holds true for batteries too, is that when you are building assets, they tend to be very large. Waratah will be the world's largest battery at 850 megawatts, five times the size of Elon Musk's big battery in South Australia
“What I would say about the Australian market, and it holds true for batteries too, is that when you are building assets, they tend to be very large. Waratah will be the world’s largest battery at 850 megawatts, five times the size of Elon Musk’s big battery in South Australia.
“And so if you look around the world, I would say that Australia is very clearly in the top five to 10 markets globally for attracting capital to fund the energy transition,” he says.
But Australia also faces a number of challenges. The domestic energy grid faces some significant transmission challenges in simply getting renewable energy that comes online to households and businesses.
There is also a greater need for offtake agreements, contracts that guarantee a certain amount of energy will be bought in order to justify the large upfront costs of these projects.
Public private partnerships (PPPs) will play a critical role in funding energy transition projects, as they were in the deal with Akaysha Energy.
“This project is on the site of the former Munmorah coal-fired power station, a site with grid connection. It has a capacity contract, which is a fixed-price contract under which a payment is made every year to the operator of the battery,” Reid says.
“You need the public involvement to initiate the process, but also to provide price stability to attract the capital. And then we also have involvement at a federal level through the Clean Energy Finance Corporation that came in to co-invest in the asset,” he says.
Looking Overseas
For long, the United States was a market that had relatively low levels of renewable energy penetration, but the Inflation Reduction Act is now a key driver of deal flow in the market. The US has become a key market.
In Europe, the most attractive markets are still the larger countries, including the United Kingdom, where BlackRock has been investing in climate infrastructure for many years, and also France and Germany. More recently, the Nordics and Southern European markets have been starting many new projects.
In Asia-Pacific, beyond Australia, Reid sees good opportunities in Korea.
“I would say Korea is the standout market,” he says. “You have a market that has the lowest level of renewable penetration of any developed market around the world at around six per cent, but it is a market that is committed to get to net zero by 2050. In order to do that, they need to build 500 gigawatts of renewables.
“That’s a multi-trillion dollar investment opportunity in one market, and in a market that benefits from 20-year fixed price PPAs (power purchase agreements),” he says.
It also helps that South Korea is home to Samsung, which gives it access to homegrown battery technology.
New Technologies
Technological advancement will play a key role in the ability of the global economy to adjust to the reality of climate change. And although the electrification of the global economy will attract the lion share of investments, there are a series of initiatives that promote new technologies.
Green fuels is an umbrella term for low or zero emission fuels and one of the most promising of these new fuels is hydrogen. Green hydrogen is emissions free and can theoretically be used as a sustainable fuel for heavy vehicles and aviation. Hydrogen can also be blended into the gas pipelines for domestic use.
I would say that the business case for [hydrogen] technology remains unproven, and you have vastly different views in the climate infrastructure community about the impact that green hydrogen will have on the road to net zero
But Reid says hydrogen is still a long way off from challenging electricity as a viable source of clean energy.
“I would say that the business case for this technology remains unproven, and you have vastly different views in the climate infrastructure community about the impact that green hydrogen will have on the road to net zero,” he says.
“We are seeing very large investment opportunities that will take many, many years to come to fruition. Those are difficult for infrastructure investors to participate in.”
Yet Reid acknowledges that ultimately it will be a combination of different technologies that will ensure a sustainable energy future.
“The target state of having solar, potentially geothermal, heat pumps, electric vehicles and batteries at home, to help balancing your load and support the grid, that’s a noble end state for what we’re looking to achieve,” he says.
Charlie Reid will be speaking at the inaugural [i3] Energy Transition Infrastructure Investment Forum, which will be held on 22 November 2024 in Melbourne. For more information click here.
This article is sponsored by BlackRock. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.