The past decade has witnessed a substantial increase in global investment outlay towards energy transition with ~$5.2 Tn of investments flowing into the market across investor categories (including PE Funds, VCs, Pension Funds, Strategics, etc.); however, majority of this (~60%) has been towards renewable energy alone.
While renewable energy can cater to decarbonisation of only ~20% of the total global energy consumption, the balance ~80% remains under penetrated. Investments targeting decarbonization of the dominant fragment of the energy consumption puzzle are becoming the focal point now. These segments have already attracted investments worth ~$1Tn in the last two years. Given the emphasis on the decarbonization acceleration, the entire energy transition chain is expected to see a higher rate of investments than witnessed in the past decade with COP28 setting focus on goals for the long term.
At current rates of decarbonisation, we are on a 2.1 – 2.8’C global warming trajectory as opposed to the targeted 1.5’C trajectory. Recently held COP28 placed focus on asking countries to revisit their emissions reductions targets over the next two years in their Nationally Determined Contributions (NDCs) while ensuring inclusion of all GHGs and with a goal of limiting global warming to 1.5’C. The COP28 mobilized a $30Bn UAE fund which expects to draw additional $250Bn of climate investments by 2030. The key segments drawing attention and investments include Renewables, Green Hydrogen, Carbon Economy, and Energy Efficiency.In the Indian market, we expect the various sub-segments of the energy transition chain to witness different levels of investor traction in the coming year.
Renewable energy provides scope for deployment of additional capital as countries race to build out capacities and meet their renewable energy targets. However, when it comes to energy transition investments, investors are now building up a disproportionate pipeline of segments other than renewable energy.
Smart meters provide a forum for significant capital deployment in the coming year. As of date, India has sanctioned ~222 Mn smart meters (of which only ~8Mn have been installed), creating scope for rapid adoption to meet the target of installing ~250 Mn smart meters by Dec 2025.
Circular economies, including waste & water management and waste-to-energy, have seen strong traction in recent years with investors looking to deploy capital in the space. The segment has witnessed the presence of fragmented decentralized players, creating a strong consolidation opportunity in the near future. Investors have shown key interest in sub segments such as biofuels (including biogas) and sustainable aviation fuels with multiple partnerships and individual targets being announced.
The carbon economy is a nascent stage industry that has already garnered strong investor traction. While the Indian government looks to operationalize the Carbon Credit Trading Scheme by 2026 leading to increased focus on carbon markets, we also witness other business models emerging. These include development of carbon communities, CCUS technologies, ancillary decarbonization services, etc. which are in initial stages of viability testing. Formalization of this segment is expected to progress in 2024 with strong traction following in the coming years.
When it comes to green hydrogen, while few investments and capital commitments across the green hydrogen value chain have occurred in the recent few years, more strategic partnerships/JVs have taken shape. We expect this segment to capture the investment spotlight in 2024 as players build out capacities while proving their commercial viability and investors back emerging business models across the value chain.
While Green Hydrogen grabs the investment spotlight for 2024, the remaining energy transition chain provides for broadening business segments across themes such as circular economy, energy efficiency, carbon markets, carbon capture technologies, energy storage, etc.
Emerging energy transition segments have already attracted ~$1Tn of investments globally in the past two years and are expected to pick up pace in the coming decade. Since most of these segments are in the initial phase of development with a majority of fragmented players, we will witness higher participation from early-stage investors with higher risk appetite, including funds formed with specific decarbonization mandates. Once these businesses achieve scale and commercial viability, these segments will attract larger private equity funds.
The transition chain comprises industries with varying risk profiles, sector stages, and return levels, providing an investment opportunity for different investor sets with varying investment mandates.
