Monthly Market Thoughts – The social impact of the energy transition

December is a wonderful month. Christmas is around the corner, and while at home the kids are excited about the advent calendar, Santa's Grottos and so on, at work it is probably one of the busiest times of the year.

It is also a great time, of course, for reflecting, looking back on the path we have traced until now and charting the way forward.

I originally meant for this editorial to serve as a forecast for 2025, so I started going through the notes of our recent Energy Transition Leader's Summit, which was held at the end of last month [November] and very aptly had a series of 'crystal ball' panel sessions.

Quite interestingly, the first panel opened with the following question: "How does your institution define the energy transition?"

At this point, it may sound like an obvious question, but the answers given by the panellists reveal the beauty of working in this field.

When it comes to shaping investment portfolios and strategies to transition the energy and infrastructure sector to a net-zero future, there are no obvious questions – let alone answers – and it becomes evident quite quickly that the opportunities are unrivalled.

Social impact

Worthy of note was the emphasis put by panellists on the social aspect of ESG in the energy transition.

Again, this one might sound obvious. However, the interesting element of that observation was the inclusive rather than exclusive nature of it.

Until now, there has often been the perception that focusing on the energy transition meant steering away from more traditional sectors – like traditional transport – or highly polluting sectors – like oil & gas.

The opposite is probably true at this point as highly polluting/more traditional core infrastructure sectors are the ones that most need to transition.

"We finance anything that leads to progress, and renewables are a big part of it. But the oil and gas industry is too," one panellist said.

"If we insist on having a puritanical view of what the energy transition means and start withdrawing from financing certain opportunities altogether, we may end up pulling the rug out from under the economic growth or the future prospects of communities – as well as corporates and projects - who depend upon them," they added.

In other words, a transition must be a just transition in many different facets. And while we think "green" and "sustainable", we also need to think about how to deal with, for instance, large industrial clusters in the North of England and the communities that depend on them.

"This is the type of social impact we need to be mindful of. We need to make sure not to disrupt the economy too much as we go about renewing the world around us," another panellist said.                                                                                                                    

Beyond renewables

So, how do we make that happen? How do we ensure that we avoid ending up in a position where key sectors are shut down, resulting in great social inequality?

While the industry eagerly waits for green hydrogen to become investable and scalable, some point to carbon capture and utilisation storage (CCUS) as a viable alternative to ensure that heavy industries continue to thrive while transitioning to a net-zero future.

The UK government is a firm believer in the technology. Just two months ago [October 2024], it confirmed plans for £21.7 billion in funding to support CCUS and hydrogen projects in the country.

The funding is to be invested over 25 years, ending in 2050.  The first funds are expected to go into the construction of two carbon capture sites located in Merseyside in the Northwest and Teesside in the Northeast of England which are expected to benefit from £8 billion of private investment into their communities. Both projects are projected to directly create 4,000 jobs during its construction and operation, while supporting 50,000 jobs in the long-term.

Denmark is another country that has got behind CCUS. Also, two months ago, the government pledged the equivalent of €3.8 billion to its Carbon Capture and Storage Fund.

The funds will used to cover the costs of capture, transportation and geological storage of fossil, biogenic or atmospheric CO2 over a 15-year contract period.

Once operational, the projects procured under the scheme are estimated to reduce Denmark's annual carbon emissions by 2.3 million tonnes from 2030, equivalent to approximately 5% of Denmark's total emissions over a year.

Electrification of transport

"We look at renewables, but renewables, in the end, are just a very small part of the energy transition."

While that may have been an overstatement from one of the panellists, it was yet another proof that the industry is ready to include rather than exclude when investing through the lens of the energy transition.

The power sector contributes to 40% of global CO2 emissions. While that represents the largest contribution of energy-related emissions by sector, it is worth noting that the transport and industrial sectors contribute 23% each.

"The biggest efforts in terms of achieving decarbonisation and meeting the requirements of the Paris Agreement are focused around two key areas: power decarbonisation and transport decarbonisation," a panellist said.

Electrification of transport and, more broadly speaking, decarbonisation of transport and hard-to-abate sectors is a theme that we have already anticipated as being key in 2025.

Interestingly, panellists' sentiment did not seem to have dampened on other parts of this segment's value chain, namely gigafactories, despite recent significant hiccups in this space.

Conclusion

The Energy Leaders Summit was a useful event indeed - not just for this editorial – as it served as a barometer for the financing community's sentiment when assessing opportunities in the energy transition space.

While the bulk of transaction volumes is largely expected to continue to come from traditional renewables, emerging investment themes across the CCUS and electrification of transport and decarbonisation of hard-to-abate sectors are widely expected to produce interesting and perhaps more fruitful opportunities.

"Investing in the energy transition is complicated and costly because it transcends the transformation of the real economy at a point in time due to the many and often opposing geopolitical and macroeconomic factors that are at play."

I cannot think of a better consideration to conclude this article than to highlight both the scope of the challenge and the opportunities.