Significant capital deployment is required to deliver on existing and planned climate change policies. The International Renewable Energy Agency (IRENA) forecasts that the global energy sector requires cumulative investment of $110tn to 2050. Representing, on average, 2% of global gross domestic product p.a. over the period.
This investment will shift away from the fossil fuel sector towards energy efficiency, renewable power generation and related enabling infrastructure. Investment in reducing energy intensity will also be critical in reaching climate change objectives. The share of renewable energy generation would increase from around a quarter of global energy supply, to two-thirds in 2050. In addition, the anticipated transition to electrified transport and heat means electricity is likely to become the central ‘energy carrier’, more than doubling electricity consumption (IRENA).
Many governments have introduced varying forms of support for the clean energy sector. In the UK, the government subsidy mechanisms such as Renewable Obligation Certificates to underpinned large proportions of expected revenues for renewable energy assets and more recently the contract-for-difference model provides offshore wind developments a floor price for the electricity produced. In the US, tax equity incentives have encouraged private investment in renewable energy projects.
Beyond governmental policies, there are other factors driving the build out of renewables: notably corporate sustainability initiatives and the falling cost of renewable energy generation. High profile corporates like Amazon and Google recognise increasing consumers awareness of sustainability and the environment, and that is driving ‘additionality’, i.e. investment in renewable energy generation capacity that would not otherwise be developed under governmental targets. But it is not all about perception or climate change initiatives. The rapidly falling cost of renewable energy technologies means that in many regions wind and solar power generation is cost-effective even relative to the most efficient forms of conventional power generation. The decision to develop new wind or solar capacity instead of a natural gas-powered plant is, in a growing number of instances, one of economic sense.
The outlook for the clean energy sector is positive and the industry is likely to see a long-term structural growth trend. This is good news for successful companies operating in the supply chain and related service industries and is also an attractive dynamic for infrastructure investors looking to gain exposure to long-dated and reliable cash flows from long-life assets. The pipeline for capacity growth in infrastructure such as energy generation assets, energy efficiency projects and energy storage solutions is very sizeable and this is the type of investment targeted by the VT Gravis Clean Energy Income Fund. There is a large and growing investible universe of publicly listed companies operating in the clean energy infrastructure space, which benefit from long-dated, contracted cash flows linked to portfolios of such critical assets.