Diversification of a different kind
Of crucial importance here is not just the value of the capital needed, but where and how the capital is deployed and the subsequent development it facilitates.
A balanced, holistic approach is critical to ensure a smooth transition and manage energy security in the medium to long term, as well as helping to secure reliable returns that are balanced by varied asset classes more likely to provide predictable cash flow.
The IEA’s roadmap broadly segments this approach across three pillars. These are: renewable and low-carbon energy generation; energy efficiency through storage and improved transmission; and reduced consumption through on-site efficiencies, behavioural change and carbon capture and utilisation. This therefore should be reflected in any energy transition strategy.
To put this in simpler terms, to reach net zero, no one element of the energy system can be prioritised over the others.
For instance, vast offshore wind farms, such as the newly commercialised Hornsea Two, now the largest in the world and just off the East Anglian coast, cannot properly contribute to the energy transition if we do not have efficient transmission infrastructure to reduce energy loss and the adequate utility storage to account for weather variability and reduce curtailment.
In 2021 alone, enough wind energy to power almost 1mn homes for a year was lost though infrastructure inefficiencies, at a cost of £507mn, according to LCP, a consultancy. This is expected to rise to £1bn by 2025, so action must be taken.
How does this look in practice? First, decentralised, low-carbon energy generation should be delivered through renewable sources, such as hydroelectric power, wind, and solar, ideally located as close as possible to centres of demand.
Second, we need to invest in adequate distribution and storage, which will be needed to balance the often volatile and unpredictable energy supply.
Third, we need to reduce demand from the grid network from the consumer, be this in a residential, commercial or industrial setting. This can be achieved through energy saving measures, such as carbon capture utilisation, heat and waste recovery, or combined heat and power.
The need to accelerate the transition towards a lower-carbon, more resilient and efficient energy system is gathering momentum. With $2,600bn (£2,219bn) annual capital investment needed right now, and with the economics of low-carbon energy investment rapidly improving, investment opportunities are set to increase exponentially.
It is absolutely essential that we support the transition to net zero by investing holistically across the energy sector. This is key because by targeting a high level of diversification, you ensure you are not dependent upon a single area of the market or specific technology, thereby mitigating against volatile peaks and troughs while targeting sustainable returns.