Expect risk-spreading by investors in the global energy transition

In this regard, some of the investment trends that have been identified in a major global study commissioned by Pinsent Masons are only likely to accelerate, as the impact of the Middle East conflict is felt more acutely over time and its effect shapes investment strategies.

Pinsent Masons and Censuswide asked almost 1,000 VC investors and technology developers to share their sentiment towards low‑carbon technology to identify global low carbon energy investment trends.

Our study identified investors’ clear focus on carbon capture and storage (CCS) and their planned pivot towards renewable energy generation over the year ahead. It highlighted investors’ interest in technologies that can support energy system optimisation too. In a geographic sense, respondents identified Germany (21%), France (20%), Indonesia (15%), Hong Kong SAR and the UK (both 14%, respectively) as among the most popular non-domestic markets to pursue low carbon investment portfolio expansion.

We think there are a number of reasons for this international spread of investment.

While China is world leader in global renewable energy investment, the US has long been associated as being a great place to raise capital and our study found that it continues to be perceived by the vast majority of investors and developers (76%) as having a supportive regulatory landscape for investing in or developing low carbon technologies. Despite this, just 10% of non-US investors said they planned to invest in US low carbon initiatives in the next 12 months in what is perhaps a reflection of the anti-climate and -energy transition rhetoric arising from the White House. Our study suggests international investors are looking to other markets for growth opportunities linked to the energy transition.

At the same time, the results of the study also point to a general drive by policymakers globally to deliver energy security. The energy transition, while largely driven by countries’ international commitments to decarbonise their economies, is central to energy security as it commonly entails a scaling up of domestic low carbon energy generation and a resultant lowering of the reliance on importing energy to meet demand inside the jurisdiction.

In Europe, this link between the energy transition and energy security has grown since Russia invaded Ukraine. According to the International Energy Agency, in 2021, the EU imported 155 billion cubic metres of natural gas from Russia, accounting for around 45% of EU gas imports and close to 40% of its total gas consumption. Those figures have since fallen sharply, amidst a robust EU policy response to the war that includes sanctions packages targeted at Russia and an accelerated commitment to domestic low carbon generation and on ending imports of Russian gas by the end of 2027.

Our study was carried out in mid-February, shortly before the Middle East conflict began. That conflict has complicated European efforts to reduce dependencies on Russian fossil fuels, as there has been a shortage of alternative supplies and higher costs associated with securing them. The price of crude oil – and products derived from it, like jet fuel – has soared. The high prices reflect constraints on supply arising from the Middle East conflict and, in particular, the resultant de facto closure of the Strait of Hormuz. Around a quarter of the world’s seaborne oil trade was thought to transit via the strait before the conflict.

It is not just European supplies that are affected. The IEA highlighted in April that the blockage of the Strait of Hormuz has “thrown supply chains to Asia into disarray”. More than 80% of Asia’s crude oil supplies is imported, with around half of those imports derived from the Middle East. The IEA noted at that time that the shortage of feedstock supplies had already led to the curtailing of operations by Asian petrochemical producers and that those “lost volumes” could not easily be replaced from alternative sources.

In its May oil market report (76-page / 3.3MB PDF), the IEA said cumulative supply losses from oil producers in the Gulf linked to the Strait of Hormuz blockage had exceeded 1 billion barrels.

The economic consequences of continued fuel supply issues are significant. For example, some countries in Asia, like Indonesia and Malaysia, have operated large scale fuel subsidy regimes for years. As the price of oil rises, so too does the cost for governments of maintaining those subsidies.

We expect these impacts of the Middle East conflict to have a broad bearing on the global energy transition.

On the face of it, a direct impact is likely to be a push by policymakers in Asia to source energy more locally, to reduce their exposure to the risks linked to dependence on global supply chains. Countries like Indonesia, Malaysia, Vietnam and the Philippines are already significant markets for renewable energy generation, offering investment opportunities in wind, solar, geothermal and tidal – all renewable energy technologies that our study identified a growing investor and developer interest in.

The problems in sourcing oil and gas from the Middle East could also spur Asian countries to explore how they might bring nuclear more into their energy mix. Currently, only China, India, Japan, South Korea, and Pakistan generate nuclear power, but the potential of small modular reactors (SMRs) for delivering baseload power could be attractive to policymakers in other countries currently feeling the cost of high oil and gas prices.

SMRs can be developed more quickly than large-scale nuclear power plants and at lower cost, with less cost overrun risk. In some countries in southeast Asia, with dense populations and little available space, SMRs could potentially be barge mounted. With their smaller scale, there are lower safety risks in theory, and their use by countries that have not previously explored nuclear generation could be more politically palatable than large-scale nuclear projects amidst the operation of nuclear non-proliferation treaties.

The conflict could have indirect impacts for the energy transition too. Investors and developers might expect challenges to arise owing to pressures on Middle East supply chains – even if their projects source materials from elsewhere.

With work we have advised on in the UK, we have seen how decarbonisation projects have faced added costs and delay owing to problems with securing kit, as suppliers have to re-route supplies to avoid the Strait of Hormuz, take on war-related risk, and cope with increased fuel surcharges and demurrage charges at ports.

In Asia, this risk may not be as prevalent. China is already by far the largest renewables generator in Asia and has an established industry that already produces and supplies related components and materials at highly competitive prices. As energy policy in other countries in the region pivots in favour of energy transition projects, investors and developers could be attracted to countries where supplies can be secured from Chinese companies, neatly sidestepping any supply pressures that might arise in the Middle East.

Findings from our study do offer an insight into what policymakers in Asia could do to make investment in cleantech in their jurisdiction more attractive. Our study found that stability of regulatory environments and national economies are among the primary drivers for investment in low carbon energy solutions, along with government-backed incentive schemes. In these regards, while there are established frameworks in place in Asian countries for renewables generation, these are not commonly replicated in respect of carbon capture and storage or hydrogen projects.