Lincoln International’s Managing Director, Carlos Candil, discussed financial sponsors’ role in global energy transition, and opportunities for corporate investors and financial sponsors at the True Perspectives event with L.EK. Consulting in July in Paris.

The State Of Decarbonization: A Big Opportunity

The 2015 Paris Climate Accords was signed by 195 countries, and subsequently signed by nearly every other country since then. These accords set “NetZero” emissions targets (not actual zero, but 1990-levels of emissions) for 2050 to avoid potentially catastrophic climate change.

Since the signing, major governments and investors have spent billions aimed at reducing emissions. The U.S. alone has put in place a program that will involve $400 billion in new spending and tax credits aimed at reducing emissions in its Inflation Reduction Act (IRA), signed into law August 2022.

While these investments have led to a downward trend in emissions, there is still a sizeable gap between the targets and the current Economic Transition Scenario–about 35 gigatons of CO₂ emissions.

Regarding the US, the world will have to wait for the outcome and aftermath of the November election to see if there will be a change in the US approach to decarbonization and emissions reduction.

In Europe, the political will seems at least more consistent.

Although all Paris Accords signatories are pushing towards a 2050 target, there are intermediate targets in Europe for 2030, and those targets have teeth. There are substantial financial penalties for countries that fall short.

Europe has also put concrete limits on emissions into other parts of the law. For example, a law prohibiting the manufacture of internal combustion engine vehicles will go into effect sometime between 2035 and 2040.

This is not just window dressing. “Road” (which covers land-based vehicles) is the second-highest contributor to global emissions. Steps taken by Europe around electric vehicles should make a significant impact on reaching decarbonization goals.

Net Zero – 1.5 C increase in temperatures by 2050 and Power and Transport are largest sectors to be decarbonized

Source: BloombergNEF

Nine Pillars: Straightforward, But Not Easy

Nine pillars outline the concrete steps that need to occur to meet the 2050 targets.

If the world can meet these targets, the other activities around reduction are simply the icing on the cake.

To be sure, if the global community is not able to achieve these goals, it will be tough to meet the overall goals.

So, how reasonable are these targets?

Many are quite doable. Wind and solar capacity tripling by 2030, and tripling again by 2050 is well within reach.

Other targets are more challenging.

For example, some industries, like electric vehicles, are perhaps prematurely eulogized, with the UK pushing back initially targets for the elimination of gasoline-powered cars in the face of moribund electric vehicle sales during Rishi Sunak’s government to only change again by the new Labour Party

However, news of the EV’s demise in Europe may be exaggerated. The market is growing at still by more than 20 percent per annum. That would be impressive growth for many other industries, but not for one that needs to be doubling or tripling to reach long-term targets.

Europe and the world will need fresh approaches for many of the fundamental pillars for reaching a Net Zero world. And, whenever business requires innovation, private equity can lend a helping hand.

Nine fundamental pillars of a Net Zero world

Source: BloombergNEF

National Investments: Reputations and Realities

Electric vehicles are not the only area where stories do not line up exactly with the numbers.

China, which has a reputation for being a major polluter, is the global leader for investment in emissions reduction by a wide margin, eclipsing the US and Europe combined.

At the same time, the IRA has conferred a reputation for America leading in energy transition investments. It does invest significantly, but not as much as Europe, at 303 billion euros, relative to Europe’s 360 billion euros.

Key economies’ spending levels are off-track for net zero

Source: BloombergNEF

Investment rankings notwithstanding, every country is falling short of what they need to invest to meet Paris Accord goals.

It is probably not realistic to expect that any country will triple their investment year-over-year, let alone tripling it twice, as would be required for India to meet its goals.

Still, we believe that there is a good chance that governments may commit to extraordinary spending increases as begin to approach the half way point this decade.

Renewables market risk and return profiles for PE and Infrastructure sponsors

Opportunities At All Levels

The size and scope of the challenge of energy transition means that there are opportunities for every type of investor, regardless of their holding period, required IRR, risk tolerance, or yield expectation.

With $1.8 trillion required to meet global energy transition targets, there is enough investment to go around for nearly everyone.

There are opportunities for private equity core+ as well as core investors across the renewables value chain

i. Source: Mergermarket, CIQ, Inframation
ii. (1) 53.31% stake, signed deal not closed; (2) Proposed transaction not closed; (3, 4 & 5) Majority stake not outright acquisition; (6) 48.1% stake; (7) 32% stake; (8) 60% stake

In the last few years, Lincoln International has completed more than 50 transactions related to energy transition, with most in the higher-risk, higher-reward Private Equity Infrastructure segment.

We expect to see more such deals moving forward. To be sure, given the level and volume of activity that will be required, it will be all hands on deck not just for Lincoln International, but those we serve and advise as well.